Question about Private money, Hard money and the Bank =)

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Question about Private money, Hard money and the Bank =)

Member since 2020 · 41 posts · 13 votes

Hello all,

I had a question about a strategy I see all over the internet where people raise money from a "Private lender" form the down payment on a property and then the rest they raise either from the bank or from a hard money person.

Are there really people that lend the initial finds for a property? Why would they be incentives to do that being that it would only be like 10-20% of total cost?

Am I understanding this correctly?

Sorry for the novice question, I'm still new to this game and this site has bees super helpful!

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Eric Boshart

Lender · Fort Worth, TX · Member since 2016 · 77 posts · 20 votes

Yes some do it in exchange for equity upside, almost like a JV, or charge a very high interest rate for a second lien on the property. Usually the private lender is someone either looking to be opportunistic or knows the borrower very well (family, friend, etc). As a borrower I'd be careful not to over-lever in this environment.

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Devin PetersonBusiness Member
Lender · Sarasota, FL · Member since 2022 · 2k+ posts · 664 votes
3y
Michael,

You’re kind of diving into the path of GP / LP Syndication at a very low level. In some instances, people have a lot of time and the wherewithal to underwrite, intelligent investment decisions, but not necessarily the funds or money. This is where your curiosity comes in to play. It may benefit you to find someone who’s very cash heavy, and does not have a lot of time. In return, you offer your time and your expertise And split the potential returns on an investment. This is of course, just one strategy and way you can team up with private investors for the down payment. Good luck.
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Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
3y
@Michael Bishay yes and no

Keep in mind that most lenders that are lendng the bulk of the money 80%. will hae limits on how much more, if any, you can borrow. The risk to tehm goes up if you borrow 100% even if it is not all comming from them. So for some lenders this is a hard no. but it will depend on the lender. In today's tighter lending market, finding lenders that will alow this will be harder to find.

Next a lender in that second position is in a much riskier position, so most won't do it especially now.

The person who might is a true "Private Lender" When I say Private Lender I mean what is traditionally called a private lender. TThat is a freind family or associate that lends to you because they knokw and trust you. They are not professional lenders, hence the name Private. They often lend and lower rates and easier terms becasue they may be comparing what they can earn at a bank vs from you.

However many professional lenders have co-opted the term private lender. This is misleading. You will not find any private lenders on the internet. If they are advertising they aer not "private" are they?

The overall quesiton is can you do 100% financing? Yes it is possible but not typical. It is much harder in today's lending market campared to the recent past.

As one member here @Chris Seveney points out regularly, 100% fianncing may not be a good thing anyway. Your risk is high and your ROI is low. You don't have to be Warren Buffett to know that is a bad deal.
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Michael Bishay
OP
Member since 2020 · 41 posts · 13 votes
3y
Quote from @Devin Peterson:

Michael,

You’re kind of diving into the path of GP / LP Syndication at a very low level. In some instances, people have a lot of time and the wherewithal to underwrite, intelligent investment decisions, but not necessarily the funds or money. This is where your curiosity comes in to play. It may benefit you to find someone who’s very cash heavy, and does not have a lot of time. In return, you offer your time and your expertise And split the potential returns on an investment. This is of course, just one strategy and way you can team up with private investors for the down payment. Good luck.

Thank you so much for your insight. I see these people selling courses on raising private money for the down payment and then the bank for the mortgage. So I figured I'd ask.
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Michael Bishay
OP
Member since 2020 · 41 posts · 13 votes
3y
Quote from @Ned Carey:

@Michael Bishay yes and no

Keep in mind that most lenders that are lendng the bulk of the money 80%. will hae limits on how much more, if any, you can borrow. The risk to tehm goes up if you borrow 100% even if it is not all comming from them. So for some lenders this is a hard no. but it will depend on the lender. In today's tighter lending market, finding lenders that will alow this will be harder to find.

Next a lender in that second position is in a much riskier position, so most won't do it especially now.

