If you are looking to invest in the residential property market in the U.S., you might be overwhelmed by your financing options. There are a lot of options available when it comes to investing in real estate, even without cash, but one straightforward and low-risk option is working with private equity lenders.
Let’s quickly break this down for you.
Private: Meaning that it isn’t under a bank or large investment firm.
Equity: The money.
Lenders: They let you use their money in return for a small cut/fee.
Often you might hear these referred to as ‘mortgage lenders’ in Australia.
Borrowing from private equity lenders is usually less rigid than having to take out a loan from banks, or similar institutions, because you’re borrowing from someone who has their own funds and, therefore, more relaxed terms.
Private equity lending in the U.S. is pretty rampant, so you have plenty of choices when it comes to different lenders. You will need to do your due diligence and make sure you cover all options before choosing a trusted lender.
So if the thought of working with an often rigid bank loan is putting you off, then why not consider a private equity lender.
They are a great way for Aussies and Kiwis to unlock funding to invest in U.S. property. Investing in residential real estate in the U.S. is a great way to make profit as compared to Australian markets because there’s so many to choose from and the stamp duties and other taxes are either non-existent or incredibly low.
What is a private equity lender?
Private equity lenders are also known as hard money lenders or mortgage lenders in Australia. They are usually private investors or companies that won’t hold you to the same repayment terms as banks or other lending institutions. They also exist out of public markets and exchanges.
Traditional mortgaging can feel restricting, especially with rigid policies in place. Hard money lenders have more lenient criteria, despite some loan terms being shorter making it the quickest way to secure your funds. Perfect for if you’re in a hurry to invest. In just a matter of days (not weeks or months), you can get your money and seal the deal on your investment.
If you are an Australian investing in the U.S. property market, getting a traditional loan can be complex. Hard money lenders often cater to foreign investors because they know how difficult it can be to understand a loaning institution’s policies from another country. Dealing with a bank can be frustrating in any country, especially one abroad.
Private equity lenders are especially well placed for Australian investors looking to flip houses and resell quickly, due to their short-term nature. If you aim to renovate a property, sell it then move on to the next purchase, this option is definitely for you.
As a foreign investor you can use the funds you’ve secured from a private lender in these ways:
- Borrowing funds to purchase a property with a deposit or downpayment
- Borrowing funds to renovate a property after having purchased it
- Refinancing capital back out of a flowing investment property
4 points to note when working with a private equity lender
We’ve already touched on a few of the benefits above, but now it’s time to see exactly how beneficial private equity lenders in the U.S. can be for your property investment. Here are some points you want to note:
1. Loan to Value Ratios (LVRs) are lower for foreign investors
While interest rates are generally higher for foreigners, (they’re often up around 7-8% or even more depending on the loan and deal criteria), loan to value ratios are generally lower. This can mean that you may need a higher deposit, but with more affordable markets. The good news is that deposits could be as low as $30,000 – $40,000 USD.
A loan to value ratio is calculated as a percentage and is used by lenders to assess the risk of accepting a loan application. The lower the loan to value ratio, the less the risk for the lender when it comes to handing over the capital.
As a foreign investor, loan to value ratios can range around 65-70% of valuation compared to 80% or even as high as 90% for local residents with low FICO (Fair Isaac Corporation) scores. A FICO score calculates your credit and gives a clear picture of how likely you are to repay a loan. This affects how much you can borrow from a lender.
2. “He who has the gold, makes the rules”
Because the money belongs to the lender, they can make their own rules including lending criteria and decisions about who they lend to. They can be more flexible in terms of repayments, making it easier for you if your investment needs don’t fit a lending institution’s stringent payment schemes.
The lack of regulations may work in your favour but they can be a potential risk as well. It is still your responsibility to find a trustworthy lender. Do your research, conduct background checks and ensure that you find past client reviews and even get in touch with them personally so you have someone to vouch for them. Finding social proof around the lender will help immensely as someone else can attest to their professionalism and how they work. More experienced lenders might be a better option because they already have insight into the investment process.
3. It makes investing in the U.S. quicker
Because you can secure funding quickly, your turnaround time will also be much faster compared to traditional mortgaging options. Faster renovations means securing profit much sooner, allowing you to work on more homes and rinse and repeat.
Return on investment comes in more rapidly compared to high bank loans that can take a long time to be approved. Private lenders tend to have quick liquidity provided that you are someone they trust and you agree with their criteria.
Depending on your arrangement, you can forgo monthly repayments and just pay in bulk when the property sale goes through. This way you can move much faster with more capital, giving you more time to focus on your residential property investment and getting renovations completed.
4. They work with you and want you to succeed
Having a vested interest in your investment means that your investors will want you to succeed and they’ll want to help you out. Your success means they gain as well, so your growth is directly proportional to theirs.
Private equity lenders may like to involve themselves in your decisions or offer their expertise. Some private lenders work with ‘fix and flip’ loans frequently so have an idea about contractors and work processes in the local area. A lender who fits with your schedule and whose personality complements yours, can make a big difference to your portfolio and help a smooth transaction for strong returns.
Investing in residential real estate in the U.S. without cash can feel daunting, but it’s definitely not impossible. Hard money lenders are a great option for foreign investors loan to value ratios, flexible criteria and proven returns. Taking the time to research a trustworthy lender will pay off with fast money access meaning you can buy and renovate your U.S. property investment that much faster and sell it again for profit.
At Star Dynamic, we work exclusively with a private equity lender that specialises in foreign investment into the U.S. property market.
We hosted a live webinar with them on last Thursday, March 3rd 2022. Click here to watch our replay.