Question about Private Money, Hard Money and the Bank

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Question about Private Money, Hard Money and the Bank

Michael Bishay
Member since 2020 · 41 posts · 13 votes

Hello all,

I had a question about a strategy I see all over the internet where people raise money from a "Private lender" form the down payment on a property and then the rest they raise either from the bank or from a hard money person.

Are there really people that lend the initial finds for a property? Why would they be incentives to do that being that it would only be like 10-20% of total cost?

Am I understanding this correctly?

Sorry for the novice question, I'm still new to this game and this site has bees super helpful!

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  • Devin PetersonBusiness Member
    Lender · Sarasota, FL · Member since 2022 · 2k+ posts · 679 votes
    3y

    Michael,

    You’re kind of diving into the path of GP / LP Syndication at a very low level. In some instances, people have a lot of time and the wherewithal to underwrite, intelligent investment decisions, but not necessarily the funds or money. This is where your curiosity comes in to play. It may benefit you to find someone who’s very cash heavy, and does not have a lot of time. In return, you offer your time and your expertise And split the potential returns on an investment. This is of course, just one strategy and way you can team up with private investors for the down payment. Good luck.

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    3y

    @Michael Bishay

    I think these ads are somewhat misleading

    People don’t borrow the down payment that is extremely rare. You need money in real estate - I don’t care what anyone tells you as there will be a time when sometime goes wrong and if you have no cushion, you will land on your you know what really hard.

    If it is a syndication the people are investors and typically share the profit which is very different than it being a loan.

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  • Evan Polaski
    Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
    3y

    @Michael Bishay, I would be happy to see the ads, if you want to share.

    But as noted, no lender is going to allow your down payment to be an other loan, secured by the same real estate.  As Devin noted, you could be seeing ads that are either: offering some form of equity investment or selling a course that basically leads to lying to lenders about the style and source of the downpayment.  

    That being said, the equity you raise could have a structure that is very close to a typical loan, but generally needs to offer a return beyond just the monthly payments to your investor(s).  I.e. you could raise equity that carries a 5% preferred return, anticipated to be paid current, then upside upon capital event that brings investors to a 12% annualized return, and cap the return there.

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