Mortgages & Creative Financing

How to Fund Real Estate Deals Using Private Money (& Why It’s a Good Idea!)

Expertise: Landlording & Rental Properties, Real Estate Investing Basics, Flipping Houses, Business Management, Personal Development, Mortgages & Creative Financing, Real Estate News & Commentary
210 Articles Written
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Over the years, I have borrowed significant amounts of money to finance my real estate investing business. I started like many people do, by going to the bank and getting 30-year, fixed-rate loans.

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Back in the day before the real estate crash in 2008, you could get several of these types of loans. But when the market turned (and for a long time after), the money that had been flowing in that way simply dried up.

It caused several real estate investors—me included—to seek out new sources of funding to grow our businesses and snatch up real estate at fire-sale prices.

As the saying goes, however, every cloud has a silver lining. The silver lining for me in 2009 was the discovery of private money. And private money has been the major funder of my real estate deals ever since.

If you are newer to investing, you might be wondering what private money is exactly. What advantages can it provide over other types of funding? How do you structure a deal using private money?

This post is intended to help explain those things.

What Is Private Money?

Private money is exactly what it sounds like. It is money held by private individuals. In other words, it is savings.

It is money that is held in bank accounts, CDs, IRAs—even under mattresses—by average, everyday people. These people become the bank, so to speak, by loaning their money to real estate investors like you and me.

Related: 4 Risks and Drawbacks to Using Private Money

Who Has Private Money?

If you take away anything from this post, take away this: never judge a book by its cover. You likely underestimate who has money. Lots of people have it and just don’t advertise it.

I have borrowed money from people I play racquetball with, from people I have met at my local REIA, and from people I’ve met on sites like BiggerPockets.

Why Would People Lend Me (or You) Their Money?

In short, they lend because they can make money doing so. We real estate investors can provide better returns on lenders’ money than they can get almost anywhere else.

Take CDs, for instance. A “safe” investment like that currently only earns around 2.7 percent interest, according to Bankrate.com.

How Can Private Money Be Used?

Private money can be used in almost any creative way that both you and the lender can agree to. I have used private money on both buy and hold and fix and flip real estate deals.

It can be used short- or long-term, in lump sums or installments, with or without interest payments, with shares of profits or not. The possibilities are only limited by you, the lender, and the creativity you both bring to the table.

The Structure of Private Money Deals

Buy and hold real estate investments are structured in much the same way as a conventional bank loan. The lender puts up the full amount to buy and rehab the property, and the buyer repays the loan at an agreed upon interest rate and amortization schedule.

These loans are usually for five years or less with balloon payments at the end. Many times, the lender agrees to refinance the loan at the end of the term because they like the stability of income.

On certain buy and hold deals, I have used private lenders as a second mortgage behind a primary bank lender to cover down payment or rehab costs. There are two things to remember when doing something like this:

  • Be sure your lender understands their position as a second mortgage holder.
  • Also, be sure your primary bank lender will allow it. (Some will not as they want some of your skin in the game.)

My fix and flip deals with private lenders have been profit sharing agreements. In these types of deals, the lender loans the entire amount to purchase and rehab the property. Then, once the property is sold, the profits are split as per our agreement.

There are no monthly payments, and the lender has no say in terms of how the property is rehabbed and listed. But, of course, I keep them informed throughout the process.

In both cases, there are significant amounts of paperwork drawn up to protect myself, the lender, and their money. A proper closing is held with an attorney and all monies are properly escrowed or exchanged.

A deed of trust is always recorded, and a promissory note outlining terms and conditions is always executed. I also give a personal guarantee, as I have no intention of defaulting, and it seems to make the lenders more comfortable.

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Related: 4 Essential Steps to Take BEFORE Seeking Private Money

Can You Pool Private Money?

Yes, you can—with many legal conditions. Laws have been changed in recent years to allow what is called crowdsourcing. Plus, syndications, or the combining of investor monies into an entity such as an LLC, have been utilized for decades.

That said, while pooling can be done, you need to be aware of state and federal rules. Advertising is a big no-no, for example. You can get into some real trouble if you do not report the right information or structure your dealings properly.

For these regulatory reasons, I have never used pooled private money. I am not saying that it is not a good idea to pool money, I just find that the requirements to do so are too burdensome.

For me, it has always been much easier and seemingly cleaner to have one private lender attached to one single property with one set of paperwork. However, this strategy is somewhat limiting, as there are many more people with $10,000 to pool than there are with $100,000 to lend. But this strategy has worked for me, nonetheless.

