{"id":89677,"date":"2017-06-22T12:00:47","date_gmt":"2017-06-22T18:00:47","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=89677"},"modified":"2024-02-13T16:16:24","modified_gmt":"2024-02-13T23:16:24","slug":"risks-private-money","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/risks-private-money","title":{"rendered":"4 Risks and Drawbacks to Using Private Money"},"content":{"rendered":"

Although using private money is a smart way to invest in real estate without using your own cash, it\u2019s not a perfect solution. Let’s\u00a0explore some of the risks of using private money, so you\u2019ll get the full picture and decide if this is an avenue you want to pursue.<\/p>\n

4 Risks and Drawbacks to Using Private Money<\/h2>\n

1. Legality<\/h3>\n

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.<\/p>\n

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\nRelated:<\/strong> Before You Invest Using Other People\u2019s Money, Know the REAL Costs<\/a><\/em><\/p>\n

2. Networking Required<\/h3>\n

Networking is neither easy nor quick. As I have noted, networking is a lifestyle, and if you don\u2019t like that lifestyle, you may find the process of raising private money cumbersome and difficult.<\/p>\n

3. Higher Interest Rates<\/h3>\n

Although the rates you and your private lender agree on may not be as high as those you\u2019d pay with a hard money lender, chances are the rates will be significantly higher than you\u2019d see with a conventional bank. Typical private money interest rates I see are between 6%\u00a0and 12%, depending on term length and other circumstances. If these rates fit your business model, great!<\/p>\n

4. Personalities Are Involved<\/h3>\n

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.<\/p>\n

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\nRelated:<\/strong> 4 Ways to Find Private Money Lenders to Fund Your Real Estate Deals<\/a><\/em><\/p>\n

Private money is not for everyone, but if it\u2019s 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\u2019t get into trouble at the end.<\/p>\n

Finally, just remember that raising private money is about having great deals, building relationships, and ultimately delivering on the promises you\u2019ve made. If you can do those three things, you\u2019ll have a successful future as a private money\u2013funded real estate investor.<\/p>\n

[This article is an excerpt from Brandon Turner’s <\/em>The Book on Investing with No (and Low) Money Down<\/a>.]<\/em><\/p>\n

Do you use private money in your business? Have you run into any of these common drawbacks?<\/em><\/p>\n

Let me know your experiences with a comment!<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

Let’s explore some of the risks of using private money, so you\u2019ll get the full picture and decide if this is an avenue you want to pursue.<\/p>\n","protected":false},"author":710,"featured_media":89678,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7403],"tags":[],"class_list":["post-89677","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-private-money"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/89677","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/710"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=89677"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/89677\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/89678"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=89677"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=89677"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=89677"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}