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Many real estate investors know that buying an investment property is different than purchasing a primary residence. Among the differences is that many homeowners will turn to a conventional mortgage, while real estate investors often look for alternative forms of financing. That’s why as a real estate investor, it is crucial to understand how to fund deals using resources like private money lenders.
In the real estate industry, private lenders will be a much-valued asset to your investor toolbox. But what exactly can they do for you as an investor, and how exactly do they work? Further, how do you approach private lenders about a given deal? Read the following to learn how to work with and find private lenders, so you can help ensure you secure financing for your next deal with ease.
What Is A Private Money Lender?
A private lender is someone who uses their capital to finance investments, such as real estate, and profits from interest paid on the loan. Private lenders are not affiliated with a bank or other financial institution and instead interact directly with the borrower. There are private lending companies that investors can seek out.
Private lenders are a valuable asset to investors because they often have different approval requirements and a faster pace than traditional financing processes. While the qualifications and interest rates will vary based on the situation, the process of working with private lenders will be similar to other loans.
2 Ways You Can Use Private Lender Loans
Private money lenders can provide several benefits for real estate investors, and the best part is: they can help with almost any aspect of a real estate investing business. The right financing will vary on a deal-by-deal basis, but it is still important to understand each of the options available (and how to use them). Here are two ways investors can make use of private money today:
Refinancing A Property
Buying A New Property
Refinancing A Property
Let’s say you purchase a rental property with a traditional mortgage but want to negotiate a better interest rate or shorter repayment timeline. Private money lenders represent the opportunity to refinance and potentially reduce the costs associated with funding a deal. Private money is particularly attractive because, in some cases, investors can even incentivize potential lenders with profit shares (rather than loan repayments). For example, investors could leverage their monthly cash flow to make a deal more attractive when refinancing a passive income property. As a whole, private money lenders can represent a much more flexible refinancing agreement when compared to traditional financing.
Buying A New Property
Private money loans can help real estate investors purchase new properties, including residential, commercial, and multifamily real estate. The key to securing these loans is to run the numbers and craft the right pitch. Experienced investors may find it helpful to highlight past deals, while first-time investors should instead focus on the potential profitability. Most investors will agree that it is great to build a relationship with as many potential private lenders as possible, that way, they are ready to meet when a deal comes along. After all, one of the biggest perks of using private money to fund a new deal is the quick timeline. Private money can enable investors to acquire new deals at much faster rates than other lenders.
How To Find Private Lenders For Real Estate
Learn the ins and outs of private real estate loans.
Build a network of potential private lenders.
Prepare a strong portfolio to present.
Identify the right lender for the project.
Wow lenders with your pitch.
When you first get started in real estate, you may look at your colleagues and wonder how to find private investors for real estate deals. More often than not, investors are using private real estate lenders to fund properties. There are many private lenders out there, but the most challenging aspect can be finding one willing to fund your deal. However, with the right mindset and preparation, you will be sure to find private real estate lenders who will want to help you.
1. Understand The Anatomy Of Private Real Estate Loans
Financing terms, especially when you’re first starting out, can be quite confusing. Are private lenders the same as hard money lenders? If not, what are the differences?
Basically, private lenders refers to individuals not affiliated with a financial institution who lend funds to promising investors. Either from a private investor or someone within your social circle who’s decided to invest in your venture.
Hard money lives in a middle ground between the two. Hard money lenders are usually affiliated with a more traditional financial institution but have less strict standards. (This comes at a price: usually higher interest rates.) Though hard money is technically private money, you’ll generally want to distinguish between the two as an investor.
In addition, it is essential to know exactly what kind of information a private lender will be looking for. In many cases, private real estate lenders will have experience investing directly in properties themselves. Therefore, they will know exactly which numbers and areas to look at when considering a particular deal. While it is important to build a positive relationship with a potential lender, be prepared to answer questions about the facts and figures of a given deal. Here are a few questions to prepare for when looking for private real estate loans:
Will they get their money back?
What is the incentive to invest?
What are the risks involved?
How will you secure my investment?
Is your plan well-researched, and it is achievable?
2. Build A Network
Unlike securing a loan from a bank—or a hard money lender—working with private lenders is all about building relationships. This starts with developing a solid investor network.
It is a good idea to begin building your network on two fronts. First, get to know professionals in your industry, such as real estate agents, fellow investors, title companies, attorneys, and private investors. Many private lenders will come through referrals within your real estate network.
Second, it is a good idea to build your contact list from people outside of the real estate industry. This includes friends, family, colleagues, and anyone not currently an investor but might be looking for new opportunities. Many aspiring investors may just be waiting for a good opportunity to come around before getting started. Alternatively, some of your friends and colleagues may have valuable connections outside your existing network. William Cannon from Signaturely adds that you should “consider all of the persons who could be able to help you with a private money loan. Friends, family, business acquaintances, and other investors are all possible sources of funding. Anyone with money to spend can, in theory, become a potential lender. And, if your proposed repayment terms are attractive enough, a private money loan could be just what you need to achieve your investing objectives”.
