Private Money Discussion

25 Replies

It has been my experience that BiggerPockets and REI Clubs are not good places to find private money. The individuals who go to these places are savvier investors who are looking for a good return on their capital, i.e. hard money rates. However, this might just be my area because Seattle is very saturated with capital and investors, so I wanted to see how it's like in other areas across the nation. What has your experience been like?

I'm currently getting private money at 6-8%, but these are people I actually have a relationship with - family, friends, co-workers, etc.  I didn't "find" them; they've always been there.  I just talk about my real estate passion all the time and it catches people's attention.

I'm able to get private money at these rates because of my experience and because I'm getting hard money at 7-9%; it doesn't make sense to pay more for private money than hard money (although there are exceptions).  Back when I was a newer investor and was paying 12% for hard money, my private money was 10-12%.  My very first private lender I actually paid somewhere between 20-30%, but it was because they were the only ones who believed in me enough to lend me money when I had absolutely no experience, and it was well worth it.  I still reward that person very well today (but definitely not at the same rates).

Also, just because private money costs the same as or even more than hard money doesn't mean you shouldn't take it.  In real estate, sometimes terms matter more than price.  Some good reasons to take a more expensive private money are:

  • 100% financing. It's tough to find a HML that will do this.
  • Less qualifications.  No credit checks, no application, etc.  I know a guy that texts his PML, "Hey found a good deal.  Need $200k." and the PML responds back with "Okay" and they close 2 days later.
  • No draw schedule.  Most HMLs typically require you to front the rehab, and then when you make enough progress, you have to request a draw, which might require things like an inspection, lien waivers, paid invoices, etc.
  • No hidden fees (and sometimes no points).  Always be careful about what HMLs are charging beyond points.  I've seen "junk fees" ranging between $0 and $5,000.
  • Can finance things that HMLs can't.  An example would be land or a mobile home.  Most HMLs won't touch these.

Let me know what you think of my random thoughts and please share your experience.

Those rate are indicative of a established operator and good job. It takes a while to build a track record. A lot of my investors want 15-20% a year. I think it’s because a lot of my guys are google experts and shop around a lot.

@Nghi Le those seem like great rates to me. We are still paying 12% on hard money loans and 10-12% on private money loans. I would love to find cheaper money. I am just not sure how to attract it yet. Any advice?

@Lane Kawaoka 15-20% sounds like a sophisticated private investor.  Find someone who's too busy to shop around or not too savvy about investing, like doctors.  People in IT usually aren't good options for cheap private money (IMO).

I started getting private money on 2nd my deal from strangers, but it was less so about track record.  There are multiple ways to build credibility and depends a lot on how you build the relationship.  Being professional on all social media platforms (LinkedIn, Facebook, etc) goes a long way.

@Marc Faulkner I'm not sure if private money terms are affected much by locality; that's the question I posed.  I know that hard money is definitely affected.  In general, hard money will cost more at the lower price points (because of the fixed fees).

@Shiloh Lundahl I'm surprised; I've seen your posts around BP a lot and you seem like an established investor (and BP member).  My strategy was to base private money on my hard money, so I spent a lot of time lowering my hard money costs.  I'll shoot you a PM and we can strategize based on your situation.

@Nghi Le, great advise. As a newbie still trying to figure out the funding portion of my business this helps a lot. I'm really considering going with a private lender to start. I see some good deals in my area (Northern, VA) but as with all newbies, $$$ is a hinderance!

Originally posted by @Shiloh Lundahl :

@Nghi Le those seem like great rates to me. We are still paying 12% on hard money loans and 10-12% on private money loans. I would love to find cheaper money. I am just not sure how to attract it yet. Any advice?

 couple to look at 

Lendinghome

patch of land

Lima one 

all of these will beat what your talking about for experienced in the space flipper.. but your probably not going to be able to do your silent second model. you will have to have true equity going into  the deals.

