The Truth About Raising Private Money for Real Estate Investing

Every time I start to browse the BiggerPockets Forums, it seems like there are several posts from brand new investors trying to get into the game of real estate with no money, no credit, and no skills. They have read how people are able to do real estate deals using little of their own money, and they want a piece of the action.

The allure to real estate makes sense. The idea of leveraging other people’s money in order to make lots of money is appealing. However, as someone who uses little of my own money to do real estate, let me share some things that may help you develop more realistic expectations when it comes to investing with little (or none) of your own money.

Starting Out With Realistic Expectations

First off, most investors are usually not able to start out without using any of their own money. In the beginning, when you are inexperienced and have little credibility, you will probably need to tap into someone you know if you don’t have your own money. This could be someone wealthy who loves you and feels sorry for you, so they are willing to lend you money to help you get started. Or this could be someone who is dumb (naïve is probably a better word) who is willing to lend you money even though you are inexperienced, just starting out, and don’t have money in reserves in case something goes wrong.

The fact is neither of those people are part of a good business plan. Optimally, in the beginning, you will need to use some of your own money from savings or from personal credit lines, such as from a HELOC, personal bank loan, or credit cards in order to get started.

Acknowledging Money Follows Success

Once you have started to experience success and developed a track record, it becomes much easier to attract private money. Why? Because money typically follows success. People want to place their bet on winners—on systems that are proven to return good results.

After I started acquiring and selling real estate more seriously, I realized that my growth was limited to my own cash and my own ability to borrow. So, even though it was getting easier to find good deals, I wasn’t able to take advantage of most of them, because I was limited to the cash that I had personally. A real estate coach mentioned to me that if I really wanted to be able to grow my company and scale up, I would need to learn how to use other people’s money to invest.

Asking for Money is Less Effective

Following the counsel of my coach, I went out and asked people to invest their money with me. I started with people who I knew so that I wouldn’t get into any trouble with the SEC for solicitation of investment products or selling securities. But I wasn’t getting anywhere. Mostly, I was just getting polite “nos.”

Becoming a Good Investment

It wasn’t until I stopped asking people for money and started sharing stories about the success I was having that I started to have people reach out to me, asking if they could lend on one of my deals.

I also started a monthly meetup group in Mesa, Ariz., where a partner and I go over current deals we are doing and share details on how we found the property, how we funded the property, how we rehabbed the property, and how we ran all of the numbers that indicated it was a good deal.

Now I get a few emails a week from people asking if they can lend on one of my deals and if I can teach them more about real estate investing. This has led to raising nearly $1 million from over 40 private money lenders in the last year and a half.

The Bottom Line

So how do you attract private money to your real estate deals? You do it by having success. Then, once you have experienced success, you can start sharing with people some of the deals that you are doing and how they are turning out.

When people see the success you are having, rather than you asking them for money, people are much more likely to offer you their money to invest so that they can get a good return.

What other tips would you add in terms of winning over private money lenders?

Share in a comment below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.