Always approach potential connections with respect and keep these networking tips in mind. Remember, it will take time to create positive relationships with fellow professionals, but it will open many doors in your career. Building a strong investment network is crucial to finding private lenders to work with.
3. Prepare Your Materials
Put together the materials that you will be sharing with private lenders during your pitch. This includes a company overview covering your education, goals, past deals and experience, and what makes you the right investor for their funds.
With this information, you will want to prepare a presentation or video that outlines previous properties you have worked with. This should outline the success of past deals, including pictures, numbers, and relevant information. You do not need to include every property you have completed and instead should select the properties that show your best work. Remember you want to make a good impression and highlight your strengths.
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. Look into the documents you will need to present to investors, such as a promissory note and insurance. Also, write out important information like how long the process will take, when they can expect to see the loan paid in full, and what happens if there are multiple investors. Going in with this information will ensure you are prepared for any questions that come your way during the pitch.
4. Select Your Private Lender
Finding private lenders might be challenging at first, but it is important to remember that the relationship is a two-way street. Although you will spend time pitching to potential investors and trying to impress them, you will want to make sure that the lender you ultimately choose will serve your needs and not just the other way around.
“Make sure to collect and compare several loan offers before you make your final decision, as each proposal will be tailored to you, based on your private lender’s perceived risk of investing in your project,” says Paw from Financer.com, a global loan comparison service.
First, make sure to ask them about their proposed loan term and interest rate and what the loan will be based on. This will help you determine how long you will have to pay the loan back and how quickly it will accrue interest. Further, you will want to know if they prefer to make their loans based on the property’s current value, or after-repair value. Next, be sure to inquire about potential fees they charge, whether upfront or in the form of penalties. Finally, find out the schedule at which the lender will disperse their funds to you.
Based on this information, you will be able to identify which private loan will present the least amount of risk to you.
5. Make The Pitch
Finalizing a deal with a private lender is about more than explaining the numbers and going over the property. You need to put your potential partner at ease and make sure you are on the same page.
To establish this rapport, go into your initial pitch meeting focused squarely on educating them about the process. Then, 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 than when you started.
Instead, focus on answering questions, especially those referring to profit splits and timelines. This is what most private investors are worried about. 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 financing.
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Pro Tips For Securing A Private Lender
Private real estate lenders aren’t nearly as hard as many new investors make them out to be. Many private lending companies are always looking for investors to lend their money to. The trick, however, is proving that you are capable of managing their money well. For more of an idea of how to find private money lenders and convince them you are the right choice, try following these steps:
Understand Negotiation Tactics: In securing private money lenders, investors will need to learn how to speak their language. That said, there are two particular strategies to consider: the hard sell and the soft sell. The former, the hard sell, is a more professional approach that will have investors develop a convincing elevator pitch. The idea is to sell the private money lender on the idea of funding an attractive deal. In this particular situation, it’s important to remember private lenders are just as eager to work with investors as investors are to work with them; both parties stand to make money on a successful deal. Therefore, investors will want to approach lenders with all necessary information and prove that the numbers are correct. Doing so should convince lenders that they are making the right decision. On the other hand, the soft sell is typically reserved for friends and family and typically involves an indirect approach. More specifically, the soft sell will catch the interest of investors by casually slipping an opportunity into a conversation. Either way, investors need to know who they are talking to before they begin negotiations.
Find Lenders Online: Proceed to find lenders using every method possible, not the least of which will include online searches. Several online sources are designed to connect private money lenders with potential investors, all of which may be found with a simple, localized Google search. However, one of the best online searches investors may initiate is looking for local real estate investor meet-ups. Look for a local REI group and find out when they meet next. Attending a local REI meeting will connect investors with several industry professionals, many of whom may be private money lenders themselves.
Cold Call: Investors should try every outlet at their disposal, and cold calls are no exception. Obtain a list of lenders online and begin to call each name. When doing so, be as upfront as possible and lay everything out on the table. Proceed to tell them everything they will want to hear about the deal, and be prepared to answer a lot of questions. That said, the initial phone call is more of an introduction. Instead of working the deal out on the phone, schedule a meeting to go over things in more detail later.
Launch A Marketing Campaign: Not unlike looking for a deal, investors should market for private money lenders. There are many marketing campaigns to consider, but investors shouldn’t limit themselves to just one; try them all. A direct mail marketing campaign, for example, will have investors soliciting potential lenders through a highly targeted mailing campaign. Another idea is to place a sign on any property that is currently being worked on. Place a sign in the yard that suggests you are looking for a private money lender to fund the next deal and to inquire within.
