Finding Private Lenders for your Rehab Deals
One of the major barriers to getting started in real estate is finding funding for your deals. This obstacle is especially imminent when it comes to funding less conventional “Fix & Flip” deals. Many books and resources seem to skim over this topic as if you’ve already got it figured out. We understand that finding financing for your flips is much easier said than done.
Strike 1 – Conventional Banks
We know that banks won’t fund your flip deals. Unless you have a substantial line of credit that is based on other aspects of your personal or business finances, you will not find a conventional lender interested in funding the purchase and rehab of a single family home.
Strike 2 – Hard Money Lenders
The next option you might consider is Hard Money Lenders. This seems like a great option. After all, Hard Money Lenders understand the flipping game. They are interested in the exact deals that you want to do! Right? Wrong! Hard Money Lenders are only interested in lending money to investors who have experience. They typically look for investors to have a minimum of five successful deals under their belt. If you are just getting started, how is this supposed to help you?
Hard Money Lenders are also reluctant to fund 100% of your purchase and rehab costs. These lenders will typically look to maximize their loan at 80% of the total investment. Again, if you’re just getting started, this is a major barrier to funding you deal. On top of all this, these Lenders will still request that you provide the mountain of documentation that conventional banks ask for. You’ll need to gather recent tax returns, W2’s, Personal Financial Statement, Bank Statements, Pay Stubs for both you and your spouse. What a headache!
Home Run – Private Lenders
By far the best way to finance your rehab deals is to find private lenders looking to gain a solid return on their money. Private lenders come in all shapes and sizes. In general, these are professionals who have a lump sum of cash sitting and waiting to gain a return. This lump sum often takes the form of a pension or an IRA. There are often restrictions on where and how this money can be invested. Often these lenders are looking to lend money to private individuals and/or businesses. The typical private lender is a seasoned professional approaching or already at the point of retirement. They are looking for a passive way to continue gaining returns on their hard earned income. This is exactly where you come in!
Four Steps on your Road to Private Lenders
Step 1 – [Constantly] Tell People What you Do
There are no two ways about it: You need to tell people who you are and what you do. This point cannot be emphasized enough. You need to make “talking about yourself” an obsession! Everyone you encounter should know exactly what your goals and aspirations are when it comes to your real estate business. The success of this strategy is as simple as the law of large numbers. If you talk to enough people and enough people know what you do and what you’re looking for, you are going to find interested private lenders. Its a fact, If you find yourself struggling to find private lenders, the solution is simple: talk about yourself more!
Consider the art of networking as planting seeds. These seeds take a long time to grow. Don’t get frustrated if potential lenders turn down your deals the first or second time. Eventually they will see the success you are having with other investors and want to get involved. Be steadfast in your efforts to continue building and cultivating professional relationships.
Step 2 – Establish Credibility
Private lenders want to feel safe about their investments. While, they understand that a strong return will come with some risk, they want to be sure that they are investing with an individual or business that who will make strong decisions with their money.
If you have a few deals under your belt, you should prepare a package of your past deals to clearly demonstrate that you know what you’re doing. This is your time to shine! Create a clean, concise document to show that you are a serious investor who values organization and professionalism.
This package should include the following:
- Project Financials
- Scope of work of your rehab
- Before/ After Pictures
- Analysis of Actuals to Projections – Was your budget accurate? Did you sell for what you thought you would? What are the lessons learned?
- Return to your investors
Even if you haven’t done a real estate deal, its possible to establish credibility. Instead of providing a package of your past deals, you will need to win over your investors with your Proposal Package (see next section). However, don’t completely ignore the task of establishing yourself as someone who knows what they are doing. Create a bio package to explain your experience in other fields and how this will apply to real estate. Include a market analysis and your proposed processes for marketing, managing the project and selling the home after repairs.
Building your credibility is like making a snowball. Its tough to get going. But once you do few deals, they all build on themselves to establish a strong reputation.
Step 3 – Build your Proposal Package
You will need to build and continuously improve on your project proposal package. This is a property specific document that outlines all the key financial and market indicators for your project. This proposal should include:
- Project Summary
- Property Statistics (Beds, Baths, SQFT, etc)
- Purchase Date & Purchase Price
- Estimated holding duration and associated costs (Taxes, insurance, utilities)
- Rehab budget (Just one number for the summary. The detail will be in your scope of work)
- After Repair Value (ARV)
- Financing Requirements
- Profit Breakdown
- Comparable Sales – List ~10 properties that serve as solid “Comps” for the house you are buying. The houses should all be similar in the number of beds, baths, square footage etc. They should also have similar features such as driveway, garage, backyard, attic etc. Your Comparable Sales page will provide justification for your estimated ARV. You will utilize the average Price per Square foot of your comps to establish the ARV Price per Square Foot of the subject house.
- Scope of Work – The scope of work will outline exactly what you plan to do to the property. This section shoudl be extremely organized and detailed. You want to demonstrate that you have done your due diligence and you have left no stone un-turned. Your scope of work should have a budgeting element that helps you arrive at your total repair cost. You should always add at least a 5%-10% contingency to your estimated repair price.
- Pictures – Include pictures of the subject property as well as pictures of your comps. Hopefully your comps are recent enough that the listing photos are still up on sites like Zillow and Realtor.com. Be sure to save these photos ASAP before they are removed
Your proposal package is a big deal. Not only does it communicate the key metrics of your deal, its also an opportunity to demonstrate your credibility as a legitimate real estate investor. Make your proposal as professional as possible. It will become invaluable on your quest for investors.
Step 4 – Get the Meeting, Nail the Pitch
Your ultimate goal when seeking out private lenders is to get in front of truly interested individuals. Once you have the meeting, your hard work to back up your credibility and build a strong proposal should do most of the work. However, make sure you are continuously improving upon your pitching skills. This is a topic for one or more separate, dedicated posts! To get started, we highly suggest you read Pitch Anything: An Innovative Method for Presenting, Persuading, and Winning the Deal.
Sometimes new potential lenders will need a bit of education to get them comfortable with the idea of investing in real estate. They may associate real estate investing with the high paced, unforgiven world of speculation and Ponzi Schemes. Come to the meeting prepared to explain why your investment is safe. For starters, your investors will get a first position lien on real estate. Few investments will bring this level of tangible security. Also be sure to educate your lenders on the market in which you are doing the deal. Explain why your comparable are strong. Explain trends and dismiss talks of real estate being a risky investment. The bottom line is that you’ve done the due diligence, you’ve padded your numbers with a contingency and you are committed to earning a return for your investor.
Where it Goes from Here
Gaining commitment from a private lender is an amazing milestone. Not only do you have funds for your deal, but you have a successful investor who has validated your business model and agreed to put his money behind your deal. However, this is only the first step. Now you must walk the walk. Its up to you to execute a strong project that finishes on time and returns your investor’s money.