Originally posted by @Jay Hinrichs :

couple to look at 

Lendinghome

patch of land

Lima one 

all of these will beat what your talking about for experienced in the space flipper.. but your probably not going to be able to do your silent second model. you will have to have true equity going into  the deals.

Curious - when's the last time you've used these lenders (and others that you've recommended on the site)?  I think Lima One may be more recent, but not sure about the rest?

I've used all of the ones here within the past year and have had mixed experiences with some.  And just about all of their programs have changed in the past year, some for the worst and some better.

Originally posted by @Nghi Le :
Originally posted by @Jay Hinrichs:

couple to look at 

Lendinghome

patch of land

Lima one 

all of these will beat what your talking about for experienced in the space flipper.. but your probably not going to be able to do your silent second model. you will have to have true equity going into  the deals.

Curious - when's the last time you've used these lenders (and others that you've recommended on the site)?  I think Lima One may be more recent, but not sure about the rest?

I've used all of the ones here within the past year and have had mixed experiences with some.  And just about all of their programs have changed in the past year, some for the worst and some better.

I have never used POL  I was realty shares VERY FIRST borrower  LOL  back in the day when Nav Athwal was working out of an incubator in Mt. View..  Lending home I have not used in a few years.. I have though a current Vertical construction loan with Lima. as I am at my credit limit in that market with my commercial bank.  And for me other than working out a few kinks up front they have been good.. but we are not beginner borrowers or even on our 10th or 20th deal.. so there is a difference in how they handle draws etc.. I would say we have best rates and easiest draw process compared to other borrowers. So i will use them when my banks have me at max debt.

@Nghi Le Do you have a common promissory note that you use to set up private lending? I have several private lenders that are interested in my projects but I don't have a legal promissory note. They don't require one but I would love to give them something so they feel secure. 

Originally posted by @Jacob Hill :

@Nghi Le Do you have a common promissory note that you use to set up private lending? I have several private lenders that are interested in my projects but I don't have a legal promissory note. They don't require one but I would love to give them something so they feel secure. 

I have a standard-issue WA state promissory note, but I'm not sure it works for you?  Feel free to PM me if you want it.

Otherwise, if you google "Promissory Note <your state>" you usually find something you can use (if you want something slightly formal).  Of course, I always suggest you have it reviewed by an attorney.

The other option is that sometimes the attorney or escrow company at closing will draft those docs for you.

@Aninze A.

https://www.biggerpockets.com/bpp29-dawn-anastasi-...

The magical question is how much do you need? The above link can offer people a means through lending club to get access up to about 70k if have good standing which means that the access problem can go away to a certain extent. 

I have written notes at 8% because less than that it stops making sense. 

The people I have talked to for deals in AZ were in the 8-12% range wanted up to 3% origination fees and there would generally be a prepayment penalty AND possibly a loan exit fee.

I've talked to people in California where the terms were very similar 1% to obtain the loan 1.5% to do the loan so 2.5% with a 6 month pre-payment penalty. 8% interest rate. WITH 1% cost to exit the loan. 

@Jason Monroe

Those terms you mentioned (8-12% with entry and exit points), are they through LendingClub, or were you referring to hard money?

@Aninze A.

Check out SoFi.  You can get up to $100k personal loan within a few days with rates in the single digits with no fees.

@Nghi Le ,

Those terms were with other hardmoney lenders. Lending Club didn't structure their business that way.

I'm confused I have looked at SoFi their terms of service when I looked at them earlier last year indicated you were not to use it for the purposes of investment in real estate where as there have been promotions with lendingclub on biggerpockets.  When did they change their policy?

Originally posted by @Nghi Le :
Originally posted by @Jacob Hill:

@Nghi Le Do you have a common promissory note that you use to set up private lending? I have several private lenders that are interested in my projects but I don't have a legal promissory note. They don't require one but I would love to give them something so they feel secure. 

I have a standard-issue WA state promissory note, but I'm not sure it works for you?  Feel free to PM me if you want it.

