Private Money

[Lance H.]

Hi everyone,
I'm looking to purchase a REO property in the next couple months to hold long term as a rental. Just like everyone else my problem is how to fund it. I have 15k in available credit and a decent credit score (mid 700's), but I just graduated college (with $0 in student loans) so I haven't been able to save anything yet. I'm putting away about $500/month in savings now, but I don't really want to wait for that to accumulate to enough for a down payment. So I'm looking at private money.

I have a family memeber who has said they would provide some funding, but we havn't talked details at all and I doubt they would give me enough for a down payment and any rehab costs. So I guess I'm curious how to use private funds without giving up any control.

Should I use multiple people with smaller investments, this seems like it would be easier to find? Will banks provide a 80% loan if private money is covering the remaining 20% plus rehab? If you have multiple people covering the 20% plus rehab you obviously can't just give them a second mortgage, so do you have to make them part owners of the LLC?

Sorry for the 20 questions, I feel like I have a pretty firm grasp on what it takes to be successful at this, but I'm trying to nail down the details. Basically I'm trying to figure out how to structure a purchase so that I can get 100% financing plus rehab costs covered on a long term hold.

Thanks for the help,
Lance

[Mike C]

Lance,

Let me weigh in. First, congrats on saving money now instead of spending it all as most of your peers would be (and I did at your age but I digress). You are ahead of most people already. Since some of the contract issues have been well handled, let me tackle the other main problem. Finding the private funds. My main suggestion is to network. Depending on your other interests, you may already have access to those who have some funds that are not earning returns they are happy with. Your only negative now is you are young and don’t have much experience. That will change going forward and help you. Also, it may not hurt as much as you think if you show a good business plan, show some enthusiasm and also make good choices regarding your finances (as you are now). This is especially true if you stick with people who already know you and are aware of your good character. Let me give some examples of what I mean. Your character and word are what your business operates on. Don’t compromise them for anything.

First, this gets easier as you get older. You are 22 or 23. I am 36. This means a lot my college friends are out there making good money and already know me, that I have their back and that I am competent. Also, I am not a rehabber so I don’t need access to vast sums of cash as a rehabber would. I use private funds for specific situations based on what my business model and plans are. Your peers are just getting started so they won’t have as much disposable income or retirement savings (yet). Your friend who in a few years is now a doctor or partner in a law firm probably has some disposable income they may want to be more aggressive with (in their mind, even though this is lower risk than the stock market IF you know what you are doing).

Use that network and your normal interests. Let me show you how this works. I play a lot of tennis. I played in college and still play competitively. As the indoor season is coming to a close, I am sure you can see how those who can pay 40 p/hr for court time, generally speaking, may have more disposable income and/or assets to invest. Most are professionals: doctors, lawyers, business owners, financial advisors, etc. They know me, how I perform under pressure, how I treat people, etc. because they see me regularly on the court and in competition so they know something about my character without me trying to sell myself. They also talk a lot about business and many other topics and are generally interested in learning exactly what I do, can conceptually understand it and are obviously interested in growing their assets. Good potential candidates of private money.

One other example. I also play a lot of golf. Members of the local golf course and country clubs pay money to sort of escape the hustle and bustle of life to play some golf, have a stogie and talk business over dinner or Sunday brunch (and yes to escape the wife sometimes). I am sure you can see how your friends (and family friends and associates) here can also be good candidates for private money. They know you and your character. How you act on the course and social situations also says a lot about you. Do you call penalties on yourself? Use the foot wedge or make excuses? Throw your clubs? Do you fall apart like a cheap suit when you go dormie or push on that Nassau? How do you act when introduced to someone new? Do you act like you are superior to them, are intimidated by social situations or do things to embarrass yourself? I am sure you can see how these things can help you or hurt you depending on how you act. There is a reason a lot of business is discussed on the golf course and in clubs of all kinds.

Also, remember I would be doing these things anyway so just by my own interests I have access to a lot of potential private lenders. Everyone has many various interests that provide many opportunities to meet movers and shakers and those who may be interested in putting money to work. Learn to use your opportunities to your advantage. You probably have more than you think if you think about it. And when you finally do sit down over lunch at the club or wherever, your reputation and character are probably already well known or easy enough to find out with a minimum of effort. Of course, that can backfire as it did to the members of the Palm Beach Country Club who invested in Bernie Madoff (ouch).

Your goal is one person giving you money and it doesn’t have to be a lot. One local executive your family or a good family friend knows who has seen his retirement shaved 40% or a member of any clubs you or your family/friends belong to may be willing to invest. Then under promise and over deliver. This is the most important thing you can do, especially in the beginning. The first deal if you say you will give them, 10%, give them 12% saying you are happy they are working with you, things worked out better than expected and I wanted to show my appreciation for your trust in me. Do this even if you make less money than you want. It is worth it. Imagine them telling all their associates about how well things went in working with you. You will soon have all the money you need from a good reputation and word of mouth. Soon enough you will have more people wanting to have you use their money you won’t believe it. Just don’t do something dumb to compromise the well-deserved reputation you have built. Get creative and make it happen. Life gives everyone many opportunities to succeed. Most don’t notice or are afraid of taking action.

Good luck and happy investing

Mike C