Private Money

[Christian Garcia]

what are the pros and cons of a private money lender ? I want to buy a vacant apartment complex and I'm willing to pay the 8% of the 20% down that the seller is asking for . 

[Darrell Shepherd]

First off, what you are trying to do is a little confusing.  Are you saying you are willing to pay 8% interest on the 20% down payment on an 80% loan?  Pretty far from a given that you can borrow that at that rate if I'm understanding right.

Anyway, there is a big difference between a private lender and a hard money lender.  

A private lender is almost always someone you know that lends you their money, thus the term "private".  Anybody that has a business of lending money is not really a private lender.

Private lenders are great, you can negotiate whatever terms you want and none of them think to ask for a credit app or tax returns.  I borrow 100% of my rehabs with no payments pretty regularly.  Private Lending is really more relationship lending.  I secured $380k from my guy on our way back from a bar last week.  Closing on the house today.  The conversation went something like "you up for doing $380k on a new one?"  "same terms?"  "Yep"  "OK".  My first loan was $17k, though, we built up to what we do now over a number of years.

The other great thing about private money is you can use it for things no institutional lender will do.  Like finance the 20% difference on an 80% commercial deal.  Nobody that lends for a living will take that risk on a deal, but your friends and relatives may take that risk on you.

Cons are you are limited by your network and their cash supply and if the deal goes south so does your relationship.  I'm still paying back some relative from my losses when I crashed and burned in 2007.  Christmas at Gma's was awkward there for a bit.  Lots of emotional trauma there too, nobody really mentions.   Losing my money didn't phase me much, neither did a bank loan or two going bad.  Losing people's money I truly cared about wrecked me.