Pros And Cons Of Private Loans
Just like everything else in the world of investing, there are pros and cons to private money loans. The main pros of private money loans are that they have a very quick preapproval timeframe, which leads to quick funding. They also only require a FICO credit score of 600 or above, making them more attainable for those with low credit scores. Finally, private money loans will often fund projects that traditional lenders won’t. All of these pros make private money loans a great option for many people, but they also come with their cons.
The first con of private money loans comes in the form of interest and fees. A private money loan can come with fees of up to 10% of the loan, as well as a high interest rate somewhere between 5% and 15%. This causes the loan to cost much more overall than a traditional loan. On top of this, private money loans are usually written with shorter payback terms of 2 years or less. This means that your monthly payments are going to be much higher than your traditional loan. It is important to compare loan options when looking to take out a loan, as making the wrong choice could cost you a lot of money in the short and long run.
Private Money Lenders FAQs
Working with private lenders is not a complex process, though it can be mysterious for investors unfamiliar with alternative financing methods. As you begin to ask how to find private lenders, make sure you don’t have any lingering confusion about the process. Read through the following frequently asked questions to make sure when you do find a private lender to work with, you know what to expect:
How Do Private Lenders Work?
Private lenders invest their capital into real estate deals in exchange for interest paid on the loan. They will work with investors to establish the loan terms, which will be paid back according to the term. Private lenders are often investors in their own right and turn to private lending to expand their portfolios.
Are Private Lenders Regulated?
State and federal lending laws regulate private lenders. Depending on where they are located, there is often a limit to the number of loans they can provide without a license. So while private lenders are not regulated as strictly as bankers, they must follow the rules. For more information on the regulations in your state, be sure to research online.
Do Private Money Lenders Check Credit Scores?
Unlike their hard money counterparts, private money lenders are not known for checking borrowers’ credit scores. That’s not to say all private money lenders don’t check credit scores before lending, but rather that the decision to loan is based primarily on the asset at hand. Otherwise known as asset-based lending, private money lenders will typically base the majority of their decision to lend on the quality of the subject property. The more likely the property is to sell for a profit, the more likely a private money lender will lend funds to an investor. Of course, the asset at hand is merely part of the decision-making process. Many private money lenders will want to know who they are lending to, resulting in some questions, not the least of which may include a credit score check. That said, not all private money lenders will look at a borrower’s credit score. Only those who are more diligent will typically consider the credit score when lending.
Who Can Be A Private Lender?
Anyone can be a private lender, though they are commonly investors or individuals with extra capital on hand. Private money lending offers a way to earn income by simply loaning someone money, often at a higher interest rate than a savings or other investment account. It is not uncommon for private lenders to be family, friends, or peers. These are typically the people you will think of first when searching for funding. Private lending represents a way to get involved in real estate without having a hands-on role.
Is It Legal To Pool Private Money?
It is legal to pool private money, assuming you follow the proper legal frameworks. Pooling private money has become an increasingly popular form of financing in recent years. Though, it is more commonly referred to by a different name: crowdsourcing. Real estate investors have leaned into the emergence of crowdsourcing platforms, such as Yieldstreet, to finance new deals. There are some state and federal regulations to be aware of. For example, there are limits on the amount real estate investors can fundraise when pooling lenders.
Best Private Lending Companies
Private lending companies will offer the same benefits of working directly with a private lender, though the application and approval structure may look different. There are many personal loan companies and peer-to-peer lending platforms that investors can consider. Here are some of the best private lending companies out there:
LightStream: This particular outlet offers loans for auto, home improvement and just about anything else, at low rates for anyone who may demonstrate a propensity for good credit.
Upstart: Upstart is an online lending marketplace that specializes in personal loans using non-traditional variables to determine creditworthiness.
Citizens Bank: Citizens Bank offers personal and business banking, student loans, home equity products, credit cards, and more.
Best Egg: Best Egg is a fast and efficient lending platform investors may tap to secure relatively low interest rates.
How Much Do Private Lenders Charge?
Private lenders charge different interest amounts ranging from four to 12 percent. The amount they charge will be dependent on several factors, including your investment history, the numbers of the deal at hand, the proposed term length, and more. However, the good news is that oftentimes the interest rates will be negotiable. Remember as you practice your pitch that not only are you trying to secure financing, but also the best loan terms possible.
When working with private money lenders , your goal should not be to land a deal and move on. Instead, you should seek out someone you can present deals to on a long-term basis. If you focus on building a strong relationship, you can secure financing for your current and future investments.
Always remain professional when building a network, a strong portfolio and a great pitch can go a long way in landing a deal. By making strong connections and maintaining positive relationships with each lender you work with, you can help ensure you always have options when it comes time to finance a deal.
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The information presented is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing provided shall constitute financial, tax, legal, or accounting advice or individually tailored investment advice. This information is for educational purposes only.