I started investing in real estate over 8 years ago and I have done all kinds of deals. I started as a landlord and buying Rentals. Then, I started wholesaling and flipping properties (currently doing about 50 transactions a year over the last couple of years). I have also Owner Financed a couple of properties, own some Multi-Family (currently have a deal under contract and looking to close 3-4 more before the end of 2020), and a co-owner in a Tiny Home Park. There is more, but this post isn't about that LOL... I didn't actually start using Private Money until only 3 years ago! I had a very good friend, who flips over 50 houses a year, tell me about Private Money Lenders and I haven't looked back! Now, I fund the majority of my real estate deals with Private Money. I’ve borrowed & repaid millions of dollars from my investors. Not all of my deals have gone as expected, but if you do enough deals then you understand that is a part of the game. I’ve lost money on a few here and there and I'm sure it will happen again. But here’s what I’m most proud about in my real estate career: MY LENDERS HAVE NEVER LOST A PENNY! So even when I’ve taken hits on some of my deals, my lenders have always received 100% of their capital AND Interest that was promised to them. *And I will note that I have a fairly conservative/cash-flow approach to real estate and always have at least 3 exit strategies on every deal, just in case…if you're considering becoming a private lender, I would strongly encourage you to get to know your borrowers AND their investment strategy [critical] **I apologize for the long post, I just wanted to share how my Private Money Lenders changed my life as an investor.

My wife and I have been loaning our hard-earned money privately to the local house flippers for ten years now. A few things to add and to clarify: 1) No sane borrower buys property without purchasing owner’s title insurance. Your lender’s title policy will be part of that. You will have to learn to read the preliminary title policy and specify each lien that gets paid off when your loan closes. The buyers title policy protects them from unknown/undisclosed liens, among many other issues. The lender’s title policy is different. It protects your loan position. This is so no one can claim to be in first position when it was your loan that was recorded first, etc. Loan priority and lien payoff are specified in your lender instructions. This is a very important document you provide to escrow, title, or the closing attorney, as appropriate. 2) If you are lending on flips, make sure your borrower has a vacant dwelling policy, with replacement cost, naming you as the Mortgagee, as well as builder's risk. A regular homeowner’s policy will not cover either of you. I find insurance binders maddeningly cryptic and I rarely understand what the borrower purchased. Always call the insurance company to confirm. 3) I don’t care that your attorney reviewed them, never use loan documents obtained from a borrower. As important as what’s in their docs is what’s not. Rather than pay an attorney to start adding terms which protect you to someone else’s docs, start with a set that was prepared with you in mind as the lender. You will pay a lending attorney once for this. Note: A lending attorney is not the same as a real estate attorney. I’m only half joking, but rest assured that when you sign our loan documents, as your pen barely lifts from the paper, you are probably already in default for something. 4) I cringe when some here write that private lenders can’t loan on an owner-occupied property. With exception of multi-family loans, owner occupancy is completely irrelevant. You should learn the difference between a consumer purpose loan and a business purpose loan and how the use of the money determines that. It’s more appropriate to write that the majority of private/hard money lenders can or will only make business purpose loans (which can be owner occupied). 5) The most important advice I can give to any aspiring lender is to only loan locally to experienced flippers and only to those you’ve personally met and gotten to know, like, and trust. Know, like, and trust is the ultimate real estate cliché but something we live by.

@Corey Young @Lisa Eckman hit the nail on the head for the most part with her answer. Private money has many benefits! A couple of reasons is the flexibility in the negotiations because it is relationship based, and the speed in which a private lender can close a deal. Conventional loans is probably going to be the cheapest lending you can get most of the time but they typically take 30-45 days and ask for lots of personal or company documents for their underwriting. I've closed deals with some lenders as fast as 3 days! Another reason to use private or hard money lenders to fund a deal is we typically borrow a % of the after repair value (ARV) which can include repair costs; where-as if you are borrowing from a conventional lender, they will only loan up to 80% of the as-is value with no repair costs. I hope that makes sense.

