4 Essential Steps to Take BEFORE Seeking Private Money
How many people remember the importance of “prerequisites” in college?
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I can recall being super excited to register for a few classes, and when I was filling out the last page of registration, it denied my paperwork since I did not have the correct prerequisite class. Of course, being young and naive, I thought this rule of needing prerequisites was stupid and unnecessary! However, as I’ve gotten older, I have come to appreciate the need for prerequisites. The purpose of prerequisites is to actually set people up for success.
So, why am I talking about prerequisites on a real estate investing blog? Well, I am excited to be writing about a very important and popular topic in real estate investing: private money. I am going to talk about the prerequisites that investors need BEFORE they can begin raising private money.
Too many real estate investors simply find a deal and then go on the hunt for a private money partner. I see various forums and posts about this topic all over BiggerPockets. I don’t want to say this is a bad strategy; however, there are some critical “must have” prerequisites before you can begin looking for private money partners and discussing deals with them. Some people might disagree with me and say, “Just fake it until you make it,” or, “Act as if.”
Well, I am all about positive thinking. However, if you are trying to build trust and rapport with private money lenders, you don’t want to “fake it ’til you make it.” Not with them. In order to increase your success rate with private money lenders, you must have some critical prerequisites.
4 “Must Haves” BEFORE You Go On the Search for Private Money
1. Gain real estate investing experience.
If you decided to invest in the stock market, I would assume you would not feel comfortable handing over your money to a financial planner who has no experience. Well, that being said, this is exactly what happens when potential real estate investors seek private money when they don’t have any education or experience under their belt.
Let me explain. You and I agree that you must be educated. I am not telling you anything you don’t already know. This point has been made time and time again all over the BiggerPockets site. And rightfully so. However, many people underestimate this step and take it for granted. They think learning a few real estate terms like “after repair value” and “debt coverage ratio” and taking a few courses equips them to look for deals and to begin raising private money.
I would recommend taking it a step further. In addition to getting yourself educated, I would highly recommend gaining real life real estate experience. Get as much experience as you can in an actual real estate deal (from the time an offer is made to the time the property is sold or rented). This is the best way to learn the business. This will help you learn the basics of real estate. Attend as many educational opportunities as you can. The key is to learn from people who you respect and want to eventually emulate.
When my husband Matt and I got started, we took an entire year to become educated. We attended countless local real estate meetings and took as many courses as we could on the subject of real estate investing. We also gained some real estate investing experience by spending time with a knowledgeable, handy realtor, who in addition to selling properties also had some investment properties of his own.
We learned a lot from him. When we moved from Philadelphia, however, we should have found a mentor in our new home of New Jersey. We could have continued to gain experience that way. That was a mistake. That is why I am so adamant to newbies to figure out how to gain experience.
That way, when you are speaking with a potential private money lender, you can speak about real estate investing in an educated way. You are not trying to impress people with the “big” terms you know; instead, show them that you know what you are talking about—and have the team and experience to back it up.
2. Become an ACTIVE part of two types of networks.
This one also might seem obvious since you are reading this blog on the BiggerPockets site! However, I don’t mean getting involved on the peripheral; I mean really getting involved and becoming an active member of the network. In order to become really “involved” in a community, you must become a resource and someone willing to help.
No one likes the person who attends networking (online or in person) and just “takes” information and never provides information or helps.
- Become active in real estate communities—both online and in person. Clearly, I am a huge fan of the BiggerPockets community. It is a phenomenal site and community. Honestly, there is nothing out there like it. I also encourage experienced and novice investors to get involved in local real estate investing clubs. Volunteer in these groups, take experienced investors out to coffee, offer to help where you can. There is always help that is needed. Bottom line—be a resource, soak as much as you can up, and surround yourself in the real estate conversation.
- Become active in non-real estate communities. This is also important to expanding your network and business contacts. Both my husband and I have been involved with various networking groups, referrals groups, and business groups (and continue to participate). There are many benefits to these groups, including the ability to expand your business contacts and network. Most recently, a member of my referral group recommended the bank we ended up refinancing our portfolio with! The worst thing you can do is just surround yourself with other real estate investors. Expand your network, and you will expand your experience.
The one caveat… I must say, please be aware of protecting your time.
Once you begin to “volunteer” and let these organizations know you are willing to help out, they may “suck you in” and never let you go! I am part kidding and part serious. Be smart about your volunteering. Make sure you are helping the organization and that it is a role and position that will help you out. Just be careful. Time, as we all know, is the one limited resource.
3. Take a personal inventory (time, assets, skills, personality, why).
I have mentioned this in various blog posts; however, this is an important one BEFORE developing partnerships and looking for private money. When I say “take a personal inventory,” I mean take a look at what you bring to the table first.
Time: Become clear on how much time you can put towards real estate investing. Many of our private money partners and investors like the fact that we are full-time real estate investors. We are always there if they have a question or even want to walk a property. I am not saying you have to be full-time; however, you need to be clear with yourself and your potential money partners regarding the time you do have to put into your real estate investing business.
Money: If you are looking for private money, many potential partners will want to know if you are going to put in money (i.e., if you are going to have some “skin in the game”). Some real estate investors will tell you that they don’t put any of their own money into a deal, and other investors will tell you that they do put in money along with the money partner.
Regardless, the key is to be clear on your personal financial position. What personal resources do you have the potential to use? Don’t let the answer to this question stop you. You can be successful whether you have money to invest or not.
Once you have an answer for this, you then will need to establish how much private money you are looking for. One of the best things we have done with most of our private money deals is to use private money to purchase and rehab the building (either for buy-hold or buy-flip). In other words, this has allowed us to do cash deals and then refinance once the project is complete (sold or rented). The deal moves faster this way, which makes everyone happy.
Skills: What are your strengths? Every single person reading this blog, on the BP site and in this world has skills and personality strengths. Each of us is great—even excellent at something. The key is to identify your strengths and then figure out how to translate these skills and strengths to the real estate investing world.
Most, if not all, skills are transferable. Then, determine your gaps (i.e., skills that you need that you don’t possess). You can deal with these gaps by developing a team, developing partnerships, or even learning the skill through mentoring and surrounding yourself in the real estate conversation.
Your “Why”: This one is fairly simple and straightforward. Become crystal clear (and honest) with the reasons and motivation you are investing in real estate. Make it deeper than simply “making money.” Every private money lender needs to trust their investor.
You build trust by sharing your goals and reasons for getting into real estate investing with people. Bottom line—be authentic.
4. Develop your strategy (market, property, financing, team).
Before you can look for private money partners, I would suggest developing your investing strategy. Begin to gain clarity around the market you want to invest in and the type of deals you want to do (i.e., buy-hold, buy-rehab-hold, turn-key, wholesale, buy-fix-flip, etc).
You also want to gain some relationships with financing partners. Even if you partner with private money lenders, you will need to have relationships with conventional lending institutions, such as banks, credit unions, etc. Lastly, begin to develop your team. It helps to have key people on your team (contractors, title agent, realtor, attorney, and accountant). If you take action from Step No. 2 above, you should have no problem building a team.
The only reason we have been able to grow from 30 units to over 100 units in a three-year timeframe is due to raising private money. This has been the key to our growth. Before you begin to raise private money, my hope for you is that you take action on these four steps.
Are there any steps you would add? Or do you disagree with me and suggest you “fake it ’til you make it?”
I would love to hear how you applied any of these suggestions!