How to Use Other People’s Private Money for Real Estate Deals

One of the first things new real estate investors need to learn is how to locate private money to close deals. It is much harder and more complex to find traditional financing options for real estate investing. Private money is key to grow your real estate investment business.

If you have solid relationships with private lenders, you don’t have to qualify for a loan, pay a big down payment or jump through the hoops of a bank loan. Plus, as a new investor you may not have the credit history or budget to secure a traditional loan.

What is Private Money in Real Estate Investing?

Don’t confuse private money and hard money. Private money comes from a relationship with an individual or company that wants to invest money in real estate. On the other hand, hard money comes from institutional private lenders. These lenders aren’t interested in investing with you and usually charge high fees and interest rates. Plus, they require collateral to ensure payment of the loan.

The person or business providing the private money wants to benefit from real estate investing but may not have the time or desire to work the details of the real estate investment deal. If you keep a positive relationship, most private money sources will work with an investor on multiple deals over time. These valuable relationships help you access more investment deals to grow your business.

Give the Right Information

Private money investors want to know their money is safe with you. Provide peace-of-mind and start on a path to build a trusted relationship. Most private lenders want to know three main things before they invest.

1 - What is the return on investment (ROI)?

They want to know what they will receive in return for providing you with the money you need for the deal. This is usually an interest percentage, set fee or other compensation combination.

2 - How is their money protected?

They need to know they can trust you with their money. Create a contract with the terms of the arrangement so you and the private lender have protection and written expectations for the deal.

3 - What is the expected timeframe?

They need to know when they will receive repayment. This is important for you to know before you enter the deal. Include the timeframe in the contract and set realistic expectations.

How to Find Private Money for Real Estate Investing

Private money lenders are out there if you play your cards right. You must establish trust! This is vital because you want to create an ongoing relationship. In fact, the two main ingredients for finding private money are: 1) proving your experience level as an investor and 2) building a trusted relationship.

Phase 1 – Gain Experience

It’s hard for new investors to build experience that provides comfort to private lenders. Thankfully, wholesaling is a great way boost your portfolio without requiring a large amount of cash. Wholesaling at least five deals will start to establish the experience and know-how you need as an investor to create trust with private lenders.

Phase 2 – Find Private Money

Once you have experience, it’s time to start reaching out to your network to locate private money lenders. Start with your cash buyers, which are the end buyers of your wholesaling deals. You know these buyers have access to cash. Plus, you already have a positive business relationship.

Also, connect with real estate agents, mortgage brokers and title companies. These professionals understand the industry, and they know private investors who have liquid funds to invest. It’s important to always communicate with professionalism and respect. Quality relationships matter in real estate investing, and you want a positive reputation in the industry.

Once you have contact information for potential private lenders, schedule either a one-on-one meeting or a meeting including the person that connected you. This initial meeting allows you to establish trust and to see if the connection is a good fit. Remember to trust your instinct in real estate investing. You need to trust the private money lender too.

Be very careful about asking your family and friends for a private money loan. This should be your last option. You want to establish a track record and make sure that you know what you are doing. Don’t take the risk of burn bridges with family and friends.

Follow the Rules

Be careful about the rules in place from the Security Exchange Commission (SEC) and state laws. You don’t want to get in legal trouble. The SEC focuses on full transparency and building relationships with the possible lenders before any money is invested (rule of 3/45 and intrastate transactions).

Also stick to the obligations in the contract. Especially as you are building your business, you want to meet your commitments. The goal is to build your business. You won’t do that if you get a reputation of not following the rules.

Private Money Opens the Door to Growth

When done right, private money helps you grow your business and build wealth. Over time, your network will grow, and you’ll have more options for private money. However, as you’re starting out, be patient and build your reputation so that you achieve your goals.