New to Real Estate · El Paso, TX · Member since 2023 · 31 posts · 17 votes
Hello everyone!
My husband and I are extremely interested in investing in real estate to achieve financial freedom and retire earlier. Both of us are 33 years of age and our income is not the best. We have never invested before but we have been reading and studying for the past 3 months about real estate investing and we feel confident in making this our business choice.
My question is, we are interested in using a Private Money Lender (because our income is not good on paper) and would greatly appreciate advice on going about speaking with a Private Money Lender. I have a couple people in mind (friends/family members) who trust us but we want to have a game plan of our language, numbers and a strategy when asking for money to begin this journey.
If we are successful in obtaining a private money lender, what would be a good strategy to pay them back?
Any advice and guidance is much appreciated! Thank you for your time!
First things first, you need a good deal. Lenders are a lot easier to talk to when you have a great deal to present. Yes, they care about the borrower, their worthiness, and their experience. But most importantly, you need a deal. Find that first.
How you pay them back depends on what you are doing with the property and also how long they want to lend the money.
If you are a fix and flip then the norm is to pay interest only until you sell the house
If you are keeping it to hold long term then they could provide long term financing or shorter term amortized over a long period but be a balloon where you would refinance out of their loan
I just asked two potential PLs, one a family member to fund a renovation. The first one was another investor who was looking for 8 to 12% interest but he wanted all his money back within 2 years. That wasn't going to work for me. I discussed with a family member, a non-real estate investor of paying her 10% interest, which is more than what a CD or high yield savings account is paying in the 4 to 5% range. I proposed a 4 year term and I could also pay her back monthly with balloon payments every 6 months. I pointed out the benefits to her and legal documents with a promissory note would be drawn up in the event that I didn't pay her back she gets my property. The terms and how and when you pay back the PL is worked out between the two of you. I've also heard that money transactions should be done through a title company so that there's nothing dishonest going on. ("I paid them. No you didn't" etc)
The property wound up falling out of contract, unrelated to funding (inspection issues) so I didn't need the PL money. Not sure if you're buying to flip or for a rental, but I would talk to the potential PL about benefits of investing in that property you're looking at: neighborhood, city, people are moving there, diverse job market, potential growth, appreciation, sales comps, rental comps, positive rental cash flow, etc. If you put together a Google Slides or report, that would probably help. Good luck!
First things first, you need a good deal. Lenders are a lot easier to talk to when you have a great deal to present. Yes, they care about the borrower, their worthiness, and their experience. But most importantly, you need a deal. Find that first.
@Chris Seveney, I plan on buying and holding the property for rental income. I want to begin building my portfolio through rentals. That way, when I am able to refinance the home, I could pay the PL back all of their money. Your clarity helped, thank you!
@Becca F., when you put together your promissory note, did you use a lawyer to have this done? And for your title company, did you create an LLC before speaking with your PL and propose your strategy to them? Thank you for the information, this has truly helped!
@Eliott Elias, I'm in the process of researching a good deal. Do you have any recommendations on exactly what to look for in a good deal? I've been practicing running the numbers on property I am seeing on Zillow or LoopNet but any other advice on this would be greatly appreciated!
I didn't even get that far with drawing up promissory notes. That's what other investors I've known who used PLs do. The deal started to fall apart after the inspection. I did a conventional loan since the property looked livable before the inspection. I don't have an LLC for any of my rentals yet - that's another topic which has been posted a thousand times on these forums (most of my California investor friends with 1 to 5 properties don't have LLCs. The investors I know with LLCs have 10 properties or more).
Had the deal gone through I would have paid for the renovation with part of my own savings and part personal loan. Best Egg has good rates, 7.36% in my case (5 year term with no prepayment penalty) and I was approved in less than an hour. I'm super cautious and I think asking family members or friends for loans could possibly backfire and ruin the relationship when money is involved. I would rather just go with an institution for a loan but if PLs work for other people, that's great. SoFi also does personal loans. Then refi in a few years when rates are hopefully lower at the higher appraised post-renovation value to get some of my money back. Sorry I can't be of more help.
the easiest pathway for you to take now is with a Hard Money lender, not Private. they are set up wot work with people just like you guys. maybe a bit more expensive, but the ease of use is worth it.
plus, learning on your friends and family may not be the best approach...
Hi Ashley, congrats for you and your husband taking the leap. You are making a wise decision. I'd say Real Estate industry has made more millionaires than any other. Whether you invest in it, broker it, sell it, lend on it, there's many, many people that have made fortunes involved with it.
You are new, so first create an LLC with you and your husband, whomever has the better credit between you two make them 51% owner and the other 49%.
You will be looking for "value add' properties or fix n flips. These are properties that need work but the total project cost (purchase + rehab costs) is south of 70%/75% of the ARV. The product for these projects is called a Bridge Loan. A Bridge Loan allows to to close on the property with 15%/20% down and also supplies the rehab funds which are kept in escrow and drawn upon as work is completed. It's called a Bridge Loan because it bridges the gap of the house's old value to the new value once work is completed.
You'll put down 15% - 20% toward the purchase
Rates will be 11.5% - 12.5% in the beginning
You will be charged a 2 - 3 point origination fee
12 month term with interest only payments and no pre pay penalty so you can pay it off at anytime.
The strategy is to get into fast projects that have the strong ARV and can be done in 60 days or less and under contract in three weeks if sold. Do not have the money tied up for too long. Then repeat asap. Scaling is about repeating what works. That's how everyone scales. Apple, McDonalds, Walmart. They all nailed down their blueprint first and then they just repeated in many areas. REI is kind of the same thing.
How to handle the money? So I guess you and your husband are short on the financials end but do you have the ability to raise capital from friends and family? So there's a few ways to go about it. For each project you can find an angel investor or two that supplies the money and then they share in the profits - anything like this I'd sell and not keep. Get in and out and pay your investors and make what you'll make and save it. I'm guessing your goal is to do this without help. Do 3 - 5 projects like that and then you should be able to do it by yourself.
Or, you can collect money and create a fund. Offer your investors a flat annual return on their money, maybe 10%. So if someone gives you 10k, you owe that person 1k per year in distributions. So if you collect 50k let's say to start, you'll owe out 5k in distributions but with that 50k you should be able to get in and out of 3 deals lets say in a year. If you make 20k net on each that is 60k and you only have to payout 5k to your investors. I know a few investors who work this way.
I've closed hundreds of bridge loans so I can answer any questions you have.
I am not familiar with Bridge Loans and will look into this a bit deeper. Most likely won't be able to use this option until we raise capital correct? For the 15-20% down.
For the create a fund, would this be similar to a private lender investor? Or is this a different strategy?
I would talk with as many people as you can or bring up the topic with as many people. Let them know the basics of what you want to do. Start getting a list of potential lenders who seem somewhat interested. When you do find a deal you can go through the list of friends and family who showed some interest.
7e investments53 Reviews