Just a few short years ago, many real estate investors were unaware of private money. More recently, private money has become familiar in almost all real estate investor circles. Private lenders can be a great source of business growth.
Unfortunately, there is currently a lack of good quality information about private lending, which is why I wrote a book about it. Let’s first clarify what I refer to as private money.
Private money is monies that you acquire from any private individual. Private money is not institutional money, hard money, or money from a lender that is in the business of lending money. Private money lenders (PMLs) are individuals that have the funds available to invest in any vehicle they see fit, and they often find that vehicle to be you and your real estate portfolio.
No matter your exit strategy – flipping, buy and rent, owner finance – private money can help you create lasting wealth. Arrangements can be structured for financing only or equity shares. Sometimes a combination of both can be beneficial.
For example, let’s say your PML will loan you one million dollars to buy rental properties, but they want some equity. Perhaps you would find it favorable to pay your PML a 7% note rate and give them 50% of the equity above purchase price and make ready costs. In return, you would collect a management fee to manage the properties and also benefit from all the earned equity from principle payments as well as 50% equity above purchase price and make ready costs.
Attracting private money involves much more than telling someone that you can give him or her a certain return on a safe investment in real estate. It’s more about you and how you conduct your business, structuring what you do in a way that is inviting to others. PMLs want to do business with someone that they trust, have confidence in, believe in, and enjoy working with. You do need to be an expert in your business and your field of practice.
Whether you plan to flip or buy-and-hold rentals, you need to know the questions to ask about the properties you look at. Property analysis is extremely important to PMLs, and you should have a way to analyze every deal from multiple exit strategies so that you are comparing each deal as similarly as possible. It’s up to you to know the property values in your area and understand how to pull accurate comparable sales and leased properties.
Know the rehab costs of projects in different price ranges and exit strategies. Understand how to efficiently hire and work with contrac- tors. People and property management skills are important, as is keeping all that you are doing as organized as possible. Practicing profitable habits is important to attracting PMLs and their money.
To maintain your business acumen you should be in a constant state of education. The more you know, the better you can communicate, and the better you can com- municate, the more money you can raise. There are plenty of real estate topics to choose from on Amazon, you can go to seminars, attend investor club meetings, and even view webinars from your home office.
Take some time to learn about personalities and communication styles. Be the realistic optimist, plan for the worst but hope for the best. PMLs want to work with someone that is working hard to build their business and willing to do what it takes to succeed, even when it requires a great deal of discipline or restraint.
Handle your business professionally and in a timely manner. Do what you said you would do, and do it on time. You should be out beating the trees and shaking the bushes to see what pops out. By doing so you will create activity and get the attention of PMLs. Producing income will make you attractive to PMLs though it is not a requirement.
Whether you have a full-time job or income from your current real estate business, use that to your advantage when talking to potential PMLs. Producing income shows the stability of your business and is a testimony to your expertise. When starting out, the quickest way to produce income in your real estate investment business is to start wholesaling. Not only does this provide you with income, but it will help you to become familiar with the market and values, which all makes you more attractive to PMLs. Targeting high-wealth PMLs will be most beneficial.
High-wealth PMLs are those that you believe have the funds to invest one million dollars with you. The fewer PMLs you work with the easier it will be to operate your business. In your pursuit of high-wealth PMLs, you will find others with smaller sums that want to invest and you should be happy to oblige. Small sums can come in handy to use as second liens when you are financing your first lien with a bank.
No marketing is required to get all the private money you need, only networking. Start with your sphere of influence and the people you know. Tell them how great real estate is going for you and how you have individuals loaning you money and earning them 10%. Invite one PML prospect to lunch every week, and you will find private money. It may take 6-12 months, but nothing worth having comes easy. Don’t expect to get a firm commitment but if they seem interested begin sending them properties that you plan to acquire.
It is a good idea to have a presentation manual that you can show or email to prospective PMLs that discusses you, your business, and how you structure your loans. Include a short video showcasing a few of your best proj- ects in different price ranges. You should also take the time to understand estate planning, tax implications, and finance.
High-wealth PMLs have a good understanding of those topics as they work to preserve their estate. Private money lenders are people from all walks of life. They are often humble and conservative, past their years of working long hours, and enjoy putting their money to work for them.
Private Money Lenders working with real estate investors are a rare instance where two individuals in different stages of life can help each other achieve their goals in an incredible way, bringing forth a profitable business and personal relationship.