How should I approach a potential private lender?

[Sherrie Wright]

Good evening, all and Happy Holidays! After running into a couple of hurdles in acquiring a loan for a multiunit building (I have an FHA loan and will need 20% down and 6 mos reserves to qualify for a conventional), I'm considering approaching a family friend as a possible private lender. I don't have a particular property in sight yet but I want to approach this family friend to start the conversation. I would like to present the arrangement to show how it could be beneficial to both parties. I'm just not sure how these arrangements are normally structured. Can anyone advise on what will be important to the potential lender? What are the key points to focus on to help visualize the arrangement? Any direction will be be appreciated. Thanks in advance!

[Chad Olsen]

Be careful in how you ask your family member for the money. Also, rather than getting a loan from them, which could make permanent financing harder down the line, and Thanksgiving dinners as well, consider bringing them on as an equity partner. You would be the person doing the work, but they would be the "money guy" behind the deal. Make sure that you have detailed business docs/agreements in place so that they know that this is a business deal and not a family deal. Then give them part of the deal for their money stake.

When you do this kind of deal, make sure that you are thinking about more than just the purchase price though. Think of the operating costs of the business, maintenance, utilities, reserves, etc that also need to be funded. Better to show a good deal and over raise the money than show a home run deal and have to go back or out and look for more money to keep the deal a float.

Good luck!