Why Private Lending Is So Important?
I get asked this all the time. People figure that private lenders are either optional or a luxury. In my opinion they are a necessity in the real estate investing business. Without private lenders you have either to use your own money, rely on banks or partner with other investors.
There are some real limitations to all of them. What do you think? What has been the biggest hurdle in your business without private lenders?
Categories: Investing, Private Lending Questions |
My biggest hurdle has been finding money to run my business. Can I use private money for that? If not how can I operate my business?
REPLY FROM PAUL:
Hi Ben,
You are asking a great question that I wish more people would ask.
I recommend against borrowing money secured on an investment property and then use that money to run your business. It is your call though, it is a different answer if you were securing it on a long term rental house and your lender is just looking for periodic payments. I would never do this if the lender was assuming you were going to flip the property and would be getting their money back quickly.
What I recommend is for people to use the lenders money for specific properties. And use the profits from your deals to fund your business. That way it keeps everything separate.
The other thing that you can do is to borrow the money privately from friends, family or angel investors directly from your company. I would offer them a promissory note and offer them a percentage of the profit or an interest rate higher than normal. They are really lending YOU the money and they believe in You and your business rather than the property.
You need to do everything according to state and SEC guidelines. When doing this I would only talk to people you know and who know you.
I live in an area that requires hundreds of thousands of dollars to buy a house. I don’t know anyone that has that kind of money. What can I do?
REPLY FROM PAUL:
Hi Studi,
You will need to raise more money from people that have larger sums. You can also raise money in a business entity like an LLC or a limited partnership or syndication and use it to buy properties.
There are many other ways such as creative financing, seller financing, “Subject To” or lease options. These ways require you to put up much less money.
Great question Studi. I live in an area where I need more than just $20,000 or $30,000 rto buy a house. I was told that I couldn’t borrow money from a couple of people to buy a house. Does that mean that I can’t use private lenders to do so?
REPLY FROM PAUL:
You can not pool money but you can follow the advice that I gave to Studi.
My biggest hurdle is talking to people about lending money privately. I am a relatively new investor and I don’t think someone is going to trust me with their money.
REPLY FROM PAUL:
This has been answered in a previous comment.
Finding lenders who are serious and qualified to provide substantial funds when needed.
REPLY FROM PAUL:
I can understand that that can be an issue. You really need to spend time and concentrate on finding private lenders. Most investors that I know don’t do this. They just talk to a few people and call it good.
In my course I talk about three things that solve the issue that you are running into:
1 – Credibility
2 – The presentation
3 – Targeting the right type of private lender and where to find them
Fixing your issue will allow you to buy more properties this year than you ever though possible.
Good luck!
How do I go about marketing to find private lenders willing to invest in real estate?
REPLY FROM PAUL:
This has been answered in a previous comment.
When I talk to private lenders at the REIA club they all want high interest and points upfront. This just seems really expensive. If I pay them I won’t have any profit left in my deal.
REPLY FROM PAUL:
Hamman,
If your deal is so tight that paying 1 or 2 points upfront and 10-12% interest will take all the profit from the property then you are not doing the right deals.
Many people object to paying points and high interest because they are comparing the cost of private lenders with the cost of going to a bank. While a bank charges less there are huge upsides in working with private lenders.
If you are a creative real estate investor you don’t need to pay cash for the property. You can use other techniques and then only borrow money on the actual cash you need. So if you are buying a $300,000 house but you take over the mortgage “Subject To” then you only need to borrow the cash for renovation, down payment and holding costs. This is much less than the actual cost of $300,000.
Also you may want to find lenders outside of your REIA group. They don’t know that hard money people expect points up front and a 15% interest rate. I pay 8% – 9% on some of my loans with no payments until I sell the property.
So finding the right private lender will solve your problem.
Good Luck.
Is it easier to get money from private lenders than from banks? It seems like there’s more involved in getting money from private lenders….
REPLY FROM PAUL:
Actually it is just the opposite. Lenders are looking to get their money working for them and even if you have a highly sophisticated lender he won’t have a 25 page application and underwriting guidelines. He is the final decision maker and even if he checks your credit and wants to see an appraisal on your property it is still much less stringent.
His guidelines might be more along the lines of Loan to Value ratio and type of deal rather than credit score and history and so forth.
