Private Money Lenders California: Investor Loans Through a Broker

Ted Erickson is a mortgage broker with Barrett Financial Group, and he places investor loans with private and hard money lenders. The money comes from those lenders, not from Barrett Financial Group and not from Ted. He has 24 years closing loans. Based in Novato, he works with real estate investors in Marin and Sonoma counties and across California. Every private money loan Ted arranges is a business purpose loan on non-owner-occupied property. He does not arrange private loans on a home you live in.

What Private Money Is

Private money loans come from non-bank sources. Private lenders for real estate include individuals, investor pools, private companies and funds. Each private lender sets its own guidelines and usually funds with its own or its investors’ capital. The loan is typically documented as a promissory note with a lien on the property.

Because the property carries the loan, private money is a form of asset based lending real estate investors use when a bank’s rules do not fit the deal. Some people call it an equity based loan, since your equity in the property is the lender’s cushion if something goes wrong.

Private Money vs Hard Money

People use the two terms interchangeably, and there is no legal line between them. One common view says hard money is named for its collateral, a hard asset such as real estate, while private money is named for its source, people or small groups lending their own funds. Another view says hard money lenders are more formal operations with set terms, while a private lender could be a business associate. Some sources simply treat hard money lenders as one type of private lender.

For you as an investor, the label matters less than the terms. Ted looks at both kinds of lenders for each deal. Ted’s fix and flip and bridge loans page covers rehab projects in more detail.

Private Money Lenders California: What They Look At

A bank starts with your income and credit. A private money lender starts with the deal. Expect the lender to focus on these points:

• The property. Its value today, or its value after repairs for a rehab, and the condition it is in.
• Your equity. How much of your own money or existing equity is in the property.
• Your exit strategy. A realistic plan to pay the loan off, usually a sale or a refinance into long-term financing.
• Your experience and plan. For a project, the scope of work and the budget.
• Credit and income. They weigh less than at a bank, but they still matter. Some lenders set minimum credit scores, and some accept bank statements, 1099s or rental income.

Ted will not tell you credit does not matter or that nobody looks at income. They count for less, not for nothing.

How Investors Use Private Money

These are the common uses Ted sees investors ask about:

• Bridge financing on an investment property while you sell, finish a project or line up long-term financing.
• Buying an investment property now and refinancing later into long-term financing, such as a DSCR loan.
• Cash-out on an investment property to pull equity for the next deal.
• Estate or probate property that the heirs are holding as an investment.
• Time-sensitive deals, such as auctions or distressed property, where a bank’s process does not fit the timeline.
• Credit or income documentation a bank will not accept, when the property and equity are strong.

The Risks You Should Weigh

Private money solves real problems, and it carries real costs. Ted will walk you through each of these before you sign:

• Higher cost than a bank loan. Pricing is higher, and project delays add to it.
• Balloon payment. Many private loans end with a large, one-time payment at the end of the term. If the property’s value falls or your finances change, you might not be able to refinance in time.
• Prepayment terms. Some loans charge a penalty for paying off early. Read them before you sign.
• Foreclosure. The property is the collateral. If the loan is not repaid, the lender can foreclose.
• Cross-collateralization. Some loans are secured by more than one property, so a default can put more than one at risk.

Ask for the costs and terms in writing before you sign. Vet any lender you are considering, and ask Ted anything that is not clear.

Investment Property Only, Never Your Home

Ted does not arrange private money loans on a home you live in. That includes buying your own next home before you sell your current one. Private money through Ted is for business and investment purposes on non-owner-occupied property, subject to lender review. Federal rules generally treat a loan on a rental the owner does not live in as business purpose, and a property the owner expects to live in for more than 14 days in the coming year does not count as non-owner-occupied for that rule.

When a DSCR or Bank Loan Is the Better Fit

Private money is a short-term tool. If you plan to hold a rental for years, a DSCR loan that qualifies on the property’s rent is often the better long-term fit. If your income is strong but hard to document, non-QM loans such as bank statement or asset-based programs may cost less. If you are buying a property to renovate and sell, start with how fix and flip loans work. And if a bank or conventional loan works for the deal, Ted will tell you so.

How Ted Shops a Private Money Loan

As a private money broker, Ted starts with the deal: the property, your equity, your exit plan and your timing. He matches it to the private and hard money lenders whose guidelines fit. Then he shops terms among those lenders and lays out the trade-offs side by side. If you have been calling hard money lenders California wide one at a time, this saves you the legwork. Ted will tell you straight what’s possible and what isn’t.

What Ted Will Ask For

• The property address, type and current condition
• The purchase contract, or your current loan balance on a refinance
• Your plan for the property and your exit strategy, a sale or a refinance
• Your scope of work and budget if you are renovating
• How the property is held (in your name, an LLC or a trust)
• Your timeline and any deadlines
• A summary of your real estate experience
• Bank statements showing funds for your equity, reserves and costs

Have a question about private money that is not covered here? The answers below cover the ones investors ask most.

For more on investor and non-bank financing, see DSCR loan requirements, fix and flip and bridge loans, and how a mortgage broker differs from a bank.

Sources

• CFPB: What is a balloon payment? When is one allowed?
• CFPB: Regulation Z 1026.3 Exempt transactions
• CFPB: Official comment for 1026.3 (non-owner-occupied rental property)