Private Money - How?

Question

Hello!

I'm finding it challenging to find deal with enough of a spread from price to arv, given repairs... when using hard money. I'm at a point where I'd love to start looking at private money but don't know where to start!

For those of you who have mastered private money....How did you get started? What kind of terms are expectable and what advice can you lend to this option?

Mike Klarman · Answer

It's a total misunderstanding that Private Money operates in a laissez-faire kind of arena where the borrower calls all the shots and sets the guidelines.  I've been through the loan process with Private Money Lenders, it's no easier.  And they in general are no easier with their money.

There are also two types of Private Money.  You have the rich brother, father, Uncle, friend, cousin, business associate, what have you who are rich and trust you and your intelligence in real estate and they will back you.  Then you have Private Money Outfits.  Wealthy individuals who pool capital and white label the process and these outfits have underwriters, and processors, and originators just like any HML.

At the end of the day the paper will be held by someone other than the lender, unless you have Private Money type A the rich relative/friend.  All these real estate notes are sold off to what are called "capital partners" to these lenders.  These are pools of real estate investors who hold the notes for the payment streams in an annuity type investment product.

To answer your original question.  If you can't find deals that a hard money lender will fund then they are not good deals.

You add up purchase price and rehab cost and divide by ARV and times that number by 100.  If that number is less than 70 then that is a pretty good project.  If it is over 75% no one will look at it, not enough meat on the bone.  if things do not go right and the housing market softens or the rehab is a disaster then that property will go under water and that is not good.

If you want to see some good deals, contact agents in the market you are looking and tell them your formula: (Purchase Price + Rehab Cost/ARV) * 100 < 70%

An Agent will look for for because they'll get that commission on anything you buy.

Ryan Craig · Answer

Have you tried looking for more cosmetic flips(minor repairs, upgrades and paints) that will qualify for traditional financing while working towards the more intricate flips?

Jay Hinrichs · Answer

ONly money that is cheaper than HML er is friends and family private money IE someone that is not known to you and lends ( first off those are hard to find since you dont know them and they dont know U).. but they know what rates are.

folks that can borrow for less from HML are VERY EXPERIEnced flippers that do 20 to 30 a year from the same company.

Nate Marshall · Answer

A lot of misconceptions out there. But plenty of solutions. I have been in the private money industry for awhile including consulting with lenders and investors on their front and back office processes, systems and more.

Money is out there. Trillions. PML's from main street and wall street are looking to deploy capital into real estate.

Hit me up if you want to discuss this more. I will be deploying AI to help more people connect with capital.

David Ramirez · Answer

Networking and building relationships with those around you can lead to valuable opportunities in real estate, such as my experience obtaining private money financing through a family referral. It's important to share your real estate journey and have a well-prepared proposal to present to potential investors or partners.

Amanda D Phillips · Answer

This is all really great information and I'm very thankful!

My biggest trouble is finding deals that meet the 70% rule. The best I find are usually  75% and with hard money being so expensive it really eats into profits and leaves less room for things to go wrong without losing. This market doesn't help. I love the clarity around the two or three types of private money, and that it's really not much different than hard. Sounds like unless I find a rich uncle, I'll just keep with hard money until my cash is built up and I don't need to borrow and can maximize profits.

Bud Gaffney · Answer

@Amanda D Phillips DSCR loan

Jeff S. · Answer

Excellent post by @Mike Klarman.  I’ll add a middle ground between your rich uncle or dentist and the Private Money Outfits he mentions.  There are a lot of private individuals with modest amounts of money who will lend to local real estate investors.  They don’t get their money using white paper, syndicated pools, or by selling their notes but by lending their hard-earned after-tax or retirement funds.

These individuals self-fund and will be your lender throughout the entire length of your loan so long as you buy well and can establish you have a good and safe deal for everyone.  I know this is true because that’s been the process my wife and I have been lending with successfully since the RE crash.  Having attended many REI clubs and lender conferences over the years, I know we're not even close to being alone.

“I'm at a point where I'd love to start looking at private money but don't know where to start!”

You should really ask, “… but don’t know where to start safely.”  The answer is in your backyard, @Amanda D Phillips.  The web is crawling with scammers and shady characters of dubious background.  Be careful of the solicitations you read here or anywhere else online.  This is a business based on relationships and that only means face-to-face.

If you want a private individual to lend you their money, I suggest you meet in person and get to know one another.  Even just a little.  Local real estate clubs are ideal for this, and Meetup is a good way to find them.  Develop a list of informed questions if you can and ask the club organizer which lenders attend regularly.

Also, for what it’s worth, we use the formula Mike mentioned almost exactly to establish a good deal except, for the higher dollar properties in our area, we use 75%.  I can show that the rehabber will earn between about 12% and 15% of the ARV using this approach.  We consider that a good deal, but always ask your prospective lender for their specific criteria.  You find we’re all as different as fingerprints.

Good luck to you, Amanda.

Scott E. · Answer

If you have no experience, you are going to have a hard time getting private money.

Private money comes from a friend, a family member, or an acquaintance. This is going to be somebody who trusts you based on your experience, AND believes in your deal.

I've borrowed private money as low as Prime+1 (no points). 18 months ago that was basically free money. Last week I met one of my private money guys and he's now at 12% (no points).

You'll save some in interest using private money but the real value in borrowing this way is that there is less red tape. Closing is quicker and draws are smoother. It's just a better experience all around compared to hard money.

All that being said, if the deal doesn't have enough spread to pay loan interest, then it's not a deal. You need to buy it at a deeper discount or move onto the next one.

Erik Estrada · Answer

What is the purchase price, rehab and ARV that you are looking at? Generally, most hard money lenders lend up to 75% of the ARV.

There are various types of private money. Some institutionalized with a committee making decisions and others are lawyers and doctors sitting on a wad of money and looking to invest it. Or your mom and dad lending you money for flips.