Where to find Private Lending for Next Investment

[Christina Merlo]

I currently have four doors that I have bought with a variety of methods, BRRR, hard money, seller financing, construction loan. I have come up with the down payment for each of these and I am completely tapped. (HELOC is not an option) I am ready to level up my investing but have no way to come up with the next down payment beyond partnering with someone to front the down payment. Everyone always just suggests to ask family and friends but that is also not an avenue I have available to me. I am at a loss to find private lenders to help continue to invest. I do not understand where you find these unicorn people and if I ever did find someone to lend the private money, how to go about structuring the deal as far as interests, paying them back etc.

I am frustrated and stuck and needing some guidance. I appreciate any help you can give. Thank you

[Alex Breshears]

Hi Christinia!  As a private lender, I really understand the struggle. We take the private part of private lender seriously. lol. We are world champs at hide and seek!

The network isn't just friends and family, it is anyone in your local community or market. I've spoken to a lot of groups of active investors and I routinely ask the crowds who in the room has done a private loan, and about 20 to 30% of crowd raises their hands. They are active investors AND private lenders. So these events for networking can be valuable to build connections with people. Private lending is very relationship based, so going to look for private lenders in the minute you need them.  You need to organically build these relationships.

The desire to have a lender for the downpayment is mentioned a lot because active investors are looking for this sort of product, and the reason there are not companies offering it is because of the amount of risk involved in doing this type of loan, especially in the current economic climate.

I just want to explain from a lender's standpoint why this might be above a lender's risk tolerance, so you can possibly find another alternative. First, when borrowing funds for the downpayment, that means the property is 100% completely leveraged. As the person providing that 2nd lien against the property, if that property loses value for ANY reason (and not all of them you control) that means my loan is automatically underwater being in the 2nd lien behind your financing to acquire the property. If the property values in your market soften, if the tenant moves in and destroys it, fire, earthquakes, floods, hail, hurricane, another lock down requires you to keep a non-paying tenant - honestly anything - and my position in the property is at jeopardy. I'm not saying no one will do this type of loan, but I'm explain why looking at it from a lender's risk perspective could help you look for another alternative.

Another reason, other than being over leveraged, is that a borrower that is not well positioned with capital is also at a much higher risk of default. If a borrower stops paying on that first mortgage, and then the lender goes to foreclose, any equity that might have been had in the property is now gone because default interest, late payment penalties, legal fees, etc will eat up anything left after the principal balance of that first lien is paid. As the 2nd lien holder, again, I'm wiped out entirely. So again not a good place to be. If you close on the property and then discover the roof is leaking, the main sewer line is nothing but tree roots, really any major expense, that can easily put a borrower in a position where they do not have enough actual cash to solve the problem, so the property loses value due to deferred maintenance, or the borrower digs themselves into more debt, making it even harder to get another loan to cash me out of the equation at that upper 20% of equity.

Now what can possibly be done, with the properties you already own. If you have equity in the properties that are getting ready to sell, you could find a private lender that will do a 2nd lien on those, again as long as the equity is there. So for example if you are pretty far along in one rehab, and you have about 50% LTV with your current financing, you could potentially find a lender that will do a 25% LTV second, so your total LTV isn't above 75%. The 2nd lien holder position has a few considerations that need to be in place, such as it can't be a hard money lender, there can't be a large pre-payment penalty, it has to be current, etc. These types of loans I have seen done, and I've personally done a few in my chosen market.

So when you are talking to lenders, keep their risk in mind. If you can have those conversations upfront early and often, they will build trust that you are looking out for their capital.