How should new investors approach private lenders?

Question

This is for the new investors just getting started. How should they go about approaching private lenders for capital to purchase property? Which would you say should come first? Find the deal first or find private lenders capital first? Everyone says Meetup and local REIA clubs are the best way to find private lenders. What if new investors are unable to attend either of those?

Erik W. · Answer

Treat it like you are interviewing for a job worth $100,000 per year salary, because in effect that's what you are asking your investors to do: provide you with a large chunk of CASH that they spent years to acquire, and all you have is a dream and very little knowledge or experience.

I've been doing rental properties for almost 15 years now, and I still haven't felt that I have the knowledge of the market and expertise to properly do what you're asking to do with no experience.  Maybe it's just the fact that I don't dream big enough, or maybe it's that for every 1 dreamer who succeeds, I see 2-3 fail and the money is lost and/or the return isn't nearly as big as promised.

You have to convince them using hard evidence that you're worth the risk.  Unless these folks are incompetent, you'll have to "sell" yourself to them, and they will scrutinize you carefully.  Have answers ready to go.   Keep it short 'n sweet.  They care less about your dream and more about how you are going to help them fulfill their dream.

So let's start here...right now.  You've walked into the room, flashed a big smile, shook my hand, and you want me to give you $250,000 - $1 million to go buy real estate.  Convince me why I should believe that you can make that work to my benefit, how my downside is protected, and how my upside is better with you than what investing in a more traditional asset class such as an S&P 500 Index fund.

Tony Marcelle · Answer

Honestly, gurus do make it seem easy to seek private lenders for capital. Every one of them preach the same gospel how the best way to fund deals is by using other people's money. I personally have never been the type to go ask people for money. I would rather avoid having to go that route. That's just me. You have given me a lot to consider before taking my chances at getting private capital. Now I see why some say start off wholesaling first then use those profits to fund other projects. If I was to repay the investor, it would be through passive income from an apartment building. That is what I am looking for right now. I know one of those GURUS by the name of Danill Kleyman talks a lot about putting together a package to present to the private lenders. I never used it though. And as for your protection when life happens, I will have some insurance to protect you when things go bad. To answer your other question, yes you will get the deed as security for your investment.

James Wise · Answer

You probably shouldn't. A private investor would be insane to lend money to a new investor without a track record. I think you'll just be spinning your wheels running into wall after wall. A more productive use of your time would be to get a 2nd or 3rd job and save up enough cash to get approved for a 30 year residential loan. You are in Alabama so I imagine all you'll need to scrape together is $20,000-$30,000 and you'll have enough money to put down on a nice rental. You'll want to string several of those together before approaching private money. Remember you need to be an attractive investment for them. Without experience you just aren't.

Erik W. · Answer

@Tony Marcelle... I know you're new.  You said so in your OP.  I can read.  ;-)

Now, to be clear, it's not that I don't care about YOU trying to succeed.  I am simply roll playing the investor, and as that investor I don't care about any excuses for not giving me what I asked for, which was a plan with some details.

Newness is something everyone has to deal with.  The newbies who succeed find ways to get past their lack of experience.

I have to be blunt.  Do you plan on going to your first meeting and telling your would-be investors "I don't have any details because I'm new..."?  Remember, you have to inspire the confidence needed for him/her to write you a check for a lot of money.

A better answer: "I don't have that information with me now, but I will get the answer and touch base with you in the next 2 hours to let you know how it's going."  Modify as needed to fit the specific situation.  Don't use it more than 2-3 times in a 20 minute presentation.  Know your facts up front, inside and out.  And absolutely get in touch within the time frame even if you haven't learned any new info.  Communication....never let it lapse for ANY reason.  Have 2 cell phones in case one dies or gets lost.

Neither I nor anyone else will expect you to have all the answers right at this second.  You don't want to deal with that kind of person anyway.  They're control freaks and will drive you bonkers.