The person who might is a true "Private Lender" When I say Private Lender I mean what is traditionally called a private lender. TThat is a freind family or associate that lends to you because they knokw and trust you. They are not professional lenders, hence the name Private. They often lend and lower rates and easier terms becasue they may be comparing what they can earn at a bank vs from you.

However many professional lenders have co-opted the term private lender. This is misleading. You will not find any private lenders on the internet. If they are advertising they aer not "private" are they?

The overall quesiton is can you do 100% financing? Yes it is possible but not typical. It is much harder in today's lending market campared to the recent past.

As one member here @Chris Seveney points out regularly, 100% fianncing may not be a good thing anyway. Your risk is high and your ROI is low. You don't have to be Warren Buffett to know that is a bad deal.

Thank you so much for your comments, makes a lot of sense.
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Michael Bishay
OP
Member since 2020 · 41 posts · 13 votes
3y
Quote from @Devin Peterson:

Michael,

You’re kind of diving into the path of GP / LP Syndication at a very low level. In some instances, people have a lot of time and the wherewithal to underwrite, intelligent investment decisions, but not necessarily the funds or money. This is where your curiosity comes in to play. It may benefit you to find someone who’s very cash heavy, and does not have a lot of time. In return, you offer your time and your expertise And split the potential returns on an investment. This is of course, just one strategy and way you can team up with private investors for the down payment. Good luck.

Thank you so much! =)
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Eric Boshart
Lender · Fort Worth, TX · Member since 2016 · 77 posts · 20 votes
3y
Yes some do it in exchange for equity upside, almost like a JV, or charge a very high interest rate for a second lien on the property. Usually the private lender is someone either looking to be opportunistic or knows the borrower very well (family, friend, etc). As a borrower I'd be careful not to over-lever in this environment.
1 Reply
Adrian Rosas
Real Estate Agent · Stockton, CA · Member since 2022 · 9 posts · 1 vote
3y
Great Question.
Thanks you all for the good responses. As I am continuing to learn in this Form as well.
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Zach Austin
Lender · Coastal Capital Funding · Member since 2023 · 27 posts · 4 votes
3y
@Michael Bishay
Hello Micheal , First off great question, From my experience hard money and pvt money lenders are pretty much the same they want skin in the game on some level is very rare you find 100 percent financing. As far as banks go there isn’t a fast way to get deals done on a large scale sure you can do an fha or va loan but you only get one! And the wait time is way too long! If you want to talk more reach out have a great day!
-Zach
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Nicholas L.Pro Member
Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
3y
It's not a beginner strategy.
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Michael SmytheBusiness Member
Real Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes
3y
@Michael Bishay people misuse these terms all the time, but if you research you will find:
Hard Money: institutional funds, from hedge funds, etc.
Private Money: from individuals, often family & friends, but could be from anyone. Often they lend their self-directed IRA funds.
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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
3y
@Michael Smythe
The industry is trying to move away from the term “hard money” due to its negative connotation.
Not sure how it’s going but to me I follow same terms you had.
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Michael Bishay
OP
Member since 2020 · 41 posts · 13 votes
3y
Quote from @Michael Smythe:

@Michael Bishay people misuse these terms all the time, but if you research you will find:
Hard Money: institutional funds, from hedge funds, etc.
Private Money: from individuals, often family & friends, but could be from anyone. Often they lend their self-directed IRA funds.
Thank you Michael.. you got me with the “self directed IRA” part. Can you please elaborate how someone can tap into that?
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Michael SmytheBusiness Member
Real Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes
3y
@Michael Bishay find someone with an IRA willing to lend you funds.
They contact one of the many self-directed IRA providers and transfer their funds to them.
They can then lend you those funds.
Suggest you Google it:)
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Doug Smith
Lender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
3y
It's going to depend on the lender, but we typically don't want to see someone borrow the down payment. That being said, we only ask for 2 months worth of bank statements to "season" those funds, so if that balance appears in the be beginning balance of the earliest of the 2 statements, you should be good to go. There might be some lenders that are OK with it, but institutional people like us might not be OK with it. I hope it goes well for you.
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