I think it would be a lot of fun to involve private investors on some of my real estate deals. I think there are some great advantages. The leverage is helpful when my personal cash is low and there are more eyes evaluating the deal. My question is, what are private lenders typically looking for in a deal? Do they want to lend money short-term or have equity in the deal?
Really depends but For the most part HML are looking for equity rich short term projects.
I want to see skin in the game from the buyer. The more the better. The last thing I want to do is have to foreclose. I am expecting one to close later this week. Buyer is putting down 35%+ and I am funding the difference. It is a flip and borrower is an experienced rehabber. The money is expensive but in some cases the alternative is to lose the deal. Nobody likes to call the expensive guys, so we are their last alternative. The flip side of the coin is FAST cash, no mountains of paperwork, etc. We fill in where the banks cannot with the 5,7, 10 day closings. Some sellers cannot wait 30,45, 60 or more days to close.
I've worked with both private money (friends & family) and hard money. Can't say one is necessarily easier than the other; that's more of a "it depends". Private money obviously has less paperwork, but it might take a while for the private lender to be comfortable with you and the deal. With friends & family, it all depends on trust and your relationship with them. With hard money, it's about the deal and the numbers. One thing I would say is that private money can be flaky sometimes, and you really have to make sure to ask for proof of funds. I've seen people lose deals (and their earnest money) because their private lender couldn't close.
In terms of what private lenders want, you have to ask them. They're all different. I try to educate my private lenders on finance and investments and to help them achieve their goals. There is one thing that they all want to know though: how are you going to protect their investments? They have to trust you as a person with morals and integrity, and you as a real estate investor who knows what you're doing (because intention isn't enough). You have to convey that.
Most private lenders I work with don't know much about real estate; they are working professionals who have cash sitting and want a passive return on their money that they can't get in traditional investments. So in terms of having extra eyes on the deal, I wouldn't be able to depend on them.
Read my post here about why I always use hard money for my deals.
As a private lender, I want the borrower has skin in the project, has clear exit strategy (either flip or hold), reliable, and has some experience. I prefer 6 month or less term. Thanks.
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