As a REI, how do I release the private lender from the deal if I don’t qualify for a refinance on my investment property?
REPLY FROM PAUL:
In my opinion I would not take possession of the money until after closing. I teach that the money is sent from the lender to the closing company and is released upon closing. If you did that then you would not have to worry about releasing any security interest because the money would be held in escrow to be release upon successfully purchasing the property.
Are there specific tips or tactics to get a private lender to feel comfortable carrying a second mortgage on an investment?
REPLY FROM PAUL:
Yes there are. But it boils down to equity above their note. Make sure that there is plenty of money left in the property so that if they had to sell it in a depressed market they could get all of their money back. I have lent my money out in 4th position before. But there was 3 times the amount in the conservative After Repaired Value. Also I knew the investor.
What are the legal issues I have to be concerned about for Washington State and California? Are the legal issues state-by-state specific, or are they applicable nationally?
REPLY FROM PAUL:
Wow, this is a big topic. I can see that I am going to need another way to answer some of these questions.
Legal issues are state specific unless they are over ridden by federal laws, guidelines and exemptions.
Some states have a reciprocal relationship when dealing with Securities exemptions. Meaning that when you file an exemption in State #1 you can then file the same exemption or even just a filing fee and be covered in State #2. This is state dependant and is not true in every case.
This is a very short simple answer to a very long complex problem. That is why our advanced manual is dedicated to these types of topics.
How do I ensure that when I lend money to investors that I am protected?
REPLY FROM PAUL:
You need to ensure that the property has the appropriate equity. You will also want these as security:
This is the minimum of what you should have when lending money on real estate.
What are all of the SEC laws and what can I do to ensure that I am in compliance with them? Particularly, how can I ensure that the relationship I have with my private lenders is safe and within the limits that the SEC sets forth?
REPLY FROM PAUL:
This has been answered in a previous comment.
How do I know that a private lender is a “good” one to work with? Is there anything specific I should look for in a lender that gives them this “good” rating?
REPLY FROM PAUL:
The answer to that is to ask around and see who they have done business with in the past. Also they need to pass the smell test. No I am not talking body odor, I talking about if they give you the willies or if they make you seem like you don’t know what you are talking about. Can you work with them? Will they play nice or run roughshod over you and your investment.
How do I structure the loans/money private lenders give me for my REI business?
One of the biggest problems I have is having confidence in my abilities as an investor. I’m always afraid that deals are going to fall through and that I’ll be stuck with a property I can’t afford to keep, and this is probably one of the biggest reasons why I have done so little with my investment business. How can I present myself and my business to private lenders when I don’t have the confidence in my ability to make a profit for either of us?
REPLY FROM PAUL:
This is a major problem. You need to get confidence in yourself. If you don’t believe in yourself you are going to fail.
Work with a mentor that will help you deal with a problem property. Pick and choose the right property and then you won’t have to worry about a problem property.
You need to ooze credibility based on your question you need to focus on self confidence first. I hope I don’t sound mean but you need to believe in yourself and understand that you are empowered to achieve success.
You Can Do It.
I understand how to use private lenders, but how do I find one who doesn’t use credit scores or other financial documents to make their decision to lend? I am credit challenged (due to explainable circumstances) and am worried that if private lenders see my history they will immediately say “no” to my request for funds.
REPLY FROM PAUL:
Not all private lenders run credit reports. Although I do recommend it.
For those “Credit Challenged” investors I recommend that you borrow from truly private lenders where you can explain the circumstances of your credit challenges and explain the deal in detail.
This lender would be lending to you because they “Trust in You.” I would keep an open line of communication with your lender and work more closely with them than otherwise would be the case. I would communicate at every step so that your deal is transparent and they can see what is going on. This is a way to build trust.
You need to convey confidence and show professionalism in everyway.
In your circumstances you will need to build a better relationship, professional not personal, than would normally be the case.
That is the best way for you to go about it.
What are the qualifications required for the lender and the borrower?
REPLY FROM PAUL:
The nice thing about Private lenders is that the deal is the biggest factor in the qualifications. The equity in the property and the upside potential is the part that you need to sell to the lender. You should have a track record as an investor and if you don’t work more closely with the lender and be more transparent than would otherwise be the case.
If you don’t have those you need to have education or a partner with experience.
