Getting the money for your first few rental properties is a relatively easy process. Go into almost any bank, and if you have decent income and credit, you will likely be approved for a loan. You will likely be able to do this a few more times before the spicket of easy bank money gets turned off. Why? Because you will have too many properties and will no longer neatly fit into their computer programs.
So then what?
You could go after commercial/portfolio loans with a local bank. These types of loans are often a good alternative and can keep you building your portfolio, but they also often come with many strings attached and terms that may make working a deal difficult.
Hard money is often out of the question. It is just too expensive.
For me, private money is they way to go. But what is it? How does it work? How do you find it?
How I Bought, Rehabbed, Rented, Refinanced, and Repeated for 14 Rental Properties
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An In Depth Look at Private Money
What is Private Money?
Private money is exactly what you think it is. It is money held by a private individual. It could be anyone who has money in a checking account, an IRA or a CD. It is basically just cash, cash that could be lent to you for your real estate projects.
What’s So Great About Private Money?
The main thing about private money is that it is so much easier to work with than bank loans. Plus, there is a lot more flexibility with what can be done. It is just you and your private lender, sitting down and working out something that is mutually agreeable. There are no silly seasoning rules or other mumbo jumbo to deal with. You really can think outside of the old box when using private money and get really creative in order to get the deal done.
Why Would Someone Lend You Their Money?
People will lend you the money because they are looking for a much better rate of return than they can find anywhere else. Think about it. Where can a retiree or young investor put their money to gain a decent return? Banks are generally offering less than a 1% return on CD and money market accounts. If someone is trying to live off of the income from their savings, a 1% return makes that nearly impossible without dipping into the principal. Where can a young person invest enough to save for their retirement?
The stock market is a possible alternative, but many consider that too risky, too complicated, too prone to dramatic fluctuations and out of their control. As a borrower, you can offer the lender a steady income for a set period of time with something solid that they can understand: real estate.
The Ins and Outs of Obtaining Private Money
First Thing To Do, Determine Your Private Money Needs
What type of funding do you need? What terms will work for you? The answers to these questions will help determine your needs. If you buy and hold, you will need some kind of long term loan, perhaps 5 years or even longer if you can get it. If you flip, your term can and should be much shorter, maybe only 6 months or so.
How much will you need? Is it $10,000, $50,000, $100,000 or more? What about interest? Does 8%, 10% or 12% work for you? How much can you afford and still have a good deal? Could you possibly do an interest only loan or a profit sharing plan? Figure out your lending needs before you go out looking for private money so you can be ready to explain them to potential lenders.
Where Do You Start Looking for Private Money?
One place to start looking is with friends and family. Friends and family make good potential first time lenders for many reasons. One is that these folks will likely know and trust you (hopefully). Another is that they might understand what it is you do in your real estate business. Still another is that you have an established relationship with them, which is important when it comes to the laws regulating the solicitation of private money, which I will touch on a bit later. Plus, they may like the idea of knowing exactly who is holding their money, where their money is invested and being able to drive by and see the property it is invested in. Finally, it will allow you to practice and refine your sales and business techniques with people you know.
Develop Your Elevator Speech
As you expand from friends and family members, you need to be prepared to do a bit of salesmanship with an elevator speech. An elevator speech is a 10 to 15 second quip about what you do. It is just long enough to explain your position during a short elevator ride, hence the name. Imagine for example just happening to get into the same elevator with Donald Trump; you are likely to never get that chance again. What are you going to say to him? Will you bumble and stumble or be succinct with something like:
“Hello, Mr. Trump. I am a real estate investor in Memphis, TN who buys, holds and manages rental properties. I do this using private financing from individuals such as yourself and offer returns in the 10% to 12% range. We could talk more about that sometime if you would like.”
That is an elevator speech. Use something like it the next time some asks you, “So, what do you do?” and you may just find your next lender.
Where Else Are These Lenders Hiding?
Funny thing is, they are not hiding. They are out there, oftentimes looking for places to invest. They are actually looking for you! You can find them by networking. Go to your local REIA meetings (I have met several lenders there). Check out your local BNI meetings or chamber of commerce meetings. Hand out plenty of business cards and develop your elevator speech. Not everyone you meet or talk to will jump on board, but some will, and that is all you need.
Can You Advertise for Private Money?
The answer to that question is yes, technically you can, BUT there are a number of regulatory hoops that you have to jump through to do so. There are both Federal and State laws governing how you can advertise and who you can advertise to. Plus, registration with your state securities commission is also likely a must. The government takes a very cautious eye if you solicit money from people who you do not have a prior relationship with. They are trying to protect the proverbial grandma from getting her savings wiped out from unscrupulous business. The hammer can fall hard and fast if you do not follow the rules.
All in all, those rules are a bit too much for me. Not that I am trying to hide anything, but I have found that I just have not needed to advertise for lenders. Instead, I have found them by discussing my business with friends and family and by developing relationships at networking events. But if you choose to advertise, please be very sure you understand all of the complexities involved.
Private money is a great tool to help your business grow. Once you use it, you may never want to use anything else. Here are some closing thoughts on acquiring and using private money:
- Prepare some marketing materials explain how an investment with you would work. Do not assume that people understand how money works. Be ready to teach them in simple, easy-to-understand formats.
- Never judge a book by its cover. You never know who has money. Do not ruin a possible windfall by being prejudicial.
- Be sure to make everything as easy as possible for your lenders. Explain and handle all of the necessary paperwork.
- Most importantly, always do what you say you are going to do, especially with friends and family, unless you want to lose your lenders. Keep everything legal and above board, use the same contracts, notes and deeds, just as you would a regular bank loan. If you keep your word and do what you say, you will likely have access to more money than you will ever need to grow your business. Word spreads quickly if you are a good investment and even faster if you don’t hold up your end of the bargain.
What are your thoughts on using private money investors? What tips would you add to my list?
Please join in the discussion with your comments.