Mortgages & Creative Financing

The Truth About Raising Private Money for Real Estate Investing

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Every time I start to browse the BiggerPockets Forums, it seems like there are several posts from brand new investors trying to get into the game of real estate with no money, no credit, and no skills. They have read how people are able to do real estate deals using little of their own money, and they want a piece of the action.

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The allure to real estate makes sense. The idea of leveraging other people’s money in order to make lots of money is appealing.  However, as someone who uses little of my own money to do real estate, let me share some things that may help you develop more realistic expectations when it comes to investing with little (or none) of your own money.

Starting Out With Realistic Expectations

First off, most investors are usually not able to start out without using any of their own money. In the beginning, when you are inexperienced and have little credibility, you will probably need to tap into someone you know if you don’t have your own money. This could be someone wealthy who loves you and feels sorry for you, so they are willing to lend you money to help you get started. Or this could be someone who is dumb (naïve is probably a better word) who is willing to lend you money even though you are inexperienced, just starting out, and don’t have money in reserves in case something goes wrong.

The fact is neither of those people are part of a good business plan. Optimally, in the beginning, you will need to use some of your own money from savings or from personal credit lines, such as from a HELOC, personal bank loan, or credit cards in order to get started.

Related: Hard Money vs. Private Money: What’s the Difference?

Acknowledging Money Follows Success

Once you have started to experience success and developed a track record, it becomes much easier to attract private money. Why? Because money typically follows success. People want to place their bet on winners—on systems that are proven to return good results.

After I started acquiring and selling real estate more seriously, I realized that my growth was limited to my own cash and my own ability to borrow. So, even though it was getting easier to find good deals, I wasn’t able to take advantage of most of them, because I was limited to the cash that I had personally. A real estate coach mentioned to me that if I really wanted to be able to grow my company and scale up, I would need to learn how to use other people’s money to invest.

business colleagues meeting in boardroom going over paperwork

Asking for Money is Less Effective

Following the counsel of my coach, I went out and asked people to invest their money with me. I started with people who I knew so that I wouldn’t get into any trouble with the SEC for solicitation of investment products or selling securities. But I wasn’t getting anywhere. Mostly, I was just getting polite “nos.”

Related: Private Money: How to Choose the Perfect Lender

Becoming a Good Investment

It wasn’t until I stopped asking people for money and started sharing stories about the success I was having that I started to have people reach out to me, asking if they could lend on one of my deals.

I also started a monthly meetup group in Mesa, Ariz., where a partner and I go over current deals we are doing and share details on how we found the property, how we funded the property, how we rehabbed the property, and how we ran all of the numbers that indicated it was a good deal.

Now I get a few emails a week from people asking if they can lend on one of my deals and if I can teach them more about real estate investing. This has led to raising nearly $1 million from over 40 private money lenders in the last year and a half.

The Bottom Line

So how do you attract private money to your real estate deals? You do it by having success. Then, once you have experienced success, you can start sharing with people some of the deals that you are doing and how they are turning out.

When people see the success you are having, rather than you asking them for money, people are much more likely to offer you their money to invest so that they can get a good return.

What other tips would you add in terms of winning over private money lenders?

Share in a comment below.

Shiloh Lundahl, LCSW, is a child and family therapist based out of Mesa, Arizona. When he is not providing therapy or teaching parenting classes he enjoys being with his wife and 5 kids in Burbank,...
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    Wenda Kennedy JD from Nikiski, Alaska
    Replied about 1 year ago
    I run from people who don't know the RE business and have nothing to bring to the table. I know that's NOT very friendly, but I don't like to lose money because of someone else.
    Rick Thomas from Carmichael, California
    Replied about 1 year ago
    So, are you a real estate investor, Wenda? If so, how did you get your start in RE investing? You loaded? If not, I'm glad whoever helped you get your start didn't have your attitude toward newbies trying to better their lot in life by doing something that makes good financial sense. No, no one likes to lose money, but if you have experience and some capital to invest, instead of looking at newbies with an "elitist" mentality, why not provide guidance and capital and mentor them? Remember, Wenda, you were once where they are. We all were.
    Sam White Rental Property Investor from Dallas, TX
    Replied about 1 year ago
    No one owes you their money or time just because they have been successful. Many of us have been newbies, but you have to bring something to the table to have value. Maybe that something is a really good deal, or time and work ethic. I wouldn’t give my money to you based on your comment.
    Jerry Maze Wholesaler from Portage, MI
    Replied about 1 year ago
    Makes Sense! Thanks for posting!
    Kou Moua Accountant from Clovis, Ca
    Replied about 1 year ago
    Anyone not willing to use their own money, but only OPM sounds like they don't believe in their own deal.
    Rick Thomas from Carmichael, California
    Replied about 1 year ago
    Or, they don't have *enough* of their own money, or, they realize that they'll *run out* of their own money eventually. Do you only use your own money to invest in real estate? Were you born into a well-to-do family? Being a Central Valley accountant, I'm doubting it. I'd like to see your portfolio, how small it is, and how long it took to build. When an investor comes to me with a deal, that tells me that they "believe" in it enough to give me the opportunity to get in on the investment and to make much higher returns (Cash-on-cash, Average Annual, Internal Rate) on my money than most other investments out there.
    Jon Parton Flipper/Rehabber from Merrillville, IN
    Replied about 1 year ago
    I agree, this is the thought process of most of the private money but if you ask 10 people you will get someone to fund your deal. I think one of the keys to being successful in finding OPM is to partner with a successful flipper on your first several deals as well as be willing to pay a little more in interest or points. This gives the private money investor way more confidence in the deal. The other thing that is vital is to insure the private money. This means not only insuring the property but also rehab. I take in addition to the home owner policy a lender policy. Accountability is also extremely important to earning trust. Including refunds and all receipts of work being done gives your investor strong confidence that are being meticulous in your numbers. With that being said, I wouldn't loan to someone who wasn't working with a very experienced flipper.
    Thomas Murray Flipper/Rehabber from Greater Bosto, MA
    Replied about 1 year ago
    Hi, I like the insurance suggestion Jon, Also what I try to do is ask a potential investor if they know anyone else who might be interested. TomM
    Arnaud Jorissen
    Replied about 1 year ago
    Rick Thomas, I totally agree with you. are you a investor, Do you mentor young investors?