Using private lenders

[Elias Munoz]

I have a question about using private money. I’m looking to buy my first investment this year. I have the capital but was thinking about using a private money lender instead and having my fund as reserves. My plan is to do the live and flip method. I do Constuction for living so I’m handy and could do the work myself. I would want to buy something with cosmetic work. After 6 months refi and payback my lender. Then repeat the process. Will this work or should I just use my own money? Thank you for taking your time to answer my question.

[Ryan Garrison]

Using Private Money (not hard money) is great if you have relationships with the right people. Do you already have the lender in mind?

Run your numbers, and if the deal supports it, it is certainly worth using Other People's Money instead of your own. 

You can leverage and scale so much faster. 

If you have 100k and were thinking of putting all 100k of your own money into 1 deal, you could become cash poor. 

Additionally, you are only able to reap the rewards of one deal...and that is a lot of risk in one deal.

That same 100k, you can keep in the bank (if your private lender agrees to $0 down) and flip as many properties as the lender can afford to fund (and as many as you can manage).

Or, you could leverage it on 10 different properties at 10k down payment each (if that is what you and the lender agreed to).

You and your private lender can agree to any terms you want.  No monthly payments. Any interest rate. Any down payment. You can be as creative or simple as can be agreed.

Over time, you may be able to secure private lenders for both short and long-term loans. Cash, Self Directed IRAs, etc.

[Mackenzie Grate]

I'd only use private money in the beginning of my investing career if they can beat conventional lenders rates. Yes, getting a conventional loan is much more of a hassle, but lenders who lend on primary residences usually give you the best rate. If the issue is holding on to your cash, look for loan packages with low downpayment opportunities. How do you plan to pay for the renovation to begin with? That also will play a factor in which route you take. Either way you are going to refinance down the line, or at least pull a line of credit from the property when some of the renovations are complete so I think it's more important to just choose one and get going while the momentum is there. :) Good luck!

[Scott Wolf]

@Elias Munoz, most private/hard money lenders won't even consider lending on someone's primary residence. While it may be tough, the FHA 203k loan is a great low money down option that will also help you fund your renovation.

[Will Barnard]

If you plan to use the live and flip method meaning this would be your primary residence, private/hard money lenders will not (most cannot legally) loan as they would have to comply with Dodd Frank rules and regs. You are much better off going with your own cash or a conventional owner occupied loan where you will get the best rates.

[Elias Munoz]

@Ryan Garrison thank you for the response and advise. Yes I do have the private lenders in mind. They are one of my good friends parents which I known my whole life.

[Elias Munoz]

@Mackenzie Grate I’m thinking about asking the private lender for the down payment and rehab cost which I’m looking for something cosmetic at first.

[Elias Munoz]

@Scott Wolf what if I know the private lender for years and have a good relationship with him. You still think it’s not worth using?

[Levi Mondoza]

Most responses here have been spot on:

• Non-Owner occupancy as a requirement
• Private capital partner would be your lender (in the case of raw, private money)
• Hard money lender would be you next best bet
• Rehab funding is accessible

I wouldn't recommend using your own money, since that's YOUR money. All of it, too, if our flipping in CA. Hard/Private money lender's are useful for limiting the amount of YOUR that you'll burn in a deal. Just enter the space with the expectation that you'll need a well defined plan, clearly laid out budgets, and that some money will need to be used. It's a tit for tat world in hard money, since no one has ever had a free lunch. But the best, most professional firms will be able to give you the best terms and LTVs if the market area is right and you can draft a stellar application with little friction (fractionalized ownership, disorganization, etc.) 

[Scott Wolf]

Originally posted by @Elias Munoz:

@Scott Wolf what if I know the private lender for years and have a good relationship with him. You still think it’s not worth using?

 Elias, if the lender is willing to lend on your primary and the numbers work out for you to make it profitable, then it may be worthwhile.  But the numbers need to work.

[Ryan Garrison]

@Elias Munoz

I would recommend not asking them directly. "would you be interested in investing in ____?"

Instead, describe the opportunity and ask that they might introduce you to friends that might be interested.

The FOMO usually makes an investor say something like "I might be interested in that. Why didn't you think of me?"

😁