Most real estate investors know that purchasing a property investment is different from buying a primary residence. Among the differences is that many homeowners are moving to a traditional mortgage while real estate developers are searching for alternative sources of financing. This is why it is important as a real estate investor to understand how to finance deals using tools such as private money lenders.
A private lender would be a highly valued asset to your investment toolbox in the real estate industry. But what exactly will the lenders do for you, and how exactly do they work? Moreover, how do you treat private lenders with respect to a given deal? Read below to learn how to work with and locate private lenders, so you can quickly ensure yourself secure financing for your next contract.
What Is A Private Money Lender?
A private lender is someone who uses his capital to finance investments, such as real estate, and profits from interest on the loan paid. Private lenders are not affiliated with a bank or other financial institution, but interact with the borrower directly instead. There are private lending firms that the investors could look for.
Private lenders are important assets for investors because they they have different approval criteria and a quicker speed than conventional methods of financing. Although the requirements and interest rates depending on the case will vary, the method of working with private lenders will be similar to other loans.
Using Private Loans In Two Ways
Private money lenders can offer a number of advantages for real estate investors, and the best part is: they can help with almost any aspect of an investment property business. Right funding can differ on a deal-by-deal basis but knowing each of the available options (and how to use them) is still crucial. Here are two ways in which investors today can make use of private money:
- Refinancing A Property
- Buying A New Property
Refinancing Real Estate
Let’s assume you buy a rental property with a conventional mortgage, but want to negotiate a better interest rate or shorter period for repayment. Private money lenders are your ability to refinance, and thereby theoretically reduce the costs associated with funding an arrangement. Private capital is especially desirable as borrowers can also incentivize future lenders with income shares (instead of repaying loans). When refinancing a passive income property investors, for example, could leverage their monthly cash flow to make a deal more appealing. In general, as opposed to conventional funding, private money lenders will represent a much more flexible refinancing arrangement.
Buying A New Property
Private money loans can be used to help real estate investors purchase new property, including residential, commercial, and multi-family property. The trick to getting those loans is running the numbers and making the right pitch. Experienced investors may find it helpful to highlight past acquisitions, while investors should concentrate more on the future profitability for the first time. Most investors would agree that establishing a partnership with as many potential private lenders as possible is fantastic, because when an offer comes in they are ready to meet. One of the greatest advantages of using private capital to fund a new project, after all, is the fast timeline. Private money will encourage investors to buy new deals at much faster rates than other borrowers do.
How To Find Private Lenders For Real Estate
- Know the ins and outs of private property loans.
- Develop a network of private potential lenders.
- Prepare to show a solid portfolio.
- Identify the correct lender for the project.
- With your pitch, wow the lenders.
When you get interested in real estate for the first time, you will look at your colleagues and wonder how to locate private investors for real estate deals. Investors use private real estate lenders more often than not to fund property. There are many private lenders out there but finding one that is willing to fund your deal can be the most challenging aspect. However, you’ll be sure to find private real estate lenders with the right mindset and preparation.
Understand the Structure of Private Loans
Financing terms can be very confusing, particularly when you start out first. Are private lenders equivalent to hard money lenders? If not, then what the variations are?
Private lenders generally refers to people who are not affiliated with a financial institution, who lend funds to potential investors. Either from a private investor within your social circle, or someone who has decided to invest in your venture.
Hard money lives between the two. Hard money lenders are typically affiliated to a more conventional financial institution, although they do have less strict requirements. (This comes at a price: generally higher interest rates.) Hard money is essentially private money, but you would typically want to differentiate between the two as an investor.
It’s also important to know exactly what kind of information a private lender is going to be searching for. In certain cases private real estate borrowers may have experience directly investing in property itself. Therefore, when considering a given deal, they will know exactly which numbers and areas to look at. While establishing a good relationship with a potential lender is vital, be prepared to answer questions about the facts and figures of a given deal. When you are searching for private real estate loans, here are a few questions to plan for:
- Will they get their money back?
- What is the reason to invest?
- What are the implicated risks?
- How do you keep my investment secure?
- Is your proposal well-studied, and is it achievable?
Develop a Network
Working with private lenders is all about establishing partnerships, unlike obtaining a loan from a bank — or a hard money lