Why use Private money? Benefits and how to find private lenders!

Why use private money?

The information below is through a combination of experience and education. My goal is to provide you with an educational view on private lenders, the benefits, how to find them, and some practical guidelines when you borrow funds.

Part 1: Overview of Benefits

Part 2: How to find Private Lenders

Part 3: What to bring to a meeting

Part 4: Cardinal rules and key takeaways

So what is a private lender? Well it could be anybody, your aunt, mother, friends, or a gym buddy at the YMCA. The biggest benefit to finding these lenders is that YOU are in control of the underwriting process. The greatest part is that most people know about the stock market, 401ks, and CD’s. But they don’t know that they can use the same money to invest in real estate. Best of all, their investment is secured by the asset and covered under an insurance policy!

As an investor, you will get to a point when you no longer qualify for fannie and Freddie debt; the long term and low interest rates we all love. Since 2012 I have borrowed money from banks, hard money lenders, and private lenders to fund my deals I can tell you that my favorite has been private money.

Part 1: Overview of Benefits. 

You can underwrite your own deals and determine the loan amount, rate, and terms. There is a lot of responsibly that comes along with this, it would be wise to create a track record first and be able to show people that you will be a good steward of their money.

I truly believe that this is the greatest benefit. When you have the power to underwrite your own deals, there are no need for credit checks, W2’s, tax returns, debt to income ratios, # of properties currently owned, and paperwork on paperwork. Playing the awful waiting game to see if you’re accepted or not from the bank... Doesn’t that one drive you crazy also!?

Its great to also give your lender options to choose from. For instance, maybe you don’t want to pay monthly interest payments or put 15% down. So you might offer different rates and terms on a 100k loan: 7% monthly interest payments/no principle pay down OR 10% and I will pay you the balance plus accrued interest at closing?

If YOU decide, typical terms (There aren’t any really) with private money means no pre-payment penalties, large down payments, monthly interest payments, or no points. Today’s typical closing fees for Hard Money include at least 15% down for the total project amount. 2-4 points due at closing. Pre-payment if you pay the note off before a certain time, and also another point if you go past a certain date. Monthly interest payments, etc.

No construction draws schedules. Each drawl schedule will have a cost attached to it. The lender will send an appraiser or inspector out to visit your project to verify if the work has been done. There is a 150-250 fee per each drawl. With private money, if you choose, you can get the entire construction budget if needed.

Faster time to close because you can write actual cash offers. Your cash offer only needs your approval and your private lenders approval.

Part 2: How to find private lenders.

Tell everyone you know about the success your having in real estate. For instance, every time I would visit my doctor or other professionals they would ask me what I’ve been up to.

“Well we just flipped this house in my hometown, we bought it for 110k and sold it for 195k, while making a profit of 23k! Our lender made 14k of profit!”

Then just see where the conversation goes; don’t push them about being a lender and start asking for money. Hopefully their curiosity is perked and they will have asked you a few questions. Which leads to my best line:

“Hey if we come across another property, should we give you a call first before paying someone else?”

Growing up I had this cousin Ryan and he was very good at promoting clubs. Some nights had specials and they would ask Ryan to help bring people in. For the first couple of months he would send out a mass text with the details. But his response rate wasn’t that great, he would only get regular people. He later learned that texting each individual and using their name led to a very high turnout rate.

So before you go blasting out a mass text, think about who might benefit as a private lender.

REMEMBER this: You ARE NOT asking for money, you are offering an opportunity.

Part 3: What to bring to a meeting.

Credibility book! This book should include: A bio about you and your company, your “resume”, case studies, benefits, and your investment strategy/business plan. The goal is simple, to build your reputation as a credible investor. Which in return builds trust with the private lender. Also, make sure you have pictures. This goes a long way. I could talk until I’m blue in the face about numbers, projections, and returns. But some people just love photos that show the before and after product.

These should be your cardinal rules:

• “Say What You'll Do; Do What You Say.”
• Protect yourself and your lender by not overextending yourself. Pick a LTV and stick with it. If you go over, it comes out of your pocket.

Part 4: Keys understandings and take away.

• I know this conversation pushed more towards private financing. Can you blame me?? But in truth, Hard Money lenders and banks have their place when it comes to real estate investing. Each form of lending has its perks, it is best to understand every lending vehicle so you can choose the best lending terms at the best time for your investments.
• All the above is based on TRUST. If you don’t have it, or lose it, your reputation will be at stake. And worst of all, you may lose someone’s life savings that they have worked really hard to save all those years.
• My mom always said don’t judge a book by its cover. So when you meet someone unassuming, don’t write him or her off. Most millionaires live a modest lifestyle. This is where the Golden Rule takes care of that. If you’re a good person and act kindly, you will have nothing to worry about.

My best advice is this. Be true to yourself, understand investing principles, be a good steward of money, persevere, and align your interests with your investor interests.