Advice for Finding and Using Private Money

First, develop a private money program that will work for your business—one that you can put on the table in front of a potential investor. Suggest loan amounts, interest rates, and profit sharing splits up front.

Also, explain in detail to potential lenders how your program will work and benefit them. Do not assume people with money will necessarily understand how money and investing works. Nor should you expect them to formulate a deal for you.

Many possess limited know-how, and out of fear of looking ignorant, they will say no. Avoid scaring away potential lenders by making things clear and easy for them.

Second, have a short, succinct speech prepared that explains what you do and how you can help people earn higher investment returns. As I said, you never know who has money. Plus, you never know who you will run into or who might be looking for better investment returns. You might encounter them anytime, anywhere—so be ready.

Lastly, remember that you, the investor, bring a lot of value to the table. The lender needs you just as much as you need them.

Create a structure that works for both of you. Do not think that the one with the gold makes all the rules. They do not!

And if an offer of private money does not work for you, walk away. I have! There are plenty of other lenders out there.

Have you used private money? Would you consider it? Why or why not?

Let’s talk about it in the comment section!

Kevin Perk is co-founder of Kevron Properties, LLC with his wife Terron and has been involved in real estate investing for 10 years. Kevin invests in and manages rental properties in Memphis, TN and is a past president and vice-president of the local REIA group, the Memphis Investors Group.

