Many real estate investors know that buying an investment property is different than purchasing a primary residence. Among the differences is that many homeowners will turn to a conventional mortgage, while real estate investors often look for alternative forms of financing. That’s why as a real estate investor it is crucial to understand how to fund deals using resources like private money lenders.
In the real estate industry, a private lender will be a
much-valued asset to your investor toolbox. But what exactly can they do for
you as an investor, and how exactly do they work? Further, how do you approach
private lenders about a given deal? Read the following to learn how to work
with and find private lenders, so you can help ensure you secure financing for
your next deal with ease.
What Is A Private Money Lender?
A private lender is someone who uses their capital to
finance investments, such as real estate, and profits from interest paid on the
loan. Private lenders are not affiliated with a bank or other financial
institution, and instead interact directly with the borrower. There are private
lending companies that investors can seek out.
Private lenders are an asset to investors because they
often have different approval requirements and a faster pace than traditional
financing processes. While the qualifications and interest rates will vary
based on the situation, the process of working with private lenders will be like
other loans.
2 Ways You Can Use Private Lender Loans
Private money lenders
can provide a number of benefits for real estate investors, and the best part
is: they can help with almost any aspect of a real estate investing business.
The right financing will vary on a deal by deal basis, but it is still
important to understand each of the options available (and how to use them).
Here are two ways investors can make use of private money today:
·
Refinancing A Property
·
Buying A New Property
·
Refinancing A Property
Let’s say you purchase a rental property with a traditional
mortgage but want to negotiate a better interest rate or shorter repayment
timeline. Private money lenders
represent the opportunity to refinance, and therefore potentially reduce the
costs associated with funding a deal. Private money is particularly attractive
because in some cases investors can even incentivize potential lenders with
profit shares (rather than loan repayments). For example, when refinancing a passive income property investors could
leverage their monthly cash flow to make a deal more attractive. As a whole, private
money lenders can represent a much more flexible refinancing agreement when
compared to traditional financing.
Buying A New Property
Private money loans can be used to help real estate
investors purchase new properties, including residential, commercial, and
multifamily real estate. The key to securing these loans is to run the numbers
and craft the right pitch. Experienced investors may find it helpful to
highlight past deals, while first time investors should instead focus on the
potential profitability. Most investors will agree that it is great to build a
relationship with as many potential private lenders as possible, that way they
are ready to meet when a deal comes along. After all, one of the biggest perks
of using private money to fund a new deal is the quick timeline. Private money can enable investors to
acquire new deals at much faster rates than other lenders.
·
How To Find Private Lenders For Real Estate
·
Learn the ins and outs of private real estate
loans.
·
Build a network of potential private lenders.
·
Prepare a strong portfolio to present.
·
Identify the right lender for the project.
·
Wow lenders with your pitch.
When you are first getting started in real estate, you may
look at your colleagues and wonder how to find private investors for real estate deals.
More often than not, investors are using private
real estate lenders to fund properties. There are many private lenders out
there, but the most challenging aspect can be to find one that is willing to
fund your deal. However, with the right mindset and preparation, you will be
sure to find private real estate lenders who will want to help you.
Understand The Anatomy Of Private Real Estate
Loans
Financing terms, especially when you are first starting
out, can be quite confusing. Are private lenders the same as hard money lenders? If not, what are the
differences.
Basically, private lenders refer to individuals not
affiliated with a financial institution, who lend funds to promising investors.
Either from a private investor or someone within your social circle who is
decided to invest in your venture.
Hard money lives in a middle ground between the two. Hard money lenders are usually affiliated
with a more traditional financial institution but have less strict standards.
(This comes at a price: generally higher interest rates.) Though hard money is technically private money,
as an investor you will generally want to distinguish between the two.
In addition, it is important to know exactly what kind of
information a private lender will be looking for. In many cases, private real
estate lenders will have experience investing directly in properties
themselves. Therefore, they will know exactly which numbers and areas to look
at when considering a certain deal. While it is important to build a positive
relationship with a potential lender, be prepared to answer questions about the
facts and figures of a given deal. Here are a few questions to prepare for when
looking for private real estate loans:
·
Will they get their money back?
·
What is the incentive to invest?
·
What are the risks involved?
·
How will you secure my investment?
·
Is your plan well-researched, and it is
achievable?
