I have a few questions about raising private money. First off here is a little about my situation. I am a full time real estate investor and I currently have about $2.5M in real estate holdings. My monthly gross income is right at $35k and going up by about $1k every 45 days or so as I buy new properties with cash. My taxes from a year ago don't show this income because it wasn't that high a year ago (this is part of the problem). I have a couple land contracts and a mortgage on my primary residence. The total of these land contracts/mortgages is about $780k.
Ideally, what I would like to do is find a private individual that I can sit down and explain my situation to and show my business plan to. I would like to find someone that I can borrow $1M from. I would like to take this money and pay off all my other loans/obligations and basically consolidate all my loans into one. This would leave me roughly $220k that I would take and purchase income producing real estate outright (there would be no loan or mortgage on these properties). This would obviously increase my monthly income as well.
The problem with the banks is they require two years worth of income on my taxes and as I mentioned, my previous years taxes weren't as high as this years and they average the income from real estate investments. My debt to income ratio is going to be to high I am afraid with the way the bank figures my income. I am growing every year but the bank regulations are what they are.
I am fine with signing a personal guarantee and putting up roughly $2M worth of collateral. As well as I have a cosigner who would be willing to sign the note (although he doesn't make a lot he has an additional $2M worth of real estate).
So here are my questions:
1) I know there are some legal issues with trying to raise money from private individuals for real estate purposes and I don't want to do something that might end me up in trouble with the law. So how do I go about "soliciting" money from someone without stepping over the lines? What do I need to watch out for?
2) Secondly, for those of you out there who have experience raising money from private individuals how did you go about it? I am looking for ideas more than just those of you who might have been lucky enough to stumble into it by having a family member who has a ton of money. How do you actively seek out these sort of people?
3) Lastly, what sort of terms or rates did you end up paying?
I appreciate in advance any and all replies!
Why don't you go to a portfolio lender and get a bank statement loan or asset depletion loan. The rate will be much cheaper then getting a private loan. If you putting property as a collateral then there is nothing illegal of seeking funding outside of conventional banking system. Where you get in trouble is usually when you try to raise money for business enterprises or investment purpose.
@David Becker I have not raised that much, but have done around 150K or so.
The key in my case, as you will be able to see if you do some reading of past forum posts and blogs is to let EVERYONE you know what you are doing. Not in the sense of "I am looking for a million dollars for a deal", but more along the lines of "I am actively investing in real estate and doing really well with it. So well that I am looking for financial partners/investors to keep expanding. If you know of or hear of anyone that might be interested in that give them my name/card/number."
My first one was someone that I am the executor of their estate, so I knew they have lots of idle cash and had invested in real estate in the past. They were happy to put their money to work making a good return.
A few that I am talking to right now are former customers (I am in construction and have lots of customers who are high net worth individuals AND have an established friendship/trusting relationship with. My approach with them was exactly as above - "here is what I am doing, if you know of anyone........". As I expedited a few of them themselves are interested and one has put me in touch with a potential lender.
One other train of thought is have you talked to a commercial portfolio lender at all? That is how we financed our properties that we hold in LLCs. Your taxes are not as important as the quality of the deal and your business plan.
Good Luck, Dan Dietz
Thanks for the info Mr. Dietz. I appreciate the advice and that all sounds like a very good idea. I will try some of those ideas and see if I get any bites. I am currently talking to some commercial lenders for a portfolio loan but don't know if they are going to work out. I especially like your idea of just letting everyone know about what you do or are doing with your business. I will definitely try this.