One of the biggest misconceptions about private money lenders is that they charge very high interest rates for making very small loans. In fact, they charge rates that are relatively close to the long term average rate for mortgages on investment property and they frequently offer attractive interest-only payment schedules. Furthermore, because of the unique way that they calculate their loan to value ratios, they can actually provide generous loan proceeds for investors looking to buy and rehabilitate properties.
A loan to value ratio is traditionally calculated by dividing the loan amount by the property's value. For example, a $300,000 loan on a $500,000 property would have a 60 percent LTV ratio. Traditional lenders order an appraisal and lend based on a property's appraised value. So, in other words, if you were going to buy a $400,000 property, an 80 percent LTV bank loan would come out at $320,000. Most private lenders have a maximum LTV of 60 percent, meaning that they would lend $240,000 on a $400,000 property.
That might not seem very generous, but it's not the whole story. Private money lenders will frequently lend not on a property's appraised value or purchase price, but on the after-repaired value. Taking the example of the $400,000 property above, if your plan was to repair it and sell it for $550,000; you could qualify for a private money loan of as much as $330,000. The $330,000 is 60 percent of the after-repair value. With this in mind, if you are buying a property right and planning to create value, the unique way that private money lenders determine your loan to value ratio could give you more loan proceeds than you expect.
The actual loan that you will qualify for will vary based on a number of different factors including the amount of money you have to put down, your plan with the property, the amount of work required, and your strength as an investor. Talking with a private money lender is the first step to finding out just how they will calculate your LTV and how much you can borrow.