How to have a talk about private money

Question

Hey All! I want to have a conversation with my father in law about being my private lender. He’s more of a stock market than real estate guy. He has plenty of money and I want to help him help me so it’s a win for both of us. I’m just not sure how to have the conversation. How would you or have you go/gone about this? I’ll leave out details about him to get a more broad response from you all. TIA!

James Peters · Answer

Hi, finding a source for private money can really propel your investment future faster. So here in Baltimore the average hard money loan is like 1-2 pts, 12-14% simple interest with a 6month-1yr ballon, 65%-75% LTV. There is also draw fees, appraisals and loan fees. When I discuss lending with private investors I am negotiating against this market average. When I go to have the conversation about it I would make sure to hit the below points.

1. They have lien position and contract from title attorney. That provides the worst case scenario protection. 2. I explain all the details of the property as to Why it will make money and what my exact strategy is from their loan. So they have comfort I can re-pay them. 3. I shoot for getting private lenders at 10% price range. For me I save on the points, no appraisals, no loan process, and I can usually get 100% of the purchase and rehab. The lender is getting 10% on their money and is backed with a note. Most people are very happy with a 10% return in my experience.

Sometimes it takes experience. You may have to do the first deal and show you can pull it off.

Alex Breshears · Answer

Hi Matthew! This is a great question, and one that gets asked a lot! So good news, there is a book about private lending coming out by BiggerPockets on July 28th. It will be on pre-order this week. In that book we talk about the ins and outs of lending, ways to safeguard your capital, how you can mitigate risks, who else to involve in the process of doing the loan. Soup to nuts everything to do your first loan.  Now, for general take aways right now I will suggest a few things.  First, make sure you have at least a TYPE of property identified. Don't just walk in "hey dad do you want to loan me money so I can invest in real estate?" That will always end with a no. lol.  Start with talking about the type of property you already invest in, or the type of property you want to invest in, why that type of property, where, what are you going to do with it.  So for example, you want to buy a duplex on the north side of town and then renovate it and move tenants into it.  The property should rent for about $800 each unit if it's a 2/1 on each side, I can buy something over there for about $120k and then maybe spend about $20k doing some light cosmetic rehab, update somethings, and then I can do a refinance out of your loan in 12 months because the property should appraise around $180k when it is rented and done. I have X amount of dollars to put towards this project, I have X experience from doing this type of thing, would you like to earn an additional $1200 a month if I make interest only payments to you, and your loan is secured by real estate so if I miss payments, you have the right to foreclose and sell the home at auction to get your money back.  Second, realize that you need to do this with ONLY investment property. Lending on a primary residence is a MAJOR no-no unless you have the federal licensing in place to lend on owner occupied property. Even the duplex example I gave you, if you or a direct family member move in and its your primary residence but you rent out the other side, do not do a private loan. That is an owner occupied property.  Third - get an attorney involved, no money changes hands outside of closing, and make sure you have adequate hazard insurance to cover the property in the event it burns to the ground the day before you put it on the MLS to sell.  There are so many other things to consider, but as a first time talking to someone about private lending, those tend to be the largest concerns people have, especially if they are coming from the stock market space as they will inherently view this method of investing as risky.

Matthew Malczewski · Answer

Hey Ozzy!

Thanks for the info. I went over all of these items with him over lunch today and he shot me down with a stern no. He said he has no desire to lend his money or get involved with mixing family and business to any extent.

I still gave him the rundown on what our plan and goals are and wrote them down for him to review. Maybe after he sees it and study’s it he will have more questions for me that open his mind a little more.

Worst case scenario, I tried and I’ll go get hard money instead.

Thanks again for your feedback!

Matthew Malczewski · Answer

Rick, that’s exactly how I’m approaching it. While I would love to get him involved so we can both make some money, I’ll be fine without him. Maybe one day he will see our success and change his mind.

Thanks for the insight!

Rick Pozos · Answer

Hey @Matthew Malczewski I have been in that situation many times. My step father was approached a few times by me all with a heavy NO. Thats ok. I learned how to handle the NOs and realized what people were afraid of.

In any situation, there will be many more NOs than YESes. Be OK with NOs and you will do just fine. You only need one or two YESes. They usually come after a few successes. Let everyone know (without sounding like you are bragging) how you did on the deal. Your friends and family need to know that you have knowledge and can handle their hard earned money.

James Peters · Answer

https://www.monumentcitycapita...

Ozzy Sirimsi · Answer

I would be straight with him and explain what your are trying to do, what would be the return and your exit strategist, best worse case scenarios

Nobody would pass a good deal.

He might hesitate on your lack of experience but be ready to answer those questions that's all.

Matthew Malczewski · Answer

Hey James!

Thanks for the info. I was going to ask what return he is currently getting on his stocks and go from there. I have the numbers for different percentages written up to explain.

I’ll definitely use all of the info you provided!

Matthew Malczewski · Answer

Thanks Alex!

Thanks for the info!  I am already under contract on the property and have put pen to paper to discuss the costs associated, fees to hold, and the process after renovation. I’ve also added in there the goals moving forward. I’ll give it a go and see what happens. Thanks again!

How to have a talk about private money

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