Tell me about your first private money deal?

Question

Hey share how you raised your  first private money or how did  find your lender? How did the deal go?

Mike Klarman · Answer

There's a difference between raising and borrowing.  You can borrower money from anyone and as long as you act in the bounds of the lending contract and pay the loan in the appropriate time with agreed upon rate, then sky is the limit between two private individuals.  You can agree upon any terms./rate/amount/duration/payment schedule.  In this situation, the debt is on you.  You have default risk and there is a clause that outlines those penalties.

When you raise money, you are recruiting passive investors who are turning over money for a guaranteed rate of return.  You put their money to work for them in real estate.  You live on the spread between the rate of return to the investors and the true rate of return on projects.  To do this, it takes a ton of legal documents and filings with multiple agencies like the SEC and IRS.  If an investor is not "actively" aiding in the pursuit of the return, they are considered passive by the agencies and if they are passive then you need a TON of various documents that outline what exactly you are doing, your investors have to be checked to see if they are accredited or not (that means they have 1 million in liquidity), if they do not then you need extra disclaimers and documents.  Think about it, everything has to be above board and all parties need to be protected.  There's a substantial amount of documents needed that protect the person handing over the money, and also protect the party accepting the money.

Can you do this on a small scale and not get caught following the rules?  I'm sure.  I'm sure two people who do not know each other where one puts up the money and one picks the project and manages do a deal together and split the proceeds.  I'm sure it happens.

Plus remember, it all depends on the definition of active and passive.  If they are NOT aiding in the pursuit of the return then you need lots of legal protection and filings, but if they are aiding in some way.  They're in on emails, they're in on phone calls and share their opinions.  Now they are active and all you need is a JV agreement that outlines responsibilities and splits.

Jamie Dietz · Answer

I wanted to share a perspective from the private lending (Hard Money) side. I receive loan requests all the time from borrowers who simply aren't prepared. Many ask for specific loan quotes without even having the most basic details ready.

If you're seeking a private loan, be ready to answer the following on the very first call:

Property Address
Yes—know the actual address. You'd be surprised how many borrowers can't recall the property location they're trying to finance.

Purchase Price & Rehab Budget
Understand your numbers: purchase price, any assignment fees, and a general scope of the rehab work with a ballpark budget.

Credit Score & Available Capital
Have a rough idea of your credit score and know how much cash you can contribute to the deal.

Project Experience
Be prepared to talk about your past projects. Lenders want to know if you've done this before.

Exit Strategy
This is critical. How do you plan to repay the loan? Know your ARV if you're flipping, or your rental/refinance strategy if you’re holding.

The more prepared you are from the beginning, the better your chances of securing funding through a private lender.

Amir Khan · Answer

@Andre Brock that is a fair question and I hear this from beginner to more seasoned investors (like you) all the time.

I raise private money from people with self-directed IRA accounts. Instead of approaching them individually, I collaborate with custodians/administrator of SDIRA and conduct educational workshops about private money lending.

With this system, I have a constant flow of individual real private money lenders (not hard money lenders :). DM me if you have any questions..

Andre Brock · Answer

Hey Mike it was a general question just to post and hear stories and to generate some discussion. Me personally I’ve been in real estate since 2005. I wish you could’ve bring some value to the post? But hey maybe next time :)

Mike Grudzien · Answer

Well that's a very broad, very vague request.  There are scores of Posts here about all aspects of private lending.

Andre Brock · Answer

Thanks that was really good information.

Andre Brock · Answer

Thanks for the dialogue.

Andre Brock · Answer

Thanks Amir will do.

Mike Grudzien · Answer

I'll say this: get away from the computer screen and start networking locally in real life: get to know realtors, title company people and join a local chapter of Real Estate Investors Association.

Tell me about your first private money deal?

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