Private Money Lenders
What is a Private Money Lender?
A private money lender is a company or individual that loans money, usually secured by a note and deed of trust or mortgage, for funding real estate deals. Private money lenders are typically considered more relationship based in comparison to hard money lenders.
Three places to Find Private Money Lenders
- Real estate investment clubs
Real estate investments clubs are a great way to find any part of your power team including private money lenders. Be proactive in networking with as many people as possible when you attend. The point is to let people know you’re doing deals and looking for more possibilities on raising capital. This is a great way to find out if the person you are speaking with is a private money lender. If they aren’t you may get a referral to people that are.
- Online searches
You can find just about anything with online searches. There are several websites out there that have lists of private money lenders or lenders that have their own website. A good place to start is www.privatemoneylendingguide.com and browse the lender directory. When contacting a private money lender, you could say “Hi, my name is John Doe and I found your information on the Private Money Lending Guide directory website. I have a deal that I’m working on that I would like to discuss with you. Do you have a few minutes?”. If they have a few minutes to speak, this is the time to start asking any and all questions about the potential loan you need (points, interest rates, terms, etc.) and how the lender operates. If they don’t have enough time, schedule an appointment with them so you’ll have the time to discuss things.
I briefly touched on this with real estate investment clubs, but don’t underestimate the power of referrals. Typically, referrals come from people you trust that have had dealings with the private money lender they are referring to you. The great thing about referrals is you can get them anywhere. Family and friends, co-workers, social media (LinkedIn, Facebook), Realtors, etc. The old adage goes “if you don’t ask, you don’t get”, so don’t be afraid to ask for what you need.
Using these methods can help you find the private money lenders you need to make your real estate business a success. Having Private money lenders lined up can also give you confidence in your deals knowing the money is there when you need it.
How to Qualify Private Lenders
Private lenders can be a great way to start your “fix and flip” real estate business. Typically, a private money loan is meant for short term lending purposes and then the property is either sold or refinanced. Private money lenders base their loan on the equity of the property and not the purchasers credit or income credentials. Private money lenders are typically a private individual or group, not an institution. When speaking with private money lenders it’s important to qualify them to find out what you can expect from them and what they expect from you. You’ll want to know the terms, the conditions and just how much they are going to be involved in your project. They will also have their own qualification process of you and your property but for now we will focus on the information you will want to obtain from your private lenders.
First of all, you will want to know the terms of the loan you will be getting from your private lender. Typically, the interest rate will be quite a bit higher than if you were to go to a conventional bank, don’t panic, as long as you run your numbers correctly and there is a profit at the end of things, this is a win-win for everyone until you can make enough profits to buy the property with your own capital. Also, make sure you ask if there will be any points charged in this transaction. It is very common for a private lender to ask for 2-3 points when the property is sold. These points are equal to 2-3% of the purchase price. This might seem like a lot but it’s all about running the correct numbers. Keep in mind that once you prove yourself to your private money lender, they may be willing to negotiate the terms of your next “flip” because they now trust that you will be able to renovate and sell the property and they want to keep you as a customer. The next thing you will want to know about the terms of your loan is how much the private lender is willing to lend to you. For example, they may be willing to give you 90% of the purchase price but you will need to come up with the final 10% as well as the rehab costs. In other instances, you might find a private money lender that is willing to give you the rehab costs for a higher interest rate and you will approach another source for the majority of the purchase price. You will also want to discuss if and when any payments will be due during this process. Keep in mind, because this is a private individual or group, they get to set the terms. Some will require monthly payments and others will not require a payment until a certain number of months have passed. It is imperative that you understand exactly what terms your private lender is giving to you, so that you can make sure you are running your numbers correctly and ensure you will make a profit.
Another thing you want to find out from your private money lender is what will happen if you go past the agreed upon number of months they are lending. In some cases, the interest rate will go up. Other times, payments with penalties included will begin. In the rare occasion that the property is not sold within the allotted time you need to know what your private lender is going to require. This is a rare situation but it’s better to have this conversation up front and know what needs to be done so that there are no surprises for either party if the situation arises.
The last thing that you want to talk about with your private money lender is how much they plan on being involved in your project. Some private money lenders want to have a say in the plans, the colors and the selling of the property. They feel because their money is involved they have a right to some of the decisions. Then there are other private money lenders that will quietly let you run the project unless they see a huge red flag and need to step in with their opinions. Either way, you want to prepare yourself for which type of “partner” you are teaming up with so that you will not be insulted if your private money lender wants to have a say in your project.
At the end of the day, a private money lender is an excellent way to get your foot in the door as a “fix and flip” real estate investor if you don’t have the capital yourself. Getting creative about using other people’s money to help you get started is a great option to begin this process. There are a lot people out there with money that want to make their money grow and you want to make your new “fix and flip” real estate business grow. By using their money to start your business, it’s a win-win for both of you. Just make sure you communicate clearly the terms, the conditions and what expectations you have of each other so that the relationship can continue through many more projects.