Case Studies: How to Use Private Money in the Short-Term, Medium-Term & Long-Term

by | BiggerPockets.com

I love to step outside the theoretical and get down to the real world, so let’s outline three scenarios of how private money can be used to fund your real estate investing business.

How to Analyze a Real Estate Deal

Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.

Click Here For Your Free eBook

How to Use Private Money in the Short-Term, Medium-Term & Long-Term

Short-Term

Ivan is a house flipper in Southern California, where the typical run-down house costs over $300,000, which Ivan doesn’t have. Instead, Ivan networks at various SoCal real estate events and meets individuals looking to invest in real estate without getting their hands dirty.

On his newest flip, he talks with Dr. Jim, an anesthesiologist, who has over a million dollars in various investments and retirement accounts. Dr. Jim has no time to invest but is looking to diversify his portfolio. He lends Ivan $370,000, enough to purchase Ivan’s newest flip and fund 100% of the repairs. Dr. Jim obtains a first lien position on the home, and Ivan signs a two-year promissory note, paying Dr. Jim 9% and payments deferred (but interest accruing) until the home is sold. The funds are disbursed, and Ivan gets to work managing the flip.

Within nine months, the property is rehabbed and sold, and Dr. Jim receives his money back, Ivan makes his profit, and everyone is happy and ready for the next deal. In this example, Ivan uses a short-term private money loan to fund a real estate fix and flip. This is one of the easiest-to-obtain private loan to obtain because it gives the investor their money back in the shortest time possible. Ivan was able to avoid paying extremely high rates and fees from a hard money lender and could make more cash when the rehabbed property was sold.

Related: 4 Tips to Raise Private Money for Your Real Estate Investments

While the flip in Ivan’s example took just nine months from beginning to end, sometimes loans that short just don’t work for certain strategies. Let’s look at another example, this one of an investor who uses private money to invest in rental property.

real-estate-negotiation

Medium-Term

Sarah is an investor in the Dallas area who is primarily interested in small multifamily properties. She is especially interested in finding properties that have been poorly run and poorly maintained, acquiring them for a low price, rehabbing them, and renting them out while she waits for the market to improve. Sarah finds the perfect property, located near her home—a garden-style fourplex in a great neighborhood that needs some new paint, carpet, and better management.

She gets the property under contract for $110,000 and sets out to find funding. She discusses the deal with an experienced investor, Wilson, whom she met online through BiggerPockets.com. Wilson is tired of dealing with tenants and has been selling off his properties. As a result, has a sizable chunk of cash in his bank account that he needs to “put to work.”

Wilson lends Sarah $130,000, enough for Sarah to buy and rehab the fourplex, for a five-year term at 8%, interest only, which comes out to $866.66 per month. Sarah immediately improves the property and rents out each unit for $750. After all the expenses, including the loan payment to Wilson, she clears almost $700 per month in cash flow. She then holds on to the property for several years, until the market improves, and then sells the property for $190,000, clearing a huge profit.

In this story, Sarah uses private money for a five-year term, which gives her time to get in and fix the property up, rent it out, and wait for the market to improve. Let’s look at one final example, which involves a much longer term. This is perhaps the most difficult type of private lending to obtain, but it can be golden to your investment strategy if you find it.

get-preapproved

Long-Term

Real estate investor Robert enjoys renting out single-family homes but has long since maxed out his “four property” limit from the banks. Instead, he uses private lending to buy cash flow–generating properties. He gets his newest project—an older, rent-ready, three-bedroom, two-bath home outside of Milwaukee—under contract for $50,000.

Related: How to Win Over Private Money Lenders or Partners for Your Deals

He then talks with his newest private lender, a distant cousin named Cal, about the property. The cousin made a killing selling his tech business in the late 1990s and has been investing his money in the stock market ever since, averaging a 6% return over the past decade. In an effort to diversify his portfolio, Cal mentioned at a recent family reunion that he’d love to get in on the real estate action. Robert and Cal agree to a 30-year fixed loan at 6%, but to sweeten the deal, Robert offers Cal 20% of whatever profit is made at the end. They close on the property, Cal makes his 6%, while Robert rents the home out for $1,000 per month and sits back to wait for his wealth to build.

