Private Money 101: A Crash Course In Private Money

Before we dive right in, answer these questions for me …

= > “Are you frustrated because you can’t get your hands on the cash you need for your real estate deals?”

= > “Are you scared to make an offer for fear that it will get accepted?”

= > “Have you ever lost a great deal because you didn’t have cash to close it?”

= > “Is a lack of financing killing your real estate investing dreams?”

If you answered “yes,” to any of the questions above, then private money may be THE solution for you.

To find out, let’s take a quick crash course in private money … aka Private Money 101.

What is private money?

Private money is cash from an individual that is lent to you, the real estate investor, rather than being invested traditionally through stocks, bonds, mutual funds. When you think about private money, think investment funds from an individual … any individual.

Is private money the same as hard money?

Far from it!

Hard money lenders finance deals for real estate investors as a business. They lend to investors based on the property, not necessarily based on the person. The hard money lender dictates the terms of the deal to you, the investor.

A typical hard money loan has high interest, points, and is short term. For instance, I purchased my second deal with a hard money loan. I was charged 15% interest, five points (or 5% of the loan balance), and had a term of six months to repay the loan in full.

Do you see why they call it “hard” money?

On the other hand, with private money, you dictate the terms of the loan to your private money lender. Based on the deal and your business model, you offer terms that suit your needs and provide a good return for your private lender. A typical private money loan could have 6% to 10% interest, no points, and a term that suits your exit strategy.

What type of properties can you buy with private money?

The primary niche for my real estate investing business is single family homes. But, single family homes are not the only type of property you can buy with private money.

Trevor only buys apartment buildings. He has been investing for several years now and has accumulated a nice portfolio. Each property cash flows well, is managed by a professional property management company, and is in or near his local market.

And how do you think he finances every one of his purchases?

You guessed it … Private Money!

Any great real estate investing deal can be financed with private money; it doesn’t matter if it is a house, condo, townhouse, apartment building, skyscraper, or beach front home.

Do you have to do lender luncheons to get private money?

One of the popular methods taught to get private money is to host a lender luncheon. You would be required to rent a facility, advertise to fill the room, and you would present your private lending program in front of the audience. While I believe this to be a good strategy for some, hosting a lender luncheon is not a viable strategy for most.

Why you might ask?

The number one fear in our country is public speaking. And you know what is number two … death! Most people would rather die that speak in front of an audience. Even if it was easy to get private money by hosting a lender luncheon, the majority of people would not do it.

So the question still remains, “Are lender luncheons required to get private money?”

Luckily for you, the answer is “no.”

I actually found that it is easier to get private money by presenting your investment program to prospects one on one. Plus, you don’t have to spend money to rent a room at a restaurant or hotel, pay for marketing costs, deal with the anxiety of presenting in front of an audience, etc. etc.

What types of people are the best private money prospects?

The first type is people who know and trust you. This could be a family member, long time friend, neighbor, someone from church or school . . . really anyone that you have built a long term relationship with could be a good source for private money.

The second is people who know a good deal when they see one. Anyone who works in a field related to the real estate industry could fit in this category. Examples would be real estate agents, mortgage brokers, bankers, appraisers, home inspectors, attorneys, accountants.

And yet another type most likely to lend to you is the best source of all . . . people who know someone who has invested with you. Or, in other words, referrals! Once you get your private lender base established, ask them who they know that would also like to make a good solid rate of return backed by real estate.

Would my local real estate investing association (REIA) be a good place to find private money?

Yes, it would!

REIA meetings are filled with people who have heard real estate investing is lucrative, want to make money doing it, but do not have the time, energy, motivation, or know how to do it themselves. That’s where your private lending program comes in …

You offer a hands off real estate investment with a good return. Your private lender gets to “invest” in real estate without having to deal with the hassles that come with owning property like repairs, managing contractors, dealing with tenants, and other general property management duties. All they have to do is stroke you a check.

People who attend REIA meetings are already sold on real estate investing, all you have to do is sell them on lending against one of your deals.

How do you convince someone to lend you private money?

You don’t!

That is coming from the wrong mindset. You’re not out to “convince” anyone to lend money to you. Your goal is to educate people about your investment opportunities. If someone is interested, great. If someone is not, next.

Class adjourned. That’s it for your crash course, Private Money 101.

If you have any questions, comments, or additional tips, throw ’em in the comment area.

Happy Private Money Getting!

– Patrick & Trevor