Private Lending: What It Is, Why You Should Use It, & How to Get Started
If you want to take your real estate investing career to another level, I highly recommend you look into private lending. Banks are, of course, the more traditional way to fund real estate deals and are a great resource. But private lending can open up many new doors and let you get really creative in ways that traditional banks would never allow.
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What Is Private Lending?
Private lending is pretty straight forward. Private lenders are people with money who are looking for someplace to invest it. They do not have to be millionaires (although that would be nice). More likely, they are everyday folks like you and me who have a bit of money saved and are wondering how best to get a decent return.
Why would such a person invest in your real estate deals rather than more traditional investments? The reasons could be many and varied. Perhaps they do not trust or understand the stock market. Perhaps it is because CD rates are currently in the tank. Whatever the reason, you as an investor need to be prepared for the opportunity to present yourself to a potential private lender. Most likely, they have never heard that they can be a private lender nor do they understand what it entails. That’s where you come in.
Why Use Private Lending?
Because it is a great way to fund your real estate deals. You and your lender make the rules and define the terms. Do you want to do a profit sharing deal? That is ok. Want to make interest only payments? That is ok, too. Do you want to move fast, without costly appraisals and inspections? You can do that as well. You are only limited to what you and your lenders can develop and agree to on any particular deal. Try doing that with a conventional bank.
How Should You Present Yourself to Prospective Lenders?
Private lenders are of course looking for a decent return, but they are also very concerned that their money will be safe and used wisely. They want to know that you are a good risk, that you can be trusted and that you will do what you say you will do with their money. So how do you do that?
First, you need to have a good reputation. I have previously posted about how important it is to have a good reputation in this business. Before investing with you, any lender is going to do some checking. Make sure that they will only discover positive elements.
Second, you need to be ready with a so-called “elevator speech.” Imagine you were on an elevator and Donald Trump got on. While you may be tempted to ask about his views on illegal immigration, you would be better served to use this once-in-a-lifetime opportunity to introduce yourself and explain that you are a real estate investor who provides great returns to investors. Always be prepared with a quick synopsis of what you do because you never know when an opportunity will present itself, and you may only have a short elevator ride to do it. Such a speech can come in handy when people ask you what you do at a party, for example.
Thirdly, you need to be ready to follow up. Suppose Mr. Trump said, “Kevin, that sounds great! Why don’t you come by my office tomorrow at 9 a.m. and pitch me your proposal?” Would you be able to do it? It’s not that hard; all you need is a packet of materials explaining who you are, what you do and how you do it. Get a nice folder or binder and place the following materials in it:
- A short description of what you do. Keep this to less than a page.
- Your resume and those of other principals in your company. Remember, you are trying to build trust and demonstrate that you are a good risk.
- A personal financial statement. You are asking for money, and you should be an open book. Remember that you are trying to build trust and demonstrate that you are a good risk. (If you have never completed a personal financial statement I highly recommend it. It can really be eye opening, especially to you newer investors.)
- A list of current and past real estate investments. Hopefully you can demonstrate success and significant returns for you and other investors.
Demonstrations of your reliability and dependability.
- Articles about real estate, especially the market you work in. If you happen to have any articles about you, or that you were quoted in, that is an extra bonus and will help build your credibility.
- If you have positive recommendations from anyone, such as other lenders, contractors, tenants, clients, put them in there.
- If you have used other lenders in the past, ask them if they will provide you with a good reference.
- Promissory note.
- Credit report.
- Tax returns. These again go back to an open book policy, but you might only provide them if you are asked for them.
Finally, follow up with personalized a thank you letter and hopefully secure your new lender.
Private landing is a powerful tool to have in your investing tool box, but you have to be prepared to jump on any opportunity with a potential private lender that presents itself.
But what if you have no experience or are just starting out? That can be difficult, and honestly you will have to work hard at finding that first lender. Start with family and friends and do the best you can with what you have done to date. Explain how you have educated yourself and the types of investments you propose. Do not lie, make stuff up or fluff things up. Remember, your reputation is the best way to present that you are a low risk.
Whatever you do, do not try to make it work. If either you or your potential lender is uncomfortable with the terms, best to walk away and find another lender or another deal.
Do you use private lenders? Care to share some of your tips and experiences?
Let’s help each other out in the comments section below.