Otherwise, if you google "Promissory Note <your state>" you usually find something you can use (if you want something slightly formal).  Of course, I always suggest you have it reviewed by an attorney.

The other option is that sometimes the attorney or escrow company at closing will draft those docs for you.

@Nghi Le Awesome Thanks!!

@Nghi Le: I already have a $45k personal loan with Sofi. And I have many personal credit cards with high limts (total $155k combined, maybe using about 20% right now). However, once I use them too much I will take a hit on my score and don't want to do that (even if I am going to pay them off after a flip). I would like to saty in the near 800 range. I really am trying to get something under my LLC which will help me build business credit and be able to use for some rehabs and other costs.

@Jason Monroe , right now I don't have a property, but I was trying to be proactive and have my funding ready to go so that when I do find something, I could ready to jump on it. 

After talking to a few other folks, I think I am going to try and partner with someone on my first one and then build from there. Try to get to know some private investors. I'm just ready to start but I don't want to do something desperate to get there.

@Aninze A. , the biggest challenge associated with finding a partner is ensuring that your goals are perfectly aligned is key. Contracts help a lot. Also saying this partnership is for the purposes of a property rehab and sale only OR if it's a BRRR that you agree to sell it after 18 months or something.

Lisa has some great content on her youtube channel: https://www.youtube.com/user/AffordableREI

She was on the show and spoke about investment in Baltimore 

Originally posted by @Jay Hinrichs :
Originally posted by @Nghi Le:
Originally posted by @Jay Hinrichs:

couple to look at 

Lendinghome

patch of land

Lima one 

all of these will beat what your talking about for experienced in the space flipper.. but your probably not going to be able to do your silent second model. you will have to have true equity going into  the deals.

Curious - when's the last time you've used these lenders (and others that you've recommended on the site)?  I think Lima One may be more recent, but not sure about the rest?

I've used all of the ones here within the past year and have had mixed experiences with some.  And just about all of their programs have changed in the past year, some for the worst and some better.

I have never used POL  I was realty shares VERY FIRST borrower  LOL  back in the day when Nav Athwal was working out of an incubator in Mt. View..  Lending home I have not used in a few years.. I have though a current Vertical construction loan with Lima. as I am at my credit limit in that market with my commercial bank.  And for me other than working out a few kinks up front they have been good.. but we are not beginner borrowers or even on our 10th or 20th deal.. so there is a difference in how they handle draws etc.. I would say we have best rates and easiest draw process compared to other borrowers. So i will use them when my banks have me at max debt.

How do you get your draws? I feel like my company is on the fore-front with draw disbursements, so I want to know if a company is doing something more innovative.

Also, I have always been curious Nghi, when you use private lenders are they creating a mortgage or is this unsecured? Do you pay any fees at all or do they incur any "loan creation" costs?

Sorry for the late response... haven't really been on BP for a couple of weeks.

@Jason Monroe That's a good disclaimer.  Just reiterating what I've seen other investors do.  Should always read the fine print.  But @Aninze A. could use it to pay off her credit cards and improve her credit score.

By the way Aninze, you have the right mindset.  I think it's a great idea to partner with someone for your first few deals to reduce your risk.  Partners can be tricky (I've been screwed by a couple and both of them were from BP), but the right ones can synergize and take your business to new levels.  I'd "vet" them like a tenant, i.e. do background and credit checks on them through Cozy or one of those tenant screening places.

@Kerry Boyle Curious what you mean by being on the fore-front with draw disbursements.  How do you guys do your draws?  The easiest one I've seen is to show the lender pictures and 2-4 hours later the funds get distributed to me.  But the easier ones tend to be more expensive, and I don't mind paperwork (for now) to get better terms, so I'm stuck with draw inspections, lien waivers, invoices/receipts, etc.  I don't mind doing this for out-of-state investments though; I like that there's a third party making sure my project is moving along.