    Brad Richardson
    Replied 7 months ago
    Understanding that all deals are different, can you give me some rough parameters on how to structure a profit sharing arrangement? Is it 50/50. 75 (to the manager)/25 (to the investor). Vice versa? I’m just trying to understand where to start.
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied 6 months ago
    Brad, I usually structure the deal so that it is weighted a bit more towards me. Something around a 60/40 split often makes everyone feel good and has worked out well. But someone just starting out, without a large track record behind them, may have to be a bit more flexible so the lender feels comfortable with the risk they are taking. You can aim high when you are asking for a loan, however be ready to negotiate a bit in order to get some experience. A 50/50 or even a 40/60 split may be worth it in order for a new investor to get their foot in the door. Good luck and thanks for reading and taking the time to comment, Kevin
    Angel Dejesus from Boston, Massachusetts
    Replied 6 months ago
    Hello Kevin What would you suggest considering the possibilities of what can go wrong in a deal to gain more confidence???
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied 6 months ago
    Angel, Thanks for reading and taking the time to comment. I am not sure I totally understand your question, but I will give it a go. I think that you are asking me what a lender can do to manage their risk on a deal. There are several things. They can ask for higher returns of interest or profits. A lender can also seek to have the investor put some skin in the game with points or a share of the purchase. Of course lenders also have to do their homework and due diligence on potential deals. Trust but verify. Finally lenders should protect their investments with proper legal paperwork. Deeds of trust, promissory notes and personal guarantees are all a part of that. You never want to sue or foreclose but if you must then you want the proper documents backing you up. I hope the above helps answer your question. If not please let me know. Kevin
    Eric Nelson from Palmerton, Pennsylvania
    Replied 6 months ago
    I think a 50/50 or 40/60 split is great for a beginner. As l am one of them looking for my first deal.
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied 6 months ago
    Eric, I think it is entirely reasonable. Always remember that you as the investor bring a lot to the deal. What you do is valuable and you should get paid for it. If a lender feels differently, walk away. It is probably best not to get into that relationship in the first place. Good luck and thanks for reading and commenting, Kevin
    Walter Hanagriff from Colorado
    Replied 6 months ago
    Yeah, I am thinking about a private investor for a buy and hold, for the down payment and rehab cost. I am new to investing, but I have spent the last few months saving money and doing a lot of research. I wont mind a split that isnt in my favor such as a 40/60 if I must, because I know that building a reputation is important. The first house is the hardest one because I have nothing to prove how much I can be trusted with property outside of my credit score proving my financial responsibility. (780 currently <3) Once I have my first property and have held it for awhile. I have more leverage to ask for better terms due to my proof of experience and responsibility in the field. Thats my thought anyway. I definitely would go for 50/50 at first for sure, at the very least to have bargaining power.
    JL Hut Investor from Greenville, Michigan
    Replied 7 months ago
    I like how you think.
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied 6 months ago
    Thanks! Thanks also for reading and commenting, Kevin
    Barry H. Investor from Scottsdale, AZ
    Replied 7 months ago
    Nice broad-based summary. I am glad you pointed out the Borrower needs to present a coherent and understandable plan with supporting documentation (rehab estimates, photos, viable comps etc). I am too often approached by investors who have a “great deal” which translates to them giving me a property address and asking me to do all the homework to decide if it is a good investment and work up a plan where they (Borrower) can make a nice profit off the money I will lend to them with no skin in the game on their part. Those investors are telling me they will bail and drop key at the first sign of a problem.
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied 6 months ago
    Barry, As you know, lenders are looking at potential risk. Being prepared with a coherent and understandable plan and program will go a long way towards reducing that potential risk for the lender. After all, if an investor truly does their homework at the outset, many bad deals would be eliminated from contention and not even presented. Thanks for taking the time to read and comment. I appreciate the kind words as well. Kevin
    Moses Hart
    Replied 6 months ago
    Thank you for sharing this info. Very informative
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied 6 months ago
    Thank you!
    David Rhodes
    Replied 6 months ago
    Thank you for taking time write this. As broad an overview as this is, it is very informative and helpful.
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied 6 months ago
    Thank you David! I appreciate you taking the time to read and for the kind words. Kevin
    Walter Hanagriff from Colorado
    Replied 6 months ago
    Love the article. Now to find a private investor. But once you find a deal, you usually need to move fast on the funding, so it is normal to seek a private investor before you find an actual deal right? Then once you have one willing to lend to you, then you find a deal and present it to the person with all necessary information to show it is worth it?
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied 6 months ago
    Walter, Yes. These days you need to have your funding lined up before you find a property as you will likely have to move quickly. You also need an attorney, title agent or title company lined up to help draw up the paperwork for the lender and get the title search completed. So talk to potential lenders first. Clearly explain what you are looking to do and how it will benefit them. Show them how their money will be secured and how they are going to get paid back. Basically have it all spelled out for them. Once they say they are in, then you can go out with confidence to find a deal. Once you find a deal, get back with your lender. Show them the numbers, all of them, and explain it all again. Then pull the trigger. Truth be told, some lenders are going to be hesitant at first and they are going to test you with “teaser” amounts of funds. But once that first deal is successfully completed and the lender has been paid they will be ready to go again, and often with larger funding amounts. Plus, word will start to get around about your successful business model. Good luck and thanks for reading and commenting, Kevin
    Gilbert Bonsu
    Replied 6 months ago
    Great article. I was wondering what interest rates do people offer private lenders? Do you make that decision by running the numbers or look at the average of what others are offering (and if so, is there a place to get that number?)
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied 6 months ago
