If you’re a real estate investor, taking out a traditional loan won’t help you much. You need to look for alternate sources, like hard money and private money lenders.As I discussed in my post about the differences between hard money and private money, the key difference between the two is that:
In other words, finding hard money lenders is pretty easy.
Finding a private money lender - not as much.
In this post, I will discuss:
Let’s get started with this post.
Advantages Of Private Money Loans
When you take out a hard money loan, you’re entering into a transactional relationship between you and a private institution. You receive hard money as collateral for a tangible asset—usually real estate. If you’re unable to repay the loan, the hard money lender can take ownership of the assets you used as collateral.
Private money lenders can be anyone: a friend, family member, angel investor, etc. Pretty much anyone with capital to loan you can be considered a private lender. While you sign an agreement with them, the terms of your agreement can vary greatly. You don’t necessarily have to put up valuables as collateral. Your only limits are the confines of the law.
Here are a few other advantages associated with private money loans.
To get a traditional loan, you must meet Fannie Mae and Freddie Mac’s rigorous requirements. A hard money loan requires you to jump through fewer hoops, but there are still some basic regulations you have to meet.
Private money loans are even less regulated. While fewer regulations can land you and your private lender in hot water, the lack of confinement can lead to more investment opportunities, and reduce your barriers to entry into the world of real estate investing.
Faster Loan Approval
One of the advantages of a hard money loan compared to conventional loans is the fast-tracked approval process. Conventional loans can take a month or even longer to get approved, while you can get a hard money loan approved in a matter of days.
The turnaround time for private money loans can be even faster. Since they have fewer requirements, you can obtain private money even faster. Basically, all that’s required is a signed contract and bank transfer.
Both traditional and hard money lenders are interested in a transactional relationship.Relationships between private lenders and real estate investors are more symbiotic. Usually, your private lender is as interested in working with you as you are with them. This is because private lenders are typically people you already have a relationship with, professional or otherwise. If your real estate agent gives you a loan to flip a house, and you both profit from that relationship, chances are you may decide to work together again in the future.
Better Terms (Potentially)
Sometimes, private investors will charge even less interest. It all depends on the terms you agree on. Your grandma can loan you money for an investment property and want her money back when you have it. Your real estate agent may decide to charge you 5% interest for a fixer upper and get a 10% cut of the net profit. As long as your contract is lawful, you and your private investor can set your own terms.
When Should You Get A Private Money Loan?
You can use private money for nearly every aspect of your real estate investment. However, there are two key ways investors often use private money to their benefit: when they’re purchasing a new property, and when they’re refinancing one.
Purchasing A New Property
Short-term loans are incredibly useful for multiple property types, including:
Refinancing A New Property
If you purchased a rental property with a conventional mortgage, but want to get a better interest rate or reduce your repayment timeline, private lenders can help you reduce your costs. Private investors can leverage their cash flow to sweeten the terms of your deal when you’re financially a passive income property. They also have more flexibility than a conventional lender, because they’re not restricted to the regulations.
How Private Money Lenders Work
Private lenders loan funds to people they consider promising real estate investors. The key word there is promising. As I mentioned, you and your private investor are forming a symbiotic relationship. They’re not going to give money to just anyone—they need to know that you’re competent enough to turn money into more money.
Often, private money lenders have real estate experience. They’ll know what to look for in an investment, and need to know that you do too. They can identify a distressed home in an otherwise beautiful neighborhood, a beach house that’ll make a killing on AirBnB, or a plot of land oozing with potential. Before you start working with a private lender, you need to know your stuff.
You’ll also need answers to questions they'll be asking:
How To Find Private Money Lenders
Finding private money lenders is like making connections on LinkedIn. There are three degrees of separation.
1st Degree Connections
Your 1st degree connections are your low-hanging fruit. These people include your friends, family, co-workers, and acquaintances. Many investors get their first funding from their first degree connections. You already know them, and they may already know about your interest or experience in real estate.
However, while someone in your 1st degree may have money to invest, they may not necessarily be a great investor. If you and your private lender are new to real estate investing, you’ll have a harder time identifying a good deal from a bad one. You may overestimate the resale price of that fixer upper, or underestimate the time and money it will take to renovate. Suddenly, what once sounded like an amazing opportunity could damage your relationship.
