Buying an investment property is not like buying a home, with a conventional mortgage, in which you intend to live. As a real estate investor you will, at some point, most likely have to look for alternative forms of financing, and mastering the skills of how to find a private lender can be a much-valued asset to your overall investor tool box.
But how do you exactly go about raising private money? What do you need to have in place when searching for private lending for real estate. And what precisely is private lending? (And what can do it for you as an investor.)
So, to help you learn how to find a private lender — and have you walking to your next private lender meeting with confidence and knowledge — here are four keys to securing private money for your next venture.
How to Find a Private Lender (Even When You’re a Newbie)
1.Understand What Private Money Is
Financing terms, especially when you’re first starting out, can be quite confusing. Is private money lending the same as hard money lending? If not, what are the differences.
Basically, private lending refers to money that, you as an investor, borrow from a lender who is not affiliated with a financial institution. Either from a private investor or someone within your social circle who’s decided to invest in your venture.
Hard money lending lives in a middle ground between the two. Hard money lenders are usually affiliated with a more traditional financial institution, but have less strict lending standards. (This comes at a price, usually with higher interest rates.)
Though hard money lending is technically private money, as an investor you’ll generally want to distinguish between the two.
2. Build Your Network
Unlike securing a loan from a bank — or a hard money lender — raising private money is all about building relationships. And this starts with developing a solid investor network.
Now this usually means building your network on two fronts. One, getting to know professionals in your industry — such as real estate agents, fellow real estate investors, title companies, attorneys, private investors. Many private lending deals will come through the referrals you’ll get from this pillar of your real estate network.
Two, you will also want to build your own Rolodex from friends, families, colleagues — anybody who isn’t currently a private investor, but who might be looking for a return on their investment. These are often some of the easiest forms of private lending to access, especially for the newbie investor, because a relationship is usually already in place.
No matter who you approach to add to your investing Rolodex, you’ll want to be sure that you proceed with ethics and integrity. (And always give before you get.)
3. Get Your Materials Together
And by materials, we mean the vitally important items you’ll be sharing with private money lenders that you pitch to. This includes a company overview, which covers your education, goals, experience (if you have any), and what makes you the ideal investor for them to truth their money with.
Along with this document you’ll want to have a Powerpoint presentation, or even better a video, that outlines some of the properties you’ve done — or perhaps your partner or mentor has done — that outlines exactly what types of properties you’ll be looking to invest in, and what they’ll look like when you’re done transforming them. (Pictures sell!)
One more thing to add to your to-do list, which may not be as tangible as a company overview or introductory video, is to have a clear understanding of the private investor process. What documents you’ll be handing over to the private investor — such as a promissory note and insurance — and how things will transpire. (When they’ll get their money back; how long the process takes; what happens if there are multiple investors.) Going in armed with this information will ensure that you’re prepared for any question that comes your way.
4. Make the Pitch
Finalizing a deal with a private lender is about far more than explaining the numbers and going over the property. You need to put your private money partner at ease and make sure you are both on the same page.
To establish this rapport, go into your initial pitch meeting focused squarely on educating them about the process. Keep building that relationship piece-by-piece. Resist the temptation to go for the quick sale, or fast deal, it won’t work — and it may leave you in worse shape then when you started.
Instead focus on answering questions, especially those referring to profit splits and timelines. This is what most private investors are worried. And the more you can put them at ease by thinking of things from their point of view, the more likely you are to secure private money financing.
The Real Finish Line
Your goal when working with a private money lender is not to close one deal and move on. Ideally you want to find someone that you can present deals to on a long-term basis.
If you’re able to focus on that, and put aside immediate concerns about getting money to buy that one property you’ve had your eye on, not only will you establish more rapport more with that would-be private investor, but you’ll also set up the conditions for a long-term healthy business relationship. (Which can pay off bigger than any one deal in your pursuit of learning how to find a private lender.)