4 Risks and Drawbacks to Using Private Money

4 Risks and Drawbacks to Using Private Money

2 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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Although using private money is a smart way to invest in real estate without using your own cash, it’s not a perfect solution. Let’s explore some of the risks of using private money, so you’ll get the full picture and decide if this is an avenue you want to pursue.

4 Risks and Drawbacks to Using Private Money

1. Legality

The legality of raising money is not easy to understand, and it differs largely depending on your location. Because of this, we advise using a lawyer, and as we all know, lawyers are not cheap. However, hiring a lawyer to set up your business correctly at the start is much better than not doing a deal at all or sitting in a federal jail cell for doing it incorrectly.

interest-based

Related: Before You Invest Using Other People’s Money, Know the REAL Costs

2. Networking Required

Networking is neither easy nor quick. As I have noted, networking is a lifestyle, and if you don’t like that lifestyle, you may find the process of raising private money cumbersome and difficult.

3. Higher Interest Rates

Although the rates you and your private lender agree on may not be as high as those you’d pay with a hard money lender, chances are the rates will be significantly higher than you’d see with a conventional bank. Typical private money interest rates I see are between 6% and 12%, depending on term length and other circumstances. If these rates fit your business model, great!

4. Personalities Are Involved

When borrowing from a bank, you are typically dealing with a system that has no emotion involved. However, borrowing from real people always involves the potential for drama, emotion, and problems. What if your lender suddenly needs his money back? What if they get into legal trouble? These scenarios are further evidence that you need strong written legal paperwork with any lending arrangement.



Related: 4 Ways to Find Private Money Lenders to Fund Your Real Estate Deals

Private money is not for everyone, but if it’s an avenue you want to pursue, it can be a terrific way to raise enough capital to really scale your business to new heights. Be sure you understand the risks involved and take the necessary steps up front (ahem, lawyer) so you don’t get into trouble at the end.

Finally, just remember that raising private money is about having great deals, building relationships, and ultimately delivering on the promises you’ve made. If you can do those three things, you’ll have a successful future as a private money–funded real estate investor.

[This article is an excerpt from Brandon Turner’s The Book on Investing with No (and Low) Money Down.]

Do you use private money in your business? Have you run into any of these common drawbacks?

Let me know your experiences with a comment!