I'm looking at offering private money loans and wonder if you can provide some advice on what's really necessary for me, as the lender, to protect my interests. Everyone's trying to keep costs to a minimum, so a lot of the safeguards might go by the wayside: - Is it really necessary for me to have an attorney involved? - Is it really necessary to have a new title policy when you have one dated within the last 6-12 months (for example, when the owner purchased the property initially and is now rehabbing)? Yes, I know that something could have changed during that time. But you can say that about a property that has a title policy as of a week ago. I guess the difference is that the title policy would pay up if necessary were you to have a current policy? I would have a 1st lien recorded on a property that has 65% LTV. However, tax and mechanics liens take priority. So there are always risks. Just trying decide what is truly necessary. Thanks for your advice! Lisa

@Lisa Eckman A lot depends upon the relationship between the investor, lender, and attorney. If it's a first time deal, I want to just represent the lender and present their loan package protecting their investment. However, if I'm the closing attorney for the investor, I may prepare the loan package for the lender. I've done this many times before so the lenders typically trust me that I'm doing it right. The advice above was correct, I typically prepare the loan package on behalf of the lender, review title and request a loan policy, and charge my attorneys fees on the settlement statement.

@Joe White, please be careful making blanket statements about "exorbitant" rates being illegal. Your statement does more harm than good.Unfortunately, your statement is blatantly wrong. Especially when you start talking about hard money and commercial loans. Many states have no usury limits on commercial or hard money loans. The reason they don't is so that business owners can conduct business as they see fit. If a business owner agrees to a high interest rate loan, it's because it worked for them. Short of coercion, you know it's a good deal if both parties voluntarily do the deal.

@Lisa Eckman I appreciate your desire to streamline and save money (regardless of who is paying) as I feel the same way. However, you basically can't save money on title (see below) and trying to save on legal is VERY BAD risk reward. 1. Title - You need a Lender's Policy. I had a situation where the lender was funding 100% of a deal and so the borrower didn't get Title Insurance as it didn't serve a purpose in this case. The Lender's Policy is more expensive if there is no Owner's policy. It is probably the same if the Lender declines Title Insurance but you shouldn't find out. 2. Legal - It should be $150 to $500 for a note, mortgage/deed of trust and loan docs. If you are in a state using a closing attorney, many will prepare these without extra charge but you will want to make sure they are representing you as the Lender. Disagreements are never about what's written. If they occur, it is about what isn't written. Don't take that risk for you and your borrower over a couple hundred bucks.

@Don Scott I loved this. Thank you for sharing, didn't actually feel long at all. I think you should write more often. I appreciate your candor and point of view.

WHY I LOVE PRIVATE MONEY LENDERS

Tiffany Smith

Investor · Saint Joseph, MO · Member since 2016 · 69 posts · 23 votes

6y

@Don Scott this sounds like such a great way to finance deals and I am currently doing this with money borrowed from a family member. Outside of family, how did you find investors? If you don’t mind me asking!

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Tiffany Smith

Investor · Saint Joseph, MO · Member since 2016 · 69 posts · 23 votes

6y

@Don Scott is it possible to use private money for a portion of the down payment on a property you are financing with a bank or do you usually use private money to purchase and then refi once repairs are done?

2 Reply

Don ScottPro Member

OP

Investor · Houston, TX · Member since 2016 · 60 posts · 100 votes

6y

Originally posted by @Rustam Uktamov:

@Don Scott

Great post! Thanks for sharing your experience Don. Experience is the most valuable commodity in real estate.

Can you also tell us how exactly did you make contact with your private lenders? I’d assume you’re talking about individuals lending their own cash, not institutional hard money lenders.

You said they lend you a percentage of arv, that sometimes includes the repair costs. Does that mean they lend you 100% on both purchase price and repair costs?

