Real estate investors spend days, hours, weeks and months finding the next deal. Some get lucky and find their deal within the first few prospects but for others it make months viewing prospect after prospect to finally find The Deal. Now comes the second part of the real estate investment equation:
Deal + Money = Investment
Without money the real estate investment equation is incomplete. Real Estate Investors need to actively work on bringing in private money lenders to both tie up their deal and fund their real estate investment opportunities.
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What is a Private Money Lender?
Definition: A private money lender is a non-institutional (non-bank) individual or company that loans money, generally secured by a note and deed of trust, for the purpose of funding a real estate transaction. Private money lenders are generally considered more relationship-based than hard money lenders.
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Why Private Money Lenders?
One of the biggest mistakes that new real estate investors make is that they spend an inordinate amount of time learning about finding and typing up deals but a small amount of time on how to raise equity capital from private money lenders. It’s just as important, if not more important, for real estate investors to understand the ins and outs of raising money as finding the deal. Finding a deal is great but if you do not have earnest money to tie up a deal or funds to purchase it, then all that time and effort is for nothing. (Ankit Investing Life Rules: Work Smarter Not Harder). When you make an offer on a piece of property, it is expected, and usually required, that you place a earnest money deposit down with your offer. If you are currently living paycheck-to-paycheck, coming up with even a few hundred dollars can be a big hurdle in launching your real estate investment business, let alone thousands needed for a purchase. Hence if you work on raising capital from private money lenders while locking up deals then you will have a greater chance for investment success.
The goal of this post to help you learn how to raise capital from private money lenders so that you can successfully tie up and invest into real estate projects. The first question that most investors come up against is who should I approach to raise the equity capital? Let’s try to answer that question
Private Money Lender Circles
The primary investor circle is composed of Friends & Family. Many real estate entrepreneurs/investors (okay lets face it we are all investors whenever we raise capital for a new investment) turn to friends and family for their first funding needs. Friends and family financing is popular because it is easy to get in front of these people who know you best and they are positively inclined to say yes. But there are negative parts of raising money from friends & family as they may not be sophisticated enough to know what is a good deal and what is a bad deal and this can lead to problems when a deal goes sour. Hence when you take funding from friends and family by very clear about the risks and downside.
I would also suggest only taking capital from friends and family members who can afford to lose the investment. That way, if the investment does turn out to be bad, at least you won’t lose valuable relationships. In addition, friends and family often cannot come up with a lot of capital so friends and family can get you into business by providing you initial earnest deposit money so consider this source your angel investment source of funds. The money from friends and family will give you time to create value by locating and locking up deals so that you can either raise additional money from this circle of investors or raise money from secondary and third party circle of investors.
A really good BiggerPockets article that talks about how to raise money from your friends and family is Raising Private Capital: How I Raised $50,000 over Dinner by Arthur Garcia
The best way to explain this circle of investors is to draw an analogy to LinkedIn Connections. When you login into your LinkedIn account and look up a person that is not your network then on the right hand side of the screen you will see how you are linked to that person from other people within your network. When you are linked to a person directly through one of your current network contacts then that is said to be a second connection.
The secondary circle of investors consists of the Friends and Colleagues of your current primary circle (Hint: the bigger your primary circle then the bigger your secondary circle of investors; get out there and make more friends and contacts through the BiggerPockets Forums and other social networking groups). This is the second best source for raising capital compared to the third party circle as this group will be more receptive to listening to you given that you have been provided a nod of approval from your primary circle mutual contact.
In addition, this circle is a bigger capital pool as there are more people in this group than in your primary circle which will allow you raise equity for your investment projects once you have locked up your deal using the primary circle’s capital. There are negative parts of working with this group as it is likely to take more time to raise money from this group as they are less positively inclined to say yes as they do not know you personally. To raise money from this group, you will need prepare to an investment presentation and spend time meeting these investors at luncheons, happy hours, and dinners.
Learn how to raise money from your secondary circle through this great Biggerpocket Blog Post: How to Raise Money Anytime, Anywhere. Even over Chicken Wings by Clay Huber
Third Party Circle:
In your third party circle are investors that are most removed from your network as you don’t know them personally in any manner. This circle is the biggest capital pool that you can access but it takes the longest to convert them into capital partners. The key question that comes into the mind of real estate investors is how do I find these potential capital investor? To help bring clarity to this question, I will provide two ways on how to reach these potential investors:
- Investor Contact Sites: You can utilize websites such as BiggerPockets Marketplace, Lending Club, Prosper, Go Big Network or Lendpost to post your investment opportunity and actively contact potential third party capital investors. A Word of Caution: Please make your contact is within the confines of the Securities and Exchange Commission at both the federal and state level.
- Investor Direct Mail List: This a guerilla approach to getting in touch with potential capital investors wherein you work with a list broker such as Melissa Data and Click2Mail to ascertain a list of potential investors who match your pre-established criteria of Median Household Income, Net Worth, Likelihood to Invest, and Responsiveness to Direct Mail.
Use this article as a guidepost as you work on raising equity dollars. Balance your experience with your capital timeline needs as you consider who you should approach for your equity capital.
I would love to hear your thoughts on how else you can approach private money lenders. Leave a comment, thought or suggestion below.
Photo: John Althouse