3 Reasons Private Money is the Future of Your Real Estate Investing Business

It seems like a distant memory now. September 15, 2008 marked a date of permanent change for everyone, but for real estate investors in particular.

What is so special about September 15, 2008? Is it kind of like one of those days where you remember exactly what you were doing when you heard the news?

The significance is that September 15, 2008 is the day that Lehman Brothers, a storied Wall Street banking institution, filed for Chapter 11 bankruptcy protection. It was the largest bankruptcy filing in U.S. history, as Lehman had over $600 billion in assets. Can you imagine that? $600 billion with a "b"! Wow.

What is most significant about the Lehman bankruptcy is

not the amount, but the timing and the domino effect it created. You see, the Lehman bankruptcy was the most significant domino that precipitated the financial market panic of late 2008. Basically, Lehman was like the giant squid that pulled the ship of the economy under.

As real estate investors, we felt the immediate impact of this. Mortgages for investment properties were tough at the time of the Lehman bankruptcy, but became nearly impossible after. Commercial mortgages changed over night. Buying distressed real estate with mortgage financing was like navigating a treacherous mountain pass - blinded. As panic set in among the biggest U.S. financial institutions, the small business owners and entrepreneurs were left holding the bag.

If you were relying on banks to give you mortgages or lines of credit before the 2008 financial panic, after the fall of 2008, you could kiss most of that good bye.

Perfect example: I spoke to one local banker in my community (metro Detroit) who told me that: "they would only lend money if it was 100% collateralized by dollars in their bank." Essentially, if you had $500,000 in cash in a checking or savings account in this bank, then they would loan you up to $500,000 as long as you kept the cash there! Talk about nuts! "What was the point of borrowing the money?" I thought to myself.

Even at this time, I was exclusively using private money in my business, but all this financial crisis did was further ingrain in my mind how important it was to NOT rely on banks and mortgage companies for my financial future and building assets and cash flow in my business.

It is in this spirit that I want to again emphasize for real estate investors - at all levels - how LIFE CHANGING CRITICAL it is for you to bring private money into your business so that you can tell these crazy banks and mortgages companies to buzz off if you want to. It's a great feeling to not need money from a banker (and it's easier than you think to accomplish as well).

Here are 3 reasons why private money is the future of your real estate investing business.

   1. Mortgages aren't going to come back (at least not to what they once were)
   2. Banks will require bigger equity positions for financing when they do right loans
   3. Cash will reign supreme

1. Mortgages aren't going to come back

I think a lot of real estate investors are holding out hope that a magic wand will be waved and the financing environment will return to the go-go days of 2002-2005. Remember those 'get a $450,000 mortgage for $1,050 per month' deals? Well, since the mortgage backed securities market is battered unrecognizable and the federal government now has a strangle-hold on much of the industry, it is highly unlikely we'll see anything like the cheap paper go-do days of years past.

For real estate investors, this means you must have alternate financing sources or your portfolio will be severely short-changed. This is where private money investors come into play. You don't have any constraints when you use private money like you do when banks or hard moneylenders are in the picture.

2. Bank will require larger equity..

This point mostly applies to larger projects. There was a point in time where you didn't have to have any skin in the game. Down payments were non-existent and 80/20 first/second mortgages or 80/10 at were the rule of the day.  When commercial financing is part of the picture, or HUD financing, going forward you're much less likely to find a bank that will let you finance your down payment. You'll have to have seasoned equity funds which means..yes, you guessed it - private money investors are the best source of this money.

3. Cash will reign supreme

You've heard me say it before, and I'll keep saying it again and again: cash is king. Cash will continue to be kind and reign supreme in real estate investing and foreclosure and short sale purchases into any foreseeable future. Liquidity is a big deal for financing institutions and when you have the liquid funds available to pay cash for investment properties and you have operating capital on hand to whether any ups or downs you'll be much better positioned for long term wealth building (which is the whole point, right?).


Part of me sometimes wishes that mortgages were like they were a few years ago. It would make things better for homeowners and real estate investors. As entrepreneurs, though, we're tasked with dealing with things the way they are, not what we'd like them to be. We make our money in real estate investing by moving to take advantage of opportunities as they present themselves. And having private investors at the ready is the best way to accomplish this.