@Rustam Uktamov, I started off connecting with lenders at networking events...Getting to know them and their investment goals, as well as them getting to know me. And to answer your second question; yes I typically borrow 100% of purchased and repair costs because I buy below 75% of the ARV (that is including my repair costs).

2 Reply

William Allen

Investor / Wholesaler · Nashville, TN · Member since 2014 · 1k+ posts · 667 votes

6y

@Don Scott, great post and you nailed it. Private money lenders are a huge way to ramp up quickly and I attribute them to a lot of my success. Being able to raise money and close on deals as a wholesaler or flipper is the name of the game. Well done and congratulations on doing 50 deals a year, especially if you are doing so in Houston. That's a competitive market! Great job.

2 Reply

Don ScottPro Member

OP

Investor · Houston, TX · Member since 2016 · 60 posts · 100 votes

6y

Originally posted by @James Williams:

@Don Scott could you possibly expand on how you started using private money lenders? Where did you find them? How did you approach them? How difficult is the process? What do they charge you on average? Do you use the same lenders all the time or do you find new ones constantly?

@James Williams I started using Private money lenders after years of using Hard Money Lenders. Although they have certain requirements and charge more, they are a great set of second eyes to look over your deals/projects.

However, once I learned about working with private money lenders, I started having discussions with lenders at networking events. I got to learn what they were looking for as far as investments and types of deals they were looking to invest in... In return they got to get to know me and how I approached deals, how much experience I had, etc. The majority of the rates range from 7-10% interest. For the most part, I have about 5-10 lenders that fund the majority of my projects but as we expend, I am looking to network with more lenders.

1 Reply

Don ScottPro Member

OP

Investor · Houston, TX · Member since 2016 · 60 posts · 100 votes

6y

Originally posted by @Christopher Gilmore:

@Don Scott How did you approach your Private lenders and what was the time frame from meeting to lending?

@Christopher Gilmore That honestly varies depending on when I have deals come up or how I met the person. I don't borrow from every person I meet that wants to lend. I look at it as relationship lending; it has to be a good fit. In this business, we get to do business with people we know, like, and trust... That includes lenders :)

1 Reply

Don ScottPro Member

OP

Investor · Houston, TX · Member since 2016 · 60 posts · 100 votes

6y

Originally posted by @Chris Lockwood:

I would like to get some clarity on a hypothetical situation. None of these numbers are real, but I think this will help people like me put it all together as I have read this thread. Let me also say I have not used private money, but I do have a few interested parties who are willing to help me, but have no clue what to do either.

Situation: SFH for sale $59,000. Needs $20,000 in repairs. ARV $120,000. As the investor I need to borrow the purchase and reno costs. Here are my questions.

1. What is the typical range of the percentage rate?

2. Can I borrow the full amount?

3. What will I pay the lender to the until I refinance or sale?

4. How much over the initial loan will I have to pay?

5. How much cash would I need to ring to closing?

I know these figures will very, just looking for a general idea. If I'm not asking the right questions or express myself clearly please let me know. That is for any response.

@Chris Lockwood those are some good questions to be asking.

1. That is going to vary, but everything is negotiable. Most of my deals are in the 7-10% range.

2. I typically borrow the full amount, but I've had deals in the past, where I've only borrowed the purchase price from the lender and paid the repairs out of pocket.

3. That is negotiable, but most deals I see are interest only deals. So, if I borrow $120,000 at 10% interest only for on a 12 month term. I will pay that lender $1,000 every month until I refinance or sell the house and the lender gets their $120,000 principle returned.

4. I think answer to the question above answers that (let me know if I interpreted correctly).

5. The cash to closing depends on so many factors: how low you buy the deal, renovation costs, how much money you borrow from the lender, your exit strategy (flip or rental).