·
Build A Network
Unlike securing a loan from a bank—or a hard money lender—working with private
lenders is all about building relationships. This starts with developing a
solid investor network.
It is a good idea to begin building your network on two
fronts. First, get to know professionals in your industry, such as real estate
agents, fellow investors, title companies, attorneys, and private investors.
Many private lenders will come through
referrals within your own real estate network.
Second, it is a good idea to build your contact list from
people outside of the real estate industry. This includes friends, family, colleagues,
and anyone who is not currently an investor but might be looking for new
opportunities. Many aspiring investors may just be waiting a good opportunity
to come around before getting started. Alternately, some of your friends and
colleagues may have valuable connections outside of your existing network.
Always approach potential connections with respect and keep
these networking tips in mind. Remember, it will take time to create
positive relationships with fellow professionals, but it will open a lot of
doors in your career. Building a strong investment network is crucial to
finding private lenders to work with.
Prepare Your Materials
Put together the materials that you would be sharing with
private lenders during your pitch. This includes a company overview,
which covers your education, goals, past deals, and experience, and what makes
you the right investor for their funds.
Along with this information, you will want to prepare a
presentation or video that outlines previous properties you have worked with.
This should outline the success of the past deals, including pictures, numbers,
and relevant information. You do not need to include every single property you
have completed, and instead should select the properties that show your best
work. Remember you want to make a good impression and highlight your strengths.
One more thing to add to your to-do list, which may not be
as tangible as a company overview or introductory video, is to have a clear
understanding of the private investor
process. Look into the documents you will need to present to an investor, such
as a promissory note and insurance. Also write out important information like
how long the process will take, when they can expect to see the loan paid in
full and what happens if there are multiple investors. Going in with this
information will ensure you are prepared for any questions that come your way
during the pitch.
Select Your Private Lender
Finding private lenders might be tough at first, but it is
important to keep in mind that the relationship is a two-way street. Although
you will spend time pitching to potential investors and trying to impress them,
you will want to make sure that the lender you ultimately choose will serve
your needs, and not just the other way around.
First, make sure to ask them about their proposed loan term
and interest rate, and what the loan will be based on. This will help you find
out how long you will have to pay the loan back, and how quickly it will accrue
interest. Further, you will want to know if they prefer to make their loans
based on the property’s current value, or after-repair value. Be sure to inquire
about potential fees they charge, whether they are upfront or in the form of
penalties. Finally, find out the schedule at which the lender will disperse
their funds to you.
Based on this information, you will be able to identify
which private loan will present the least amount of risk to you.
Make The Pitch
Finalizing a deal with a private lender is about far more
than explaining the numbers and going over the property. You need to put your
potential partner at ease and make sure you are both on the same page.
To establish this rapport, go into your initial pitch
meeting focused squarely on educating them about the process. Keep building
that relationship piece-by-piece. Resist the temptation to go for the quick
sale, or fast deal, it will not work — and it may leave you in worse shape than
when you started.
Instead focus on answering questions, especially those
referring to profit splits and timelines. This is what most private investors
are worried. And the more you can put them at ease by thinking of things from
their point of view, the more likely you are to secure private financing.
Pro Tips For Securing A Private Lender
Private real estate lenders are not nearly as hard as many
new investors make them out to be. In fact, a great deal of private lending
companies is always looking for investors to lend their money to. The trick,
however, is proving that you can manage their money well. For more of an idea
of how to find private money lenders
and convince them you are the right choice, try following these steps:
Understand Negotiation Tactics: In securing private
money lenders, investors will need to learn how to speak their language. That
said, there are two strategies to consider: the hard sell and the soft sell.
The former, the hard sell, is a more professional approach that will have investors
develop a convincing elevator pitch. The idea is to sell the private money lender on the idea of
funding an attractive deal. In this situation, it is important to remember
private lenders are just as eager to work with investors as investors are to
work with them; both parties stand to make money on a successful deal.
Therefore, investors will want to approach lenders with all the necessary
information and prove to the lender that the numbers are correct. Doing so
should convince lenders that they are making the right decision. The soft sell,
on the other hand, is typically reserved for friends and family, and will
typically involve an indirect approach. More specifically, the soft sell will
catch the interest of investors by casually slipping an opportunity into a
conversation. Either way, investors need to know who they are talking to before
they begin negotiations.
