Private Lending: What It Is, Why You Should Use It, & How to Get Started

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If you want to take your real estate investing career to another level, I highly recommend you look into private lending. Banks are, of course, the more traditional way to fund real estate deals and are a great resource. But private lending can open up many new doors and let you get really creative in ways that traditional banks would never allow.

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What Is Private Lending?

Private lending is pretty straight forward. Private lenders are people with money who are looking for someplace to invest it. They do not have to be millionaires (although that would be nice). More likely, they are everyday folks like you and me who have a bit of money saved and are wondering how best to get a decent return.

Why would such a person invest in your real estate deals rather than more traditional investments? The reasons could be many and varied. Perhaps they do not trust or understand the stock market. Perhaps it is because CD rates are currently in the tank. Whatever the reason, you as an investor need to be prepared for the opportunity to present yourself to a potential private lender. Most likely, they have never heard that they can be a private lender nor do they understand what it entails. That’s where you come in.

Related: 4 Ways to Use Hard Money & Private Financing for Your Rental Business

Why Use Private Lending?

Because it is a great way to fund your real estate deals. You and your lender make the rules and define the terms. Do you want to do a profit sharing deal? That is ok. Want to make interest only payments? That is ok, too. Do you want to move fast, without costly appraisals and inspections? You can do that as well. You are only limited to what you and your lenders can develop and agree to on any particular deal. Try doing that with a conventional bank.

How Should You Present Yourself to Prospective Lenders?

Private lenders are of course looking for a decent return, but they are also very concerned that their money will be safe and used wisely. They want to know that you are a good risk, that you can be trusted and that you will do what you say you will do with their money. So how do you do that?

First, you need to have a good reputation. I have previously posted about how important it is to have a good reputation in this business. Before investing with you, any lender is going to do some checking. Make sure that they will only discover positive elements.

Second, you need to be ready with a so-called “elevator speech.” Imagine you were on an elevator and Donald Trump got on. While you may be tempted to ask about his views on illegal immigration, you would be better served to use this once-in-a-lifetime opportunity to introduce yourself and explain that you are a real estate investor who provides great returns to investors. Always be prepared with a quick synopsis of what you do because you never know when an opportunity will present itself, and you may only have a short elevator ride to do it. Such a speech can come in handy when people ask you what you do at a party, for example.

Thirdly, you need to be ready to follow up. Suppose Mr. Trump said, “Kevin, that sounds great! Why don’t you come by my office tomorrow at 9 a.m. and pitch me your proposal?” Would you be able to do it? It’s not that hard; all you need is a packet of materials explaining who you are, what you do and how you do it. Get a nice folder or binder and place the following materials in it:

  • A short description of what you do. Keep this to less than a page.
  • Your resume and those of other principals in your company. Remember, you are trying to build trust and demonstrate that you are a good risk.
  • A personal financial statement. You are asking for money, and you should be an open book. Remember that you are trying to build trust and demonstrate that you are a good risk. (If you have never completed a personal financial statement I highly recommend it. It can really be eye opening, especially to you newer investors.)
  • A list of current and past real estate investments. Hopefully you can demonstrate success and significant returns for you and other investors.
  • Demonstrations of your reliability and dependability.
    • Articles about real estate, especially the market you work in. If you happen to have any articles about you, or that you were quoted in, that is an extra bonus and will help build your credibility.
    • If you have positive recommendations from anyone, such as other lenders, contractors, tenants, clients, put them in there.
    • If you have used other lenders in the past, ask them if they will provide you with a good reference.
  • Sample paperwork.
    • Deed.
    • Promissory note.
    • Contract.
  • Optional items.
    • Credit report.
    • Tax returns. These again go back to an open book policy, but you might only provide them if you are asked for them.

Finally, follow up with personalized a thank you letter and hopefully secure your new lender.

Related: The Definitive Guide to Finding Private Money Lenders in Your Network

Conclusion

Private landing is a powerful tool to have in your investing tool box, but you have to be prepared to jump on any opportunity with a potential private lender that presents itself.

But what if you have no experience or are just starting out? That can be difficult, and honestly you will have to work hard at finding that first lender. Start with family and friends and do the best you can with what you have done to date. Explain how you have educated yourself and the types of investments you propose. Do not lie, make stuff up or fluff things up. Remember, your reputation is the best way to present that you are a low risk.

Whatever you do, do not try to make it work. If either you or your potential lender is uncomfortable with the terms, best to walk away and find another lender or another deal.

Do you use private lenders? Care to share some of your tips and experiences?

Let’s help each other out in the comments section below.

About Author

Kevin Perk

Kevin Perk is co-founder of Kevron Properties, LLC with his wife Terron and has been involved in real estate investing for 10 years. Kevin invests in and manages rental properties in Memphis, TN and is a past president and vice-president of the local REIA group, the Memphis Investors Group.

21 Comments

    • Kevin Perk

      Jenkins,

      Thanks for reading and for the kind words.