6 Reply

Chris Lockwood

Kansas City, MO · Member since 2019 · 7 posts · 10 votes

6y

@Don Scott thank you for the reply. You just taught me more in a few sentences than I have learned in a week. I have a few friends and family who are willing to assist and now I have a better understanding of what to tell them. I know there is more details that this a lawyer can help with, but wow thanks!

4 Reply

James Williams

New to Real Estate · Charlotte, NC · Member since 2019 · 73 posts · 46 votes

6y

I love post that generate this much good conversation. I'm here for all of this.

4 Reply

Don ScottPro Member

OP

Investor · Houston, TX · Member since 2016 · 60 posts · 100 votes

6y

Originally posted by @Sharon Tavilla:

@Don Scott

Novice BiggerPockets user here love this thread because I want to buy my 4th property, but I already have a primary resident mortgage and a mortgage on a rental property (small and large respectively).

My question is do private lenders usually expect to be paid within a shorter time frame like 1-3 years or less? Will they lend large amounts like $400k?

@Sharon TavillaI I would say it depends... Thats something you discuss when you are discussing what you are looking for out of a lender. But since it is relationship based (in my opinion), you can be creative and discuss 1yr terms and at the end of each year you two can decide to keep riding out the deal or decide the lender needs to be cashed out and you would need to refinance the deal (which would cash out that lender). I hope that helps.

0 Reply

Don ScottPro Member

OP

Investor · Houston, TX · Member since 2016 · 60 posts · 100 votes

6y

Originally posted by @Tiffany Smith:

@Don Scott this sounds like such a great way to finance deals and I am currently doing this with money borrowed from a family member. Outside of family, how did you find investors? If you don’t mind me asking!

@Tiffany Smith It definitely can be done outside of family. I have actually borrowed money from a family member for any of my deals. I found my lenders either through networking or referrals from other investors or lenders that love working with me and tell their friends and family about working with me.

0 Reply

Don ScottPro Member

OP

Investor · Houston, TX · Member since 2016 · 60 posts · 100 votes

6y

Originally posted by @Tiffany Smith:

@Don Scott is it possible to use private money for a portion of the down payment on a property you are financing with a bank or do you usually use private money to purchase and then refi once repairs are done?

@Tiffany Smith yes you can borrow money from lenders for a portion of the down payment on a property you are financing through a bank but I wouldn't recommend it. It puts the lender in a vulnerable position, because the bank is going to take 1st lien position. So if anything happens, it makes it difficult for that lender to get their principle back. If I am going to keep a property as a rental, I would use the private money to purchase and complete the repairs, and then refinance into conventional lending. I hope that helps.

2 Reply

Marcello Di Gerlando

Investor · Colorado Springs, CO · Member since 2011 · 322 posts · 238 votes

6y

You pump me up @Don Scott. get um!

1 Reply

Marcello Di Gerlando

Investor · Colorado Springs, CO · Member since 2011 · 322 posts · 238 votes

6y

@Sharon Tavilla

Most HMLs will want to be paid within 9 months. Depending on the particular opportunity you are proposing you may find lenders willing to go to 3years. BP has a lot of hard money resources, tips and techniques search the threads using key words you will find good info. 400K is not a problem it is the smaller amounts that are are more difficult because they simply do not offer enough of a return for the lender.

2 Reply

Ian WalshBusiness Member

Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes

6y

One for the good guys:)

0 Reply

Ola Dantis

Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes

6y

@Don Scott

That is the beauty of REI: When you take an average of all your deals, you can see a pattern of how forgiving Real Estate can be over time if you persevere!

Love that about Real Estate Investing!

0 Reply

Account Closed

Real Estate Broker · Boca Raton, FL · Member since 2017 · 11 posts · 4 votes

6y

Private (local) lenders typically lend at 65%-75% of as is value for 1-3 years. They might permit owner occupants with a good credit history for a few years. Institutional lenders typically lend at higher LTV's than that with loan amounts down to $75k, but only to entities planning to fix or put tenants in (not owner occupied). Terms are usually 18 months are less, long enough to get a property habitable. Rehab is funded at or nearly at 100% and rehab costs typically reimburse as the work is performed. Some will require asset verification for funds to close and payment reserves. All will have their own criteria for minimum credit score, good guy pricing for higher scores, as well as experience levels for more liberal LTV's.