Find Lenders Online: Proceed
to find lenders using every method possible, not the least of which will
include online searches. There are several online sources designed to connect private
money lenders with potential investors, all of which may be found with a
simple, localized Google search. One of the best online search’s investors may
initiate, however, is one that looks for local real estate investor meetups. Look for a
local REI group and find out when they meet next. Attending a local REI meeting
will connect investors with several industry professionals, many of whom may be
private money lenders themselves.
Cold Call: Investors should
try every outlet at their disposal, and cold calls are no exception. Simply
obtain a list of lenders online and begin to call each name. When doing so, be
as upfront as possible and lay everything out on the table. Proceed to tell them
everything they will want to hear about the deal and be prepared to answer a
lot of questions. That said, the initial phone call is more of an introduction.
Instead of working the deal out on the phone, schedule a meeting to go over
things in more detail later.
Launch A Marketing Campaign: Not
unlike looking for a deal, investors should market for private money lenders. There are several
marketing campaigns to consider, but investors should not limit themselves to
just one; try them all. A direct mail marketing campaign, for example, will
have investors soliciting potential lenders through a highly targeted mailing
campaign. Another idea is to place a sign on any property that is currently
being worked on. Place a sign in the yard that suggests you are looking for a
private money lender to fund the next deal, and to inquire within.
Private Money Lenders FAQ
Working with private lenders is not a complex process,
though it can be mysterious for investors who are unfamiliar with alternative
financing methods. As you begin to ask how to find private lenders, make sure
you do not have any lingering confusion about the process. Read through the
following frequently asked questions to make sure when you do find a private
lender to work with, you know what to expect:
How Do Private Lenders Work?
Private lenders work by investing their capital into real
estate deals in exchange for interest paid on the loan. They will work with
investors to establish the terms of the loan, which will be paid back according
to the term. Private lenders are often
investors and turn to private lending to expand their portfolios.
Are Private Lenders Regulated?
Private lenders are regulated by state and federal lending
laws. Depending on where they are located, there is often a limit to the number
of loans they can provide without a license. So, while private lenders are not
regulated as strictly as bankers, there are rules they must follow as well. For
more information on the regulations in your state, be sure to research online.
Do Private Money Lenders Check Credit Scores?
Unlike their hard money counterparts, private money lenders
are not known for checking borrowers’ credit scores. That is not to say all
private money lenders do not check credit scores prior to lending, but rather
that the decision to loan is based primarily on the asset at hand. Otherwise
known as asset-based lending, private money lenders will typically base most of
their decision to lend on the quality of the subject property. The more likely
the property is to sell for a profit, the more likely a private money lender
will be to lend funds to an investor. Of course, the asset at hand is merely
part of the decision-making process. Many private
money lenders will want to know who they are lending to, which could result
in some questions, not the least of which may include a credit score check.
That said, not all private money lenders will look at a borrower’s credit
score. Only those who are more diligent will typically consider the credit
score when lending.
How Much Do Private Lenders Charge?
Private lenders charge different interest amounts ranging
from four to 12 percent. The amount they charge will be dependent on several
factors including your investment history, the numbers of the deal at hand, the
proposed term length and more. However, the good news is that oftentimes the
interest rates will be negotiable. Remember as you practice your pitch that not
only are you trying to secure financing, but also the best loan terms possible.
Summary
Your goal when working with private money
lenders should not be to simply land a deal and move on. Instead, you
should seek out someone you can present deals to on a long-term basis. If you
focus on building a strong relationship, you can secure financing for both your
current and future investments.
Always remain professional when building a network, a
strong portfolio and a great pitch can go a long way in landing a deal. By
making strong connections and maintaining positive relationships with each
lender you work with, you can help ensure you always have options when it comes
time to finance a deal.
Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Hard Money
Lender
Hard Money
Loans
Hard Money
Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com
Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About: Dennis has been working in the real estate industry in some
capacity for the last 40 years. He purchased his first property when he was
just 18 years old. He quickly learned about the amazing investment
opportunities provided by trust deed investing and hard money loans. His desire
to help others make money in real estate investing led him to specialize in
alternative funding for real estate investors who may have trouble getting a
traditional bank loan. Dennis is passionate about alternative funding sources
and sharing his knowledge with others to help make their dreams come true.
Dennis has been married to his wonderful wife for 43 years. They have 2
beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona
resident for the past 40 years.
© 2019 Level 4 Funding LLC. All Rights Reserved.
Dennis Dahlberg
