As a real estate investor, the more ways you can figure out how to close deals, the more success you will be privy to. Finding financing for your first few deals may have been as easy as walking to your local bank and filling out an application. However, the more deals you close, the harder this process gets. Even if you have had no trouble getting approved, you never know when private financing can come in handy. Accordingly, securing private funds is an essential process for investors of every level. Other peoples’ money is one of the few aspects that can help you realize more success than you ever thought imaginable.
Private money can be generalized as any individual or group that lends money with the hopes of getting a greater return in the future. Instead of earning 1% in a savings account, lenders have elected to put their money to work with an investor in the real estate market. These lenders could be a friend, family member or someone you know from your local network. If you have been in the business for some time, you have probably come across a private money investor. However, you may not have any need for them at the time. If that is the case, build a relationship anyways. You never know when you may need their help in the future.
Before you start looking and networking for private money lenders, you should have some idea of how they work. On a traditional loan, a bank will look at credit score, income and assets as a means to issue a loan approval. Private money typically doesn’t carry nearly the same level of scrutiny. Depending on your relationship with the lender, you may only need a credit score or even just a plan of how they will be repaid. Conversely, not having to jump through as many hoops will cost you. Hard money lenders and private money lenders are different in that a hard money lender will typically have a set fixed rate with interest and repayment. A private money lender will still have repayment, but they may want a percentage of the profits or a higher rate of return. Essentially, you are paying more for an expedited service.
Most lenders are mainly concerned with how they will get their money back. However, this is the case with any lender. Having said that, you need to come up with a business plan: what types of properties will you look for and what do you intend to do with them? Your strategy can include anything from buying and holding for five years or flipping with the hopes to get out in six months. Whatever it is, you need to have a firm, and realistic, exit strategy in place. You should always provide plenty of cushion to your estimates because it is always more difficult to go back for more money than have it and not use it. You need to strike a balance between giving away too much and knowing that using private money can help you get deals that you may not of otherwise had access to. They are the ones with the money and you are the one that needs it. As such, they can ask for what they want. It doesn’t mean you have to accept it. However, if you look at the big picture, oftentimes it makes sense to use the money and move on.
Using private money will give you opportunities and access to deals that traditional lender financing does not. A majority of short sales and foreclosures will go to buyers who make cash offers. Lenders have been burned by lender deals falling through and like the security that a quick, cash closing brings. The same can be said about dealing with buyers that are looking to get out of the property quickly. By having the access to cash, you can make offers on many properties that you otherwise would not have. Additionally, you will find that more of these offers are accepted.
Dealing with friends and family can be tricky once money is involved. It is imperative that you get any terms, rates, repayment schedules and expectations on the table before you agree to anything. If either side starts changing things after you get started, it will lead to a short and unproductive partnership. You also need to make it known what work is expected from each side. If your lender is strictly a money partner, you need to take care of everything else. You will also probably have to deal with weekly or daily phone calls looking for updates. A private money transaction is only successful if both parties end up happy in the end. This may require a little give and take on your end, but it is worth it.
There are more people willing and able to lend their money than you may realize. Start by sending an email or mailing a letter to your friends and family. You should get a couple of responses. If not, you can use your local network to find someone. Private money may not work for you on every deal, but it is a nice option to have when you need it.