So if I were you here's what I'd do next: find a deal in your market and pencil it out as if you were going to buy it.  This will be a good exercise to get some real answers to real question.  For starters:

How much money do you need to get into it?  What's the overall plan: rehab or turnkey?  Fix and flip or buy and hold?  Value add and how will that be accomplished?  Project Phases?  Timelines?  What's the exit strategy and how far into the future will it happen?  How do I (the investor) get paid: equity, profit sharing, preferred income stream, combination of all three?

Btw, you were right that return OF principle takes priority over return ON principle...good job!  Now tell me how you plan on doing that.  Do I have my name on a deed?  Do I have a personal guarantee from you, and do you have any assets to back up that personal guarantee?  Is the dirt worth more than the building itself so even if the whole thing falls down we can bulldoze it and I get paid?  Etc.  "Show me the money!" said Jerry McGuire (sp?).

Also, what happens if you have to get out of the game?  What if you get sick, in a bad car wreck, your spouse divorces you/girlfriend dumps you, your kid causes an accident and you get sued for $10 million.... how do we deal with "life" when it happens?  Notice I didn't say IF life happens.  It ALWAYS happens!  Remember the seven D's: death, disability, disinterest, divorce, dishonesty, disease, and dissolution.  You don't have to give me a 500 page partnership agreement, but how would you plan on dealing with those contingencies?  Hire a lawyer?  How much does it cost to work up a partnership agreement?

There's a lot to think of when asking people for a large chunk of money.  I've barely scratched the surface here.  My goal isn't to drive you away or upset you, but to lay out the reality.  The gurus and pod casts make it seem easy, don't they?  Just put on a nice set of clothes and a big smile, tell people about the big dream you have to make big $ in real estate, and people will throw money at your projects.  What they don't tell you is 49 out of 50 people won't be interested, but you have to keep slogging on.  They won't tell you to make your plan and bullet proof as possible then give it to someone whose been doing it for 20 years to shoot holes in (and believe me, they will shoot a LOT of holes in your " bullet proof" plan!).  It can take a year or more to find that first person who is willing to take a risk with you, and the weight on one's shoulders to perform is immense.  That said, the rewards can be amazing.

I working on something similar right now... can you tell?  ;-)  So, just sharing a few things I've picked up along the way that I hope are helpful.  Good luck!

Tony Marcelle · Answer

@Erik Whiting That's a tough one. It is hard for me to do this without an actual deal I am working on where I need the money for real. I am new at this, but I would focus on a few things to hopefully put you at ease. One would be to present to you an investment that is low risk. I would go in to details explaining how your investment is protected. I would even go further by giving you some control of the project in case you feel I am not fulfilling my end of the bargain. I could go on telling you about the high return you would be getting. For me, I would be more concerned with the return OF your capital rather than the return ON your capital. I guess what I am trying to say is I have to put myself in your shoes if someone was to approach me asking for my hard earned money to invest in their real estate deal. I need assurance that person knows what they are doing and my money will be returned to me in full as promised. Showing me the numbers that makes sense is a good start. I would want that for you also. Like I said I am new at this.

Tony Marcelle · Answer

I don't have any friends. The people I used to associate with back in the day are people I have not seen or spoken to in many years since we all graduated highschool. Everyone is doing their own thing, so I doubt they are people I can talk to about what I am trying to do.

Travis Henry · Answer

@Tony Marcelle Regarding your question on whether the deal or money comes first - Money!

My recommendation would be to put together a sample deal package for your potential private lenders. Ideally, the sample deal would be representative of the types of deals you're targeting, and would include things like capital contributions, investment term, expected returns, etc. Michael Blank talked about this in his book on apartment investing and it's helped me to find a couple of the private lenders I'm working with.

Needless to say, as @Jeff Kao mentioned, all of this will stem from personal relationships. Are you able to leverage 2nd or 3rd degree connections through your existing network - like a friend of a friend? Or a parent of a friend?

Tony Marcelle · Answer

Are hard money lenders very expensive?

Jeff Kao · Answer

@Tony Marcelle Hard money lenders are another option.

Tony Marcelle · Answer

What if the people they know don't have the private capital to fund real estate investments?

How should new investors approach private lenders?

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