Case Studies: How to Use Private Money in the Short-Term, Medium-Term & Long-Term

Case Studies: How to Use Private Money in the Short-Term, Medium-Term & Long-Term

4 min read
Brandon Turner

Brandon Turner is an active real estate investor, entrepreneur, writer, and podcaster. He is a nationally recognized leader in the real estate education space and has taught millions of people how to find, finance, and manage real estate investments.

Experience
Brandon began buying rental properties and flipping houses at the age of 21. He started with a single family home, where he rented out the bedrooms, but quickly moved on to a duplex, where he lived in half and rented out the other half.

From there, Brandon began buying both single family and multifamily rental properties, as well as fix and flipping single family homes in Washington state. Later, he expanded to larger apartments and mobile home parks across the country.

Today, Brandon is the managing member at Open Door Capital, where he raises money to purchase and turn around large mobile home parks and apartment complexes. He owns nearly 300 units across four states.

In addition to real estate investing experience, Brandon is also a best-selling author, having published four full-length non-fiction books, two e-books, and two personal development daily success journals. He has sold more than 400,000 books worldwide. His top-selling title, The Book on Rental Property Investing, is consistently ranked in the top 50 of all business books in the world on Amazon.com, having also garnered nearly 700 five-star reviews on the Amazon platform.

In addition to books, Brandon also publishes regular audio and video content that reaches millions each year. His videos on YouTube have been watched cumulatively more than 10,000,000 times, and the podcast he hosts weekly, the BiggerPockets Podcast, is the top-ranked real estate podcast in the world, with more than 75,000,000 downloads over 350 unique episodes. The show also has over 10,000 five-star reviews in iTunes and is consistently in the top 10 of all business podcasts on iTunes.

A life-long adventurer, Brandon (along with Heather and daughter Rosie and son Wilder) spends his time surfing, snorkeling, hiking, and swimming in the ocean near his home in Maui, Hawaii.

Press
Brandon’s writing has been featured on Forbes.com, Entrepreneur.com, FoxNews.com, Money Magazine, and numerous other publications across the web and in print media.

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YouTube
Instagram @beardybrandon
Open Door Capital

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I love to step outside the theoretical and get down to the real world, so let’s outline three scenarios of how private money can be used to fund your real estate investing business.

How to Use Private Money in the Short-Term, Medium-Term & Long-Term

Short-Term

Ivan is a house flipper in Southern California, where the typical run-down house costs over $300,000, which Ivan doesn’t have. Instead, Ivan networks at various SoCal real estate events and meets individuals looking to invest in real estate without getting their hands dirty.

On his newest flip, he talks with Dr. Jim, an anesthesiologist, who has over a million dollars in various investments and retirement accounts. Dr. Jim has no time to invest but is looking to diversify his portfolio. He lends Ivan $370,000, enough to purchase Ivan’s newest flip and fund 100% of the repairs. Dr. Jim obtains a first lien position on the home, and Ivan signs a two-year promissory note, paying Dr. Jim 9% and payments deferred (but interest accruing) until the home is sold. The funds are disbursed, and Ivan gets to work managing the flip.

Within nine months, the property is rehabbed and sold, and Dr. Jim receives his money back, Ivan makes his profit, and everyone is happy and ready for the next deal. In this example, Ivan uses a short-term private money loan to fund a real estate fix and flip. This is one of the easiest-to-obtain private loan to obtain because it gives the investor their money back in the shortest time possible. Ivan was able to avoid paying extremely high rates and fees from a hard money lender and could make more cash when the rehabbed property was sold.

Related: 4 Tips to Raise Private Money for Your Real Estate Investments

While the flip in Ivan’s example took just nine months from beginning to end, sometimes loans that short just don’t work for certain strategies. Let’s look at another example, this one of an investor who uses private money to invest in rental property.

real-estate-negotiation

Medium-Term

Sarah is an investor in the Dallas area who is primarily interested in small multifamily properties. She is especially interested in finding properties that have been poorly run and poorly maintained, acquiring them for a low price, rehabbing them, and renting them out while she waits for the market to improve. Sarah finds the perfect property, located near her home—a garden-style fourplex in a great neighborhood that needs some new paint, carpet, and better management.

She gets the property under contract for $110,000 and sets out to find funding. She discusses the deal with an experienced investor, Wilson, whom she met online through BiggerPockets.com. Wilson is tired of dealing with tenants and has been selling off his properties. As a result, has a sizable chunk of cash in his bank account that he needs to “put to work.”

Wilson lends Sarah $130,000, enough for Sarah to buy and rehab the fourplex, for a five-year term at 8%, interest only, which comes out to $866.66 per month. Sarah immediately improves the property and rents out each unit for $750. After all the expenses, including the loan payment to Wilson, she clears almost $700 per month in cash flow. She then holds on to the property for several years, until the market improves, and then sells the property for $190,000, clearing a huge profit.

In this story, Sarah uses private money for a five-year term, which gives her time to get in and fix the property up, rent it out, and wait for the market to improve. Let’s look at one final example, which involves a much longer term. This is perhaps the most difficult type of private lending to obtain, but it can be golden to your investment strategy if you find it.

get-preapproved

Long-Term

Real estate investor Robert enjoys renting out single-family homes but has long since maxed out his “four property” limit from the banks. Instead, he uses private lending to buy cash flow–generating properties. He gets his newest project—an older, rent-ready, three-bedroom, two-bath home outside of Milwaukee—under contract for $50,000.

Related: How to Win Over Private Money Lenders or Partners for Your Deals

He then talks with his newest private lender, a distant cousin named Cal, about the property. The cousin made a killing selling his tech business in the late 1990s and has been investing his money in the stock market ever since, averaging a 6% return over the past decade. In an effort to diversify his portfolio, Cal mentioned at a recent family reunion that he’d love to get in on the real estate action. Robert and Cal agree to a 30-year fixed loan at 6%, but to sweeten the deal, Robert offers Cal 20% of whatever profit is made at the end. They close on the property, Cal makes his 6%, while Robert rents the home out for $1,000 per month and sits back to wait for his wealth to build.

Fifteen years later, Robert sells the home for an $80,000 profit, and Cal receives $16,000 of that profit.

As you can see, these three examples were very different, but they all had one thing in common: a great deal. As I’ve said time and time again, a great deal is the best foundation for creative investing. Because all three of the examples involved solid deals, the lending arrangement was a win-win for all parties, and the relationship could continue for many more deals.

[This article is an excerpt from Brandon Turner’s The Book on Investing with No (or Low) Money Down. Get the full copy here.]

How do you use private money in your deals?

We’d love to hear your experiences! Comment below.