    Gilbert, The interest rate depends on the overall market and the amount of cashflow I want. So yes, I do run the numbers and see what will work for me. It has varied between 6 and 10%. That will of course depend on the deal and the amount of risk involved in the property. If the property is in a class B/C area, interest rates are generally lower as the prices of properties are higher. In lower class C or D areas interest rates can be higher due to lower property values and increased risk. I do have a general idea of what private lenders are asking for/offering. I do not know of an easy way to get that except through word of mouth and by networking at my local REIA. Good luck and thanks for the kind words, Kevin
    Gilbert Bonsu
    Replied 6 months ago
    Thank you again
    Kirby Davison
    Replied 6 months ago
    Kevin, great article. Thanks for sharing your experience. This got me thinking about how to approach potential investors to fund my next deal.
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied 6 months ago
    Kirby, Great! I am glad I could help. Good luck, Kevin
    Ryan Breakfield from Hattiesburg, ms
    Replied 6 months ago
    Great article at a great time. I have been wondering about and researching private money deals. What are some good books on how to structure/ give more detailed guidlines on this topic?
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied 6 months ago
    Ryan, Thanks for reading and for your question. I do know know of any specific books off the top of my head. I learned much of what I know about private money by attending and networking at educational seminars hosted by my local REIA. I even purchased a course at one many years ago that was very helpful and informative. But I find the networking with other people in the real estate profession – investors, lenders, attorneys, CPA’s, etc. – to be most helpful. Good luck, Kevin
    Matt McGuire Rental Property Investor from Montgomery, TX
    Replied 6 months ago
    How do you feel about using family members for private money loans? I have some friends who use their parents and it seems to work for them. My mother-in-law has expressed some interest in loaning us money but I am very hesitant to go into business with family. What do you guys think?
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied 6 months ago
    Matt, I could go either way here. It could be great or as Dave Ramsey says it could negatively impact dynamics of the family relationship. Only you will know which way it could potentially go. I would say that if there is any negative potential, then perhaps it is best not to do it. If you choose to go forward. Here are some thoughts. Pay back the loan as agreed. Do not slack off just because you know and are related to the lender. Do not assume you cannot pay your dad back this month just because it is you dad for example. This is I think a dangerous trap and will lead to those negative consequences I mentioned above. Second, conduct the transaction as you would any other. Draw up the proper documents, have a closing, etc. Do not make anything any different just because the lender is a relative. Finally, keep business and family separate. Do not discuss at family dinners, etc. Keep everything strictly professional. Dave Ramsey says this is impossible. Only you will know for sure. I hope this helps. Thanks for a great question. Kevin
    JL Hut Investor from Greenville, Michigan
    Replied 6 months ago
    Exactly, well said. precoded with great caution.
    Ken Bailey Contractor from yucca valley, ca
    Replied 6 months ago
    Hi Kevin, Excellent education and great reading. Fortunately, I have a few dollars which would fund my 1ST opportunity if necessary. Through the education I realize OPM (other peoples money) is the way to go and keep capital. I’m ready to start out as soon as I locate a great opportunity or the market changes. I’m a bit upside down as I’m having trouble comprehending the 50/50 40/60 approach. I visualize purchase at 50,60, or 70% and should you default (which I wouldn’t as I’d use your procedure and have a good exit strategy prepared) the lender would get the property which is an incentive to loan money. So, what am I missing (apologize but have to ask to get this straight). I do grasp everything else and its exciting. Also, what reading material do you recommend on this subject. Again, thank you so much this was great, Respectfully, Ken Bailey
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied 6 months ago
    Ken, If I understand your question correctly I think you might be confusing purchase price and loan terms. Perhaps an example would best answer your question. Investors should attempt to purchase properties at a discount, 50%, 60% or 70% off of retail prices as you mention. Let’s say you purchase a single family home at 50% of retail value for $50,000 that you intend to fix up and flip. Rehab costs will be $20,000. The lender loans you $70,000 to buy and fix and you agree to a 50/50 profit split upon the sale. You buy it, fix it and flip it for $100,000 or a $30,000 profit. Thus you each get $15,000. I hope that clears things up. If not let me know. Thanks for reading and for the kind words, Kevin
    Greg Velasco
    Replied 6 months ago
    Thank you for the informative information. I’ve been thinking about this since I got into the business and you broke it down great. I’ve also been trying to figure out how to bring this up in conversations with the people I’ve built relationships with because I see the value. Any feedback? Also do you have a forms they sign or something because my word goes so far I know I need something in writing, do you have a template you can share?
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied 6 months ago
    Greg, Usually people ask about my business or what I do and the conversation naturally flows. These is some finesse needed here as you do not want to seem too pushy. It takes practice for sure. I do not have a template to share. Private lending in my experience happens after a lot of conversation and getting to know each other. So once I have the word, I trust the lender will follow through. What I do have however are backup plans. Other lenders that I can go to if something goes wrong. Thanks for reading and for your kind words, Kevin
    Rick Klopp
    Replied 6 months ago
    Great article, good questions and excellent responses. Someone has asked about additional resources – a book I found helpful is Raising Private Capital by Matt Faircloth and it’s available from the bookstore at Bigger Pockets.
    Ken Bailey Contractor from yucca valley, ca
    Replied 6 months ago
    Thanks Kevin, Totally grasp what your example is saying, Definitely adjusted my mind and I’ve got it. Looking forward to your next article. Thank you Kevin. Respectfully, Ken Bailey
    Kyle Souleyrette from Elizabethtown, KY
    Replied 5 months ago
    Great article, I really enjoyed it. Have you found investors interested in behaving exactly as a bank, i.e. writing a note for 15 years, charging a set interest rate, and being listed in first lien position on the property? I have little interest in flipping property, but from what I have found so far on Bigger Pockets points to that being the main way PM guys are willing to invest. Is there interest in the private market to behave like a typical bank would, and can it be profitable?
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied 5 months ago
    Kyle, Thanks for the kind words. Yes, there are private investors who will act like a bank for buy and holds, but I have never found one that was interested in doing so for more than 5 years at a time. It is my experience that investors just do not want their money tied up that long and most prefer to have their money “working” a bit more, thus the interest in flips. These investors are out there however, it just takes a bit more work and time to find them. Good luck, Kevin