How many properties at one time can I use money from private lenders on? Let’s say I have 3 properties I am planning to invest in and I only need $100,000 for all 3 properties. If one private lender lends me the entire $100,000, can I split that money and apply it to all 3 properties? Or is that an SEC violation?
REPLY FROM PAUL:
Nope. That is not an SEC or state department of securities violation. I would split it up and have three of everything though. Put $40,000 on one house, $40,000 on another and $25,000 on the last. I would not do a blanket mortgage and cover all three properties with one note. That could get messy.
I feel like people who are in the money business have a tendency to not give straight answers to those they are working with. Is there anything I can do to make sure that I am receiving all the information I need and getting all my questions answered in a timely manner? I don’t like being thrown for a loop…
REPLY FROM PAUL:
I understand your reluctance. But really from your question you may be going after the wrong people. If you feel you are getting the run around then one of two things:
First you are dealing with either a hard money lender or other person who does this for a living.
Second you are probably dealing with people who don’t like to or can’t make decisions.
Another thing you say is getting your questions answered in a timely manner. You have to take into consideration whose timeframe is important to the lender, his. Your time frame only matters to you. So when you communicate with them let them know if you have a deadline and if so what it is.
Always tell them what they should do i.e. please call me tomorrow afternoon. Or better still what your next action will be. I will call your office tomorrow afternoon to determine if this investment meets your investment criteria.
Hope that helps.
How can I get private lenders to commit to invest in my RE deals?
How much will it cost for me to use a private lender to fund my projects? What are the typical rates that private lenders charge, and are there any other fees that I need to know about besides that?
What do I have to do in order to pool funds from individuals without having to secure their interest as an individual lien against the property?
What kind of terms do private lenders have?
I am interested in using private lenders, but don’t want to have a really high loan rate. Is there anything I can do to persuade private lenders to loan at less than 10% interest?
REPLY FROM PAUL:
I have several private loans that I am paying 8% or less. It depends who you are talking too and what you have to say to them. Give them a compelling reason and they will lend you their money.
If I were you, I would not worry too much about the interest rate. If you are paying 12% annually and you only have the money out for 6 months you are paying 1% per month. That is $3,000 for a $50,000 loan; $3,000 should not kill any worthwhile deal.
If I am making $50,000 on a flip, why should I care if I pay $3,000 on a loan? I figure that into my costs and determine whether I am willing to take the risk for the reward.
How can I explain my real estate deal and document it in such a way to make both parties feel safe and within legal compliance?
I am having difficulty figuring out how to legally advertise my need for private money. Do you have any tips?
I am a seasoned investor, but have never invested my money privately to fund real estate investments. What is the best way, as someone wanting to lend money out, to get started with a few real estate investors and avoid legal problems?
REPLY FROM PAUL:
Dr. George,
Work with someone you know and trust. As a lender you don’t have a lot of legal issues you need to avoid other than lender fraud and predatory lending. You can even legally advertise for Real Estate Investors or that you buy or make private notes.
We are finalizing our Private Lender product “The intensive Guide to Securing High Returns™” You can find out more information and advance notification when we release it by visiting our other website http://www.SecuringHighReturns.com
Is it legal to use public records to prospect for private money investors?
I am new to real estate investing and have yet to complete any projects. Actually, I don’t even have any properties lined up. My problem is that I want to make sure that I will have available funds once I have properties I’m ready to move on. How can I get private lenders to work with me before I find properties?
How do I form a syndication?
REPLY FROM PAUL:
Huge topic. I cover this in my Advanced Manual.
Short Answer – use a good SEC Attorney. I give recommendations in my course.
Once you find a private lender, what is the best way to retain them so I can use them on future real estate deals?
REPLY FROM PAUL:
Hi Millionaire,
The key is communication. I recommend keeping an open line of communication with your lenders. Letting them know what may be coming down the road for their future consideration.
Get them excited and you need to stay busy and help them understand they are dealing with the right investor.
I am a commercial real estate investor looking for big-ticket lenders. What is the best way to locate lenders in the $2 million to $60 million range? For paperwork purposes, I would really like to find 2-3 people who have large amounts of money to lend, rather than have 20 people lending at the same time.
REPLY FROM PAUL:
AndreREgiant, You really are a giant of a thinker aren’t you. It would be nice to only have to work with 2 or 3 people but look at this realistically. You are looking to raise $2M to $60M, are you in a position to work with people like this who have this deep of pockets?
By that I mean are you circulating in the proper circles and have you got the necessary experienced in your investing career. If so then all you have to do is to network in those circles and show your track record. Not only that but they typically have money managers that manage their investments.
But if you are like most people just an average run of the mill successful real estate investor that does commercial properties you would need to go after a bigger quantity of investors. Find people who have several hundred thousands to invest up to a million. Ask for referrals and meet and greet the investors you are looking for.
Make sure and follow the law properly because when you are in these circles you are by nature dealing with a more sophisticated lender that will be careful especially after the $50 Billion fraud perpetrated by Bernie Madoff. The SEC will be much more diligent now.
If you are dealing with investments this big you will definitely want to raise money using the SEC Reg D 506 exemption.
I am an experienced real estate investor and have become very good at closing deals. I feel that I would be able to present myself in such a way that private lenders would feel secure in lending me money for my real estate projects. I am ready to act now and find private lenders. Is there a way to develop lists of potential private lenders?
REPLY FROM PAUL:
Hi Lydia,
What is stopping you? There are many ways to develop a list of lenders. Just make sure you follow the state and federal guidelines.
I recommend lead generation advertising to find potential investors and then develop a relationship with them before you offer any deals.
This is a long term relationship that you are creating so don’t do things illegally or in violation of statue.
You can not just put an ad in the newspaper that says “Private Lenders Wanted.” But you can offer something for them such as a report, CD, seminar or something that will have them raise their hands. This will allow you to develop a relationship with them. Which is required by law.
Do you think that it’s possible to find a private lender who can lend over 70% of the ARV with no upfront fees?
As a real estate investor, if I can’t sell my property within the time frame of the loan, what are my options? I’m so worried about private lenders foreclosing on me and having that ruin my financial history…
REPLY FROM PAUL:
Why would you be more worried about private lenders foreclosing on you than a bank? Just the opposite is true. You can usually work with private lenders much easier than banks.
I would just get an agreement with the lender that if things turn really bad and you can’t sell the property or finish it for what ever reason that you would give the property to the lender without a foreclosure. That is called a deed in lieu of foreclosure.
Just make sure that you don’t have a bunch of junior liens that will make it impossible to turn it over to the lender.
Really you just need to be careful about putting the right lender on the right property. Don’t put someone that needs his or her money back in 6-12 months on a property that you are selling on a lease option. If you do that you are not going to be happy and neither is the lender. Just think ahead.
One of the biggest problems I have run into with my real estate business is finding lenders who lend on a case by case basis, and when I come to them with all the figures they all of a sudden aren’t able to lend. What can I do to keep this situation from happening?
I feel like people have been so brainwashed by the media when it comes to money management. How can I convince people that real estate is still the best investment out there today?
REPLY FROM PAUL:
I think that you are right. But they are probably thinking similarly about the stock market too.
In my opinion the worst person out there teaching money that is the most egregious would be Suzy Orman. She has NO Clue about real estate investing or lending and yet she is out there talking down about it everyday.
You just need to educate your potential lender and let them know the facts. Ask them questions that lead them to the conclusion that real estate is a safe investment. Ask them questions like:
When is the best time to buy real estate?
Would you feel you got a good deal if you bought a house for pennies on the dollar?
Have you ever known real estate to be worth zero in most markets?
Then talk about how you buy houses and why it would be the right fit for them.
What is the best way to use IRA money for private lending, both my own IRA money and that of other lenders?
My current private lender has a 9 month repayment schedule and I’ve been running around like a mad dog, trying to sell my property. Are there longer term loans available? I’d like to have more time to sell my property, especially because of the current market.
REPLY FROM PAUL:
Zofante,
Many people confuse Private Lenders and Hard Money Lenders. The difference is that a hard money lender is in the business of lending money and a private lender is just looking to receive a good return.
Private lenders come in all shapes and sizes. You will be able to find lenders that want to get their money working at 8-10% for years on end. They are not looking for their money back they just want stability.
If you are not finding these types of lenders you are not talking to the right people. I recommend looking around some more and talking to more and more people about where they are investing their money.
Is it better to incorporate and raise money with and IPO than to try and find private lenders?
REPLY FROM PAUL:
Great Question!
This is a technique to raise big money for your business. I would recommend this for large investors that are doing commercial and Multifamily deals.
But what I am talking about is a little smaller than this. I recommend following the SEC guidelines for an exemption for small businesses. This way you can do a portion of the IPO paperwork and filings that will cost substantially less and still receive the result of raising money for your business.
In my advanced manual I talk about this strategy as well as syndication and hedge funds.
I cant find anyone to lend on construction cost. Any suggestions?
REPLY FROM PAUL:
Talk to other private lenders. I borrow money on construction costs all the time. I inform lenders what their money is doing and what you will be doing with the property. Outlining the construction and what it will do to the value of the property.
Offer a current appraisal and an after repaired value appraisal or CMA.
Because of the current real estate market I am struggling with finding people with money that feel safe lending. How do I ensure their money will reap a return and that they are safe even considering today’s real estate conditions?
REPLY FROM PAUL:
Sally, it is all in how you present the opportunity. The way you evaluate the deal and whether or not you have done your homework.
If you had a great deal and you had good security for your lender and they felt safe with the fact that you are not buying a property at full retail and then selling it higher only through an agent you would have better luck.
Think like a lender and provide them with what they are looking for as far as proof and opportunity goes.
A little hint: to many people high interest rates mean high Risk. So instead of offering 12-15% talk about a 7% to 9% return. This is much more believable.
It seems banks as well as private lenders are NOT lending 100% of property value. Is this truly the case?
REPLY FROM PAUL:
I would never recommend borrowing 100% of the After Repaired Value. But I have often borrowed more than 100% of the Current Market Value and used the rest for rehab and holding costs. It was still less that 83% than After Repaired Value.
I know that my private lenders can take money from their IRA’s to invest as well as any other liquid funds in their accounts. Is there anywhere else they can find money to lend privately?
REPLY FROM PAUL:
There are many ways for lenders to find the funds to lend. But really it is up to them. One of the ways that I find investors is to offer them a CD that I recorded that they can listen to on their own. In the CD I tell them all the options available to them.
These can include IRAs, savings, lines of credit as well as many other sources. I get into this in the “Cracking the Private Lending Vault” Basic Manual. I also give you everything you need to find the Private Lenders that will help your business grow.
I have a few lenders that want to lend their lump some of over $100,000 to one property without splitting it up. However, I only need a smaller amount (under $100,000). How do I convince them they should split it up?
I know that Private Lending is a huge opportunity for people with money who want to make a high rate of return. However, I am having a hard time expressing the benefits to them. How do I communicate the obvious benefits to them so they are aware of the potential?
Is there a maximum number of investment properties that a REI can have if they utilize private money to finance them?
REPLY FROM PAUL:
Nope not at all
Is there any way to guarantee that all of the private funding I need will be available to me whenever I need it?
REPLY FROM PAUL:
Sorry there are no guarantee in life? The only way to guarantee that is to spend time developing relationships. Private lenders are individuals so it is up to you dude. You sow what you reap.
If a buyer falls through on a house that I have renovated using private money, should I just give the property to the lender? What if I can never find a buyer? What are my options in these situations?
REPLY FROM PAUL:
I will give the property to the lender as a last resort. I would work to sell the property creatively and communicate your issues to the private lender.
I would beef up my marketing and work hard at selling the property. I can recommend that you visit Karen Schaefer’s website http://www.SimpleAppeal.com she is an expert at selling properties fast even in a slow market.
How can I leverage private money to grow my real estate portfolio?
REPLY FROM PAUL:
I recommend watching Video 2 in the Video Vault the “Exponential Growth Effect™” In this 27 minute video I explain this very thing.
How can I use private lenders to cash flow a property?
REPLY FROM PAUL:
Find a lender that is looking for interest accruing rather than monthly payments. Every lender is looking for something different.
The downside is that you will have to pay them off sometime and you will be receiving your profits monthly rather than in a lump sum at the end of the transaction.
As a real estate investor, what can I offer private lenders so that they will beg me to give me their money? Is there a specific interest rate, or other terms that I should offer them?
How do I do the necessary due diligence to ensure that everyone involved in the deal feels that their investment is as safe as possible?
REPLY FROM PAUL:
Hi Angela, I cover this pretty well in the first video. Also make sure and watch the second video to see how you can induce Exponential Growth in your Real Estate Business.