There are a lot of advantages to using private money or money from private investors to fund your real estate deals:
- Private money can fund a deal very quickly
- Private money may not care about your credit
- Private money is open to all sorts of returns, depending on what rates of return they receive elsewhere
- Private money will work with you if there’s a problem
- Private money may not want monthly payments. They will just want part of the profits at the end
There’s one big drawback – You have to ask for it. Many people are very skittish about asking people for money, especially people they know. It’s important to change your attitude towards asking.
When you borrow money from banks, you feel very obligated to pay it back. The bank lets you know all the nasty things that will happen to you if you don’t follow their rules and make their payments. They put liens on your property. You sometimes feel like you are groveling in hopes the bank says ‘Yes’.
Private lenders should really be called ‘Investing Partners’. Real estate investors who raise a lot of private money view the investors as people who are helping to complete the deal in exchange for some of the profits. Many of these investors are earning 1-3% on their money in the bank. You could double their return to 6 or 7% and they would be thrilled. Plus many of them would love to be part of ‘the deal’. With the ‘investor partner’ mindset, you can present a deal to them as if it is YOU doing the favor for THEM, by increasing their rate of return.
There are three types of people who can be private money lenders for real estate deals:
- People you know
- Other real estate investors
- People who are already private lenders
The people who you know consist of friends, family members and other acquaintances (we hear them sometimes called ‘Friends, Family and Fools’). People really don’t like asking people they know. Those people are the best place to start. As you create a presentation to show your private lenders and practice it, your friends and family will give you your best feedback. Strangers may just say ‘No’. Plus friends and family will trust you more. They have a history with you. The pressure will make you be very careful with the deals you take on.
Other real estate investors know what you’re doing and can be great mentors as well as lenders. Experienced investors would help analyze a deal and may save you a bundle of money by turning you down on a bad deal. You can find private lenders through Real Estate investor meetings in your local area, or just networking with other people who come into contact with investors. Realtors, mortgage lenders, and contractors are examples.
People who have already made private loans are very likely to make more private loans. They understand what a good deal looks like and will also help you analyze one. You can find these private lenders by going to a list broker service like ListSource.com. They can give you private lender information for around 20 cents a lead. Our company has partnerships with other database companies so we may even be able to get you this information at a lower price.
If you do a direct mail campaign for your private lenders, be careful not to break any laws. The SEC does not look kindly on solicitations to people you don’t know on specific deals. Don’t send out a mailing saying something like ‘8% return for private money on house flip’. Instead mail them something like ‘Hey – I hear you do private money loans. I know some real estate investors who need private money. Maybe I can help?’ It would pay to run your mailing by an attorney to ensure you are not violating any laws.
Private money can be a wonderful path to real estate wealth for both the real estate investor and the lender. Like any partnership, setting expectations up front and putting everything in writing will resolve many disputes later on.