You should strive to work with someone who has real estate experience or other skills directly related to your investment goals, especially if you’re just starting out.
2nd Degree Connections
Your 2nd degree connections are people who your immediate circle knows: the real estate agent your aunt knows, the house flippers your brother plays cards with, etc.Since you don’t have prior connections with your second degree, your relationship with them will be more transactional. You are looking for funding for your investment property, and they’re looking for a good opportunity. If your link between you and your 2nd degree connections is strong enough, they’ll likely be receptive to hearing you out. However, they’ll also be harder to convert.
3rd Degree Connections
Your 3rd degree connections are people your 2nd degree connections know: your aunt’s real estate agent’s spouse who invests in new businesses, the private investor of the house flippers your brother plays cards with, etc.
This pool is huge, but it’s also the most difficult to access and takes the longest to convert. They don’t know you personally or professionally. All they have to go on is the word of their immediate connections and any information they may find about you if they’re interested in a meeting.
My advice: Start by examining your 1st degree connections. Write a list of people who could potentially invest in you and whom you could have a positive working relationship with. Even if they say no, these could be good people to practice your pitch to later.
Where To Find Private Lenders
Finding private investors has never been easier! Here are a few sources you should explore:
How To Pitch Your Investment Idea
Getting an introduction to a private lender is only half the battle. The other half is convincing them to invest in you. It won’t be easy, especially if they’re not a 1st degree connection. Here’s how to increase your chances.
Do Your Research
Not all private lenders are created equal. Some will want to charge higher interest rates or shorter repayment periods. Others may only feel comfortable investing in neighborhoods they’re familiar with, or look for specific qualifications or property types.
If you can, ask your potential private lenders what their terms are and what’ll make them want to shake on a deal. If you can’t ask them directly, ask your mutual connection for advice, or learn anything you can find about them online. You don’t want to end up making the right pitch to the wrong person.
Prepare Your Presentation
Create an introductory video, a presentation deck, or whatever your visual medium will be while presenting. To do this, gather the materials you’ll need for your pitch. Be sure to include your real estate investing experience and goals. Include any details about previously successful projects you’ve worked on, including before and after pictures, numbers, testimonials, and other relevant information.
Also, gather as much information as possible about the property you want to buy, including:
If you want to flip the property, include the purchase price, estimated resale value, and project timeline. If you’re turning it into a rental property, outline how much you plan to rent it out for, and how quickly you can repay the loan.
You should be able to clearly explain why you’re the right person to invest in. Write down a list of your strengths and find ways to incorporate them into a presentation.
Practice your pitch before delivering it, preferably with another real estate professional or someone who can provide you constructive feedback. Ask them about any questions they have. You’ll likely have to answer questions about timelines, profit splits, and potential roadblocks. Work on your answers to these questions, and get advice on how to fine tune them.
Make Your Pitch
Going into your pitch meeting, focus solely on how to paint the clearest picture you can to convey your plans for the property and how to implement them. Conclude your pitch with a compelling call to action, but don’t try to force a quick sale. Instead, keep their potential questions in mind and give them straight answers.
Try to avoid fluff or flowery language. Many investors assume that if you’re trying to paint a pretty picture, it’s because you’re inexperienced, underprepared, or have something to hide.
Another vital component of your pitch is relationship-building. If your desired investor has a sense of humor, don’t be afraid to include a joke or two. If they’re a numbers guy (or woman), show them the math. Incorporate a little of who you are in your pitch, so that they can get to know you. People enjoy working with those they like or can relate to, especially when you’re also proving your competency.
The better you are at answering their questions and building that relationship, the more likely you are to get the deal.
And if you don’t, it’s not the end of the world. Ask them for feedback, if you can. This will help you pitch to another private lender.
By learning how private money lenders think, where to find them, and how to create a pitch that converts prospects into partners, you’re setting the foundation for a successful relationship. The better you work together, the more likely your investment will become profitable, and the more likely you’ll want to work together again in the future.
Not sure if working with a private lender is right for you? Check out my post on hard money lenders and what they look for in a deal.Are you worried about your credit history? Read up on our article about hard money loans for bad credit.