      I just do not feel an inspector provides me much value anymore as I know what I am looking for. Sure, if I see some termite damage or something structural I may call in for that type of inspection, but most times the properties are being sold “as is” anyway and you have to move fast so there is usually little time for an inspection.

      Thanks again,

      Kevin

    • Kevin Perk

      Desiree,

      The post basically represents my table of contents and if you search the web for a sample resume and personal financial statement you will find one. The rest is up to you and your creativity.

      Keep things short and to the point though and use some pictures of past real estate projects.

      Good luck and thanks for the kind words,

      Kevin

  1. Ron Biggs

    Great article!

    I agree and since I have been at this real estate game for 35 years ( wow I just got tired haha) and have been through it all and using private money has been hands down the best way I simplified and made my business more profitable!

    Can’t be stressed enough how having access to the funds quickly changes the game completely! When you meet with a seller or a wholesaler and you can truly say you can close in days it does make a difference!

    Private money is the way that all involved win! The private money lender makes so much more than most any other investment and their investment is better protected than anything else I know of! You make more money as private money is a lot cheaper to you than hard money.

    Getting started it may seem tough to find private money but keep looking and be prepared like the article says and you will find the money. One of the ways I drop hints is when anyone ask or I tell anyone about my real estate business I talk a little about what I do and I say something along the lines of “and one of the best things is I don’t even use banks as I have people that invest with me and they make great returns and so do I” “when someone goes from making 1% return or less with savings and CD’s and they can jump up to sometimes 10% and more they want me to do more houses” Then you change the subject and let that simmer! I have had them turn the subject back into real estate numerous times 🙂

    Again great article and Happy Investing everyone!

  2. John Thedford

    Good post. I work both ends. I borrow private money if I need an acquisition and am not liquid at that time. I use my SOLO 401K to do private lending and the returns are excellent. Private money is generally fast and easy. No appraisals. No 8″ tall stacks of applications. No application fees. And yes, no denials if you have established a relationship. In many ways it is far better than the banks even if slightly more expensive. I don’t live my banker but I do love my private lenders:)

      • @Ron and John. You bet your private lenders love ya! Most of my rehabbers are great. Well prepared, efficient and they communicate. Some think that once they get the money the email and love from them should stop. Keep up the communication and keep the lender (me) happy so we can do more deals together in the future. No more communication no more deals.

        If ya get into trouble, talk to us, we know other people that may be able to help.

        Kevin

        • Kevin Perk

          Kevin (great name!),

          Communication is key, especially if you get into a bind. The private lending relationship is a two way street – everyone needs to remember that!

          Thanks for bringing it up,

          Kevin

  3. Bolawa Fadoju

    Kevin,

    Awesome article. My only question as it relates to making use of Private Lenders money is related to TAXES. For instance, if I use a private lender to fund a flip and we agree on a percentage share of the profit how does that affect taxes paid on capital gains?

    Thanks

    • Kevin Perk

      Bolawa,

      I believe they would be split in the same manner. Hopefully though you sell the property in less than one year and have a short term capital gain which is taxed like ordinary income. But I am not an accountant to check with someone who is please.

      Thanks for reading and for commenting,

      Kevin

  4. This is an awesome article! Being in real estate investments the lender can make a huge difference on how the deal goes through. We prefer to use private lenders or people that we have established before.

  5. We have a multi-use property that we are thinking of selling. As we have hardly any mortgage & it is in the 7 figures, we have thought of Holding the Note . Would that be similar to being a “private lender”? How do I establish what the Rate & terms are that are favorable to both parties BUT gives us solid protection in monthly payments. What types of forms would I need to pursue this? How would I establish the selling price – NOW or future worth? What about Insurance & Tax payments, can I require an Escrow company to hold & pay those?

    Thanks for any pointers,
    JQ

    • Kevin Perk

      JQ,

      Sort of.

      I would figure out what terms work for you and then negotiate with the buyer. You can negotiate whatever terms you like, including selling price, escrows, who gets paid and when, whatever. You need to sit down with a qualified real estate attorney in your area and discuss these items with him or her. They will be able to provide you with the necessary forms (they differ by locale).

      Good luck,

      Kevin

  6. Karen Musselman

    Great article and tips here!

    Now what do you do when your Personal Financial Statement is a downright wreck? As in, people are trying to figure out how you’re even surviving on such little income? LOL

    i.e., we have very little in our checking accounts, no savings (we used that up when I ended up on permanent disability and had to wait six months for the first SSD check); and our credit is shot.

    Looking at a sample personal financial statement form, which I found here: http://bankruptcy.findlaw.com/debt-relief/sample-personal-financial-statement.html – I would be embarrassed if I had to show it to anybody!

    Assets: Two old vehicles; one we’re still paying on and one we paid cash for. That’s it.

    Liabilities: Our mortgage and a lot of unpaid medical bills.

    On the plus side, we have no credit cards because we can’t qualify for any. LOL

    So, how would we make that work without fudging the numbers or outright lying (which we would never do)?

    Do all private lenders require a personal financial statement?

    Thanks! 🙂

    Karen & Jim

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