I've worked with private lenders in all the capacities that you've mentioned.  In the end, I try to cater to the lender's needs (and what makes them feel comfortable and safe), and I try to keep things really simple.  Usually there's no cost; I have the standard state docs and I fill it out, and then I tell them to have it reviewed by an attorney if they'd like.  Having a 2nd lien is nice, but it can be hassle for both the private lender and investor - more paperwork, more dependencies, and HMLs generally don't like to see junior liens.  Sometimes a personal guarantee is stronger than being in 2nd position, but of course, the safest for the lender would be to have both.

Originally posted by @Nghi Le :

Kerry Boyle Curious what you mean by being on the fore-front with draw disbursements.  How do you guys do your draws?  The easiest one I've seen is to show the lender pictures and 2-4 hours later the funds get distributed to me.  But the easier ones tend to be more expensive, and I don't mind paperwork (for now) to get better terms, so I'm stuck with draw inspections, lien waivers, invoices/receipts, etc.  I don't mind doing this for out-of-state investments though; I like that there's a third party making sure my project is moving along.

I've worked with private lenders in all the capacities that you've mentioned.  In the end, I try to cater to the lender's needs (and what makes them feel comfortable and safe), and I try to keep things really simple.  Usually there's no cost; I have the standard state docs and I fill it out, and then I tell them to have it reviewed by an attorney if they'd like.  Having a 2nd lien is nice, but it can be hassle for both the private lender and investor - more paperwork, more dependencies, and HMLs generally don't like to see junior liens.  Sometimes a personal guarantee is stronger than being in 2nd position, but of course, the safest for the lender would be to have both.

Thanks for the description for how you do private lenders! I didn't realize you were only using them in a second or unsecured position.

As for our draws we give you the money, then you let us know when the work is done.

i.e. If you have a 4-draw schedule that is for 65k in rehab you would have this set-up with us:

$10,000/$25,000/$25,000/$5,000

$10,000 is a credit on your HUD (as long as it plus our base loan doesn't exceed 100% purchase price). You complete the work and order an inspection, same as other lenders. If it passes, then we give you the next $25,000. When you complete that work, you get the next $25,000. The only draw that is payed similar to other lenders (in arrears) is the last. You get that one when all the work is complete. So you complete the work, then you get reimbursed for the last $5,000.

@Kerry Boyle I've used PMLs for many different types of transactions, including 1st lien at 100% financing.  They're the most flexible kind of lenders who can be used for almost anything.

Your draw process is easier than most.  What kind of paperwork do you require for a draw?  I'm assuming some kind of spreadsheet to signify what kind of line items you are drawing against that you've completed?  Do you also require invoices or lien waivers?  How fast is that entire process from initial request to money wired to the borrower's account?  What are your draw fees?

Originally posted by @Nghi Le :

@Kerry Boyle I've used PMLs for many different types of transactions, including 1st lien at 100% financing.  They're the most flexible kind of lenders who can be used for almost anything.

Your draw process is easier than most.  What kind of paperwork do you require for a draw?  I'm assuming some kind of spreadsheet to signify what kind of line items you are drawing against that you've completed?  Do you also require invoices or lien waivers?  How fast is that entire process from initial request to money wired to the borrower's account?  What are your draw fees?

Prior to close our construction manager reviews your draw schedule and approves it. Email our draw request department to request an inspection. Inspector confirms that you have completed all items listed in "draw 1". Inspector sends report upon completion to us, then we wire 2nd draw money once we verify work complete (less $200 inspection fee).

Lien waivers are only required on the final draw. Invoices are not required - though I suppose there could be fringe situations where we might ask.

Normal inspection turn time is 3 business days (you can request a rush for $50 reducing to 1-2 business days). From the time you request the inspection with us, we will put in the request with the vendor same day if it is before 1pm EST. Vendor completes inspection and we send you paperwork to DocuSign. If we receive the paperwork prior to 1pm EST, we will release draw the same day.