Private Lending?

Question

Hello,

I am just starting to narrow down my plans to start investing in real estate. I have been reading a lot about the different types of options to fund and pay for my future properties. However, I do still have tons of questions about how they all work.

The one that sounds the best fit for my needs would be Private Lenders given that I want to buy and hold properties for cash flow.

Now my question, which actually branches to multiple questions, is, how does private lending work? (Yes I know that is a very broad question)

My experience with trying to get a loan to buy a house is:

- Get your credit checked

- Find out how much they can give you

- Finally look at properties.

Now, from what I understand with big deals on apartment buildings and such, these steps are completely different and do not even apply.

With that in mind, when looking for private lending, should I be looking at getting the full amount to buy the property? Or should I just look for the down payment of the property which will be financed with a banker?

All I am trying to ask here is, how does private lending really works? How should I approach a lender? and which order of actions should I follow? (i.e. find properties -> find lenders or find lenders -> find properties)

I am sorry if I am being a little confusing, if so please feel free to ask questions to perhaps make my point clear to you.

Aaron Crow · Answer

Private lending is generally looked at as the best way to invest because you are using OPM (other peoples money) and they are generally cheaper and easier to deal with than a bank or hard money, though this is not necessarily the case.

If you have access to private money, then why would you only get enough for the purchase and rehab?  that is what I have done, it is like dealing with a hard money lender, but again usually cheaper..

The biggest hurdle is getting a private money lender...there are plenty around..anyone with a large amount in a retirement account, IRA, etc that is not getting positive returns on their investment is a great place to start.  But you have to gain their trust, know how to handle the process, etc.

Don't let Private Money slow you down from buying a house.   Many times you need to do deals first, before a private lender will lend you money.  You have to build credibility as an investor and that only comes with experience.

Jay Hinrichs · Answer

@Simon Aristizabal  as stated above it would be rare to find a private lender that would loan on a buy and hold.  private lenders generally are priced at or near HML rates some higher some lower.

Kevin Felmlee · Answer

I'd be curious to hear what the Private Money Lenders typically require from the borrow to protect themselves?  Obviously, they would be listed as the mortgagee but do they require borrow to list the lender on the deed also (for a fix & flip)?  Thoughts?

Kelly Smith · Answer

When it comes to hard money this isn't always true.  I've recently won loans from private money lenders because of the 'fine print' and because we do not have a cap on loan amount.  For example; one private money lender i was competing with held back 25% of the draws (TX Code is only 10%) in one instance.  Sometimes points are cheaper than profit sharing.  ...there are other examples but the "hard money is bad" isn't always a true statement.

Julian Buick · Answer

@Simon Aristizabal there are two main types of private lenders (I'm generalizing, there are a lot more). There are your Aunt May type, someone you know personally that would be willing to lend you money to help you out and also make a modest return on their investment (typically around 7%). Then there are the ones that are mostly described in this post. They are real estate investors that are trying to make money by lending money at a more aggressive interest rate. That can be in the 12-20% range. They lend on short term projects (typically less than a year)  which would in general be fix and flips, not buy and holds. If you are looking for a private lender for buy and holds then start by asking relatives or family friends and see if you can tempt them with a 7% annual return. Otherwise, if you are looking to do fix and flips then head down to your local REIA and start networking. That is where you will find the investor type private lenders. good luck

Simon Aristizabal · Answer

Thank you @Aaron Crow and @Scott England for your insight!

Yes I do understand that I do need to build credibility to be able to gain a private lender's trust. The thing is I need the money to start doing deals because I do not have the means to do so now. That is the reason I was looking into private lending.

It does make sense to have a deal and then talk to them. In that case, then would it be okay to, once they see the deal, ask for the entirety of the money needed? Pretty much they become the bank instead of trying to get a loan from an actual bank.

Scott, do you mind elaborating a little regarding offering double digit to private lenders?

Scott England · Answer

Simon

The best way to approach a private lender (IMO) is to bring a deal to them, then ask for the money.  It is somewhat of a waste of time for the individual to talk to someone who has no plan.  If you have a good enough deal, the money will come.

Also, if your strategy is buy/hold long term, private money may not be the best option, but a bank.  Most private lenders don't have to have their $ out for more than 5 years or so, unless you want to offer up double digit returns.

Raj G. · Answer

Just wondering, what are general terms and conditions you borrowed or lent money.

Manuel Angeles · Answer

@Kevin Felmlee @Simon Aristizabal

As a Private Lender, you can have Title be held in your or your Company's name...

And you can have the Borrower pay you interest during the Project, as their "Skin in the Game."

Once the Property is fixed up and sold on the market, You and the Borrower can Split Net Profits 50/50, or whatever the determined net profit split would be.

Simon Aristizabal · Answer

Thanks @Ken Deboy! I will look at my options then!

Private Lending?

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