1 Reply

Matthew Brown

Duluth, GA · Member since 2017 · 11 posts · 4 votes

6y

@Don Scott how did you go about finding private money lenders?

0 Reply

Mark Atalla

Lender · Irvine, CA · Member since 2019 · 1 post · 0 votes

6y

Love to hear that you've found working with private lenders beneficial to you and your projects!

0 Reply

Joseph Walsh

Brookfield, WI · Member since 2016 · 191 posts · 108 votes

6y

Learned a lot from this thread. I know a few individuals that would consider being private lenders, but need to be educated on what to do to protect themselves. Knowing now I can go to them and not only talk numbers, but also say, "You'll be first lien on the property, but that's not enough, sure you can foreclose on me if things go badly and take ownership, etc., but you also should get A "Lender's Title Insurance Policy. Lender’s title insurance protects you as the lender against problems with the title to your property-such as someone with a legal claim against the home" (Thanks @Don Scott for the quote) And I encourage you to have a qualified attorney review everything. We'll include those costs in my fees, you shouldn't have to pay that just to lend me money. My goal here is to make sure you are well protected in the off chance something goes south. I'll also be returning you 10% (or whatever) interest every month, and of course 100% of the principal once I refinance or sell the property. You get good returns, and protection with a real asset. Instead of just "you'll get 10% interest every month, and when I sell/refinance, I pay back your investment in whole" Especially since I am looking to try and do a few small deals over the next year or two to build the, as Don put it, investment relationships as I look toward scaling up. Also good information for seller financed properties, one i am looking at here now (potentially)

1 Reply

Derrick Alexis

Rental Property Investor · Philadelphia, PA · Member since 2018 · 38 posts · 2 votes

6y

@Lisa Eckman good afternoon,

After reading the threads I just wanted to chime in and ask where it is that you intend/ looking to lend out?

0 Reply

Senut Lash

Glen Burnie MD · Member since 2018 · 1 post · 0 votes

6y

@Don Scott great content. In terms of the interest rates, do you give the full year interest even though you sell the property in say 4 months. For example if you get 100k at 10%, and you sell the flip in 4 months. Do you just pay 4k in interest and return the 100k capital?

0 Reply

Emily Di

Specialist · San Diego · Member since 2010 · 37 posts · 18 votes

6y

@Don Scott Thank you for sharing! I totally agree with you. I didn't move to private money until I "had" too buying a couple of trashed houses and maxing out my loan limit, but I, too, am grateful. Many of my landlord friends think I'm crazy paying rates in the 8-10% range but when the property still cashflows (and I'm in Socal!) private money is a powerful business tool. I remember my first lender wanted me to submit examples of renovations and adding value to properties. It was refreshing. Unlike the conventional lenders, who at one time were requiring 6 months reserves on EVERY PROPERTY. There was no understanding of the business. But that's because conventional loans are really geared toward homeownership. It's generous Fannie Mae even allows 10! Thanks for posting and reminding me of who to thank! Best wished in your endeavors.

1 Reply

Dontavious Dawson

Rental Property Investor · Portsmouth, VA · Member since 2017 · 5 posts · 2 votes

6y

@Don Scott. Do your lenders loan to individuals for properties overseas?

0 Reply

Glenda Smith

Washington DC · Member since 2015 · 2 posts · 0 votes

6y

I am looking to up my investing business this year and this is one of the things I wanted to look into. How would I go about finding private money lenders?

0 Reply

WHY I LOVE PRIVATE MONEY LENDERS

WHY I LOVE PRIVATE MONEY LENDERS

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