Private money is a general term for non-bank, non-agency loans. It is one of the ways real estate investors can leverage and grow their residential investment portfolios. Investors who are new to private money lenders usually have questions regarding the differences between conventional financing and Private lenders.
Private lenders are usually grouped differently from conventional lenders. One of their advantages is their independence from regulations. Hence, it means that government-sponsored entities (GSE) are not a source of capital accessible by the lender. Hence, private lenders must find an alternative source of liquidity for their loans. A source of capital explored by private lenders is the market for Commercial Mortgage-Backed Securities (CMBS).
The process involves bundling of mortgages into a bond, and subsequent sale to investors called a securitization. SPE LLCs are one of the ways lenders create the uniformity needed for securitization. As a result, LLCs are important to both lenders and investors.
It provides them with security as they separate the liability of the business activities. In instances where liability against the business under the protection of an LLC occurs, that liability is curtailed at the entity’s assets. Also, if there is a liability against the owner’s assets, the assets within the entity are protected. SPEs take this coverage one step further by restricting the assets, liabilities, and activities that the LLC can take on.
Private money lenders offer competitive interest rates for borrowers. CMBS investors provide liquidity to private money lenders. This reduces the cost of the lender’s capital. Hence, the low interest enjoyed by real estate investors.
For more information on why Lenders require SPE LLCs, you can read more by clicking here.
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