Fifteen years later, Robert sells the home for an $80,000 profit, and Cal receives $16,000 of that profit.

As you can see, these three examples were very different, but they all had one thing in common: a great deal. As I’ve said time and time again, a great deal is the best foundation for creative investing. Because all three of the examples involved solid deals, the lending arrangement was a win-win for all parties, and the relationship could continue for many more deals.

[This article is an excerpt from Brandon Turner’s The Book on Investing with No (or Low) Money Down. Get the full copy here.]

How do you use private money in your deals?

We’d love to hear your experiences! Comment below.

About Author

Brandon Turner

Brandon Turner (G+ | Twitter) spends a lot of time on BiggerPockets.com. Like... seriously... a lot. Oh, and he is also an active real estate investor, entrepreneur, traveler, third-person speaker, husband, and author of "The Book on Investing in Real Estate with No (and Low) Money Down", and "The Book on Rental Property Investing" which you should probably read if you want to do more deals.

10 Comments

  1. Kim bennett

    I want to know about being property locator and just pass them off to another investor and they do the rest and split the profit after closing go through and send me a check for the finder fee for finding the house and submitting . I am a newby. Kim Bennett

  2. sam wilson

    So here’s a few ways we’ve done it for fix and flip:

    1) Whatever they invest as a % of purchase and renovation costs- they assume same % in returns generated on property. Don’t like this method. It doesn’t account for my time and expertise. If I did this again, I would bill my time against the project at a reasonable rate ($100- $150 hr or something).

    2) Simply hard money at fixed percent

    3) They finance the deal entirely. We split it 50/50. I locate it, renovate it and sell it. They are hands off. But this presents me with an opportunity that I wouldn’t have had before if we’re running out of funds.

    I think for fix and flip, hard money / fixed percent loan certainly sets you up for the greatest upside.

    I’d love to learn more about how to get long term loans. Those seem like the real gold in this business.

  3. Ashley Watkins

    Great Article! I love how Brandon always looks for ways to show that getting creative is about solving problems. I am about to embark on my first real estate ever, because of this thinking Brandon urges! For my example, I am 22, straight out of college, and have a sad savings account – rent eats up everything! So, I talked with a close family friend, he is older, and doesn’t trust the stock market. We have a very close bond, and he knows I am financially responsible. We went in on a deal, where he is funding $50k for a downpayment on a property, and agreed to recieve whatever interest rate the remaining mortgage I get is funded at. This will be private money at a very low rate! We agreed to a 10 year term, so it won’t hurt the bottom line for me, and he can get the steady interest he needs! I would have never thought of this had I not been on Bigger Pockets learning for the past 6 months or so!

  4. stephanie Estivene

    I’ve been on here reading articles after articles and all of them are awesome. I am very new to this, although excited. I am over whelmed with information. I don’t know where to start. I have a large amount of money, however I’ve learned its better to use other peoples money. Can someone please help guide me in the right direction 😉

  5. Gordon MacDonald

    Stephanie E, I have met with several private money lenders over the years and the one thing they have all said that they like to see is what I have done already or deals I did to show I know what I am doing.
    I had a couple that said come back to them when I got 4 to 6 homes under my belt to show my proof of concept. So I did my first deal on my own in cash and then my second deal I found a hard money lender to just give me 10k of a deal at 10% interest only with a 24mo repayment. I paid that back and so on. My point is if you have a large sum of money and you are confident with your numbers and ability to find refinancing to cash back out or your ability to call the market value and flip something, then do that first to show a lender you can do it. I feel you will have more success in getting a lender to trust you in the deal.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here