You’ve done the research, learned the ins and outs of identifying prime real estate investment opportunities, and you’ve got your sights set on a lucrative deal.
Now the question is: how do you fund the property purchase?
Unless you have thousands in the bank that you can use for an escrow deposit to secure the property, you will need to raise the funds through another source.
Raising capital from private money lenders gives investors the leverage they need to secure deals and ultimately purchase properties.
Private Lender Money
What is a private money lender? Generally, this is an individual or a company, not a bank, which loans money to fund real estate transactions. They are given a first or second mortgage that secures their legal interest in the property and safeguards their investment.
Why do they do it? Money sitting in the bank is likely only earning interest at a rate of about one percent. With an inflation rate of four percent, that money is losing about three percent of its value per year.
By using their cash to fund real estate investments, private lenders can earn a 12 to 15 percent return.
Private Lender: Investor Circles
So where do you start?
Friends and family make up the primary investor circle. These are the people who know you best, and are more inclined to say “yes.” The downside: If something goes wrong, and the deal is a loss, you risk the relationships.
It’s important to be transparent about the risks up front and discuss the potential repercussions of a deal gone sour before you borrow money from your primary circle. You should only approach those who can afford to potentially lose the investment.
The secondary circle of investors is made up of friends and colleagues of your primary circle. Your mutual contact can vouch for you with these potential lenders, but since they don’t know you personally, you will need to prove to them that the deal is sound and you’re the right person to make it happen.
You’ll need to prepare a comprehensive proposal and be ready to address any concerns they might have. Because this circle is wider than your primary circle, you have more potential lenders to approach at this level.
Your third-party circle is your biggest capital pool. You do not know them personally, nor do you have mutual contacts. How do you find them? You can post the details of your investment opportunity to myriad investor capital websites. Important: Make sure your contact is within the confines of the Securities and Exchange Commission at the federal and state level.
Working With a Broker
You can also work with a list broker to obtain the contact information for potential investors that meet certain criteria, such as net worth, income and likelihood of investing. Once you have this list, you can design a direct mail campaign to reach out to these potential investors with the opportunity to invest in your transactions.
You may work with one private money lender or multiple. Each will want to have their funds secured with a lien on the property. They will need to know the value of the property as purchased, plans for improvements, if any, and the time you expect it will take the property to sell, as well as your repayment plan for the loan
Private money lenders want to ensure there is enough equity from the beginning to cover them in case they have to assume ownership of the collateral property if you default on your agreement.
Keeping these ideas in mind can help you focus during your search for a private lender, and lead to better success in your efforts. Just remember to select your lenders wisely, always be transparent and have a plan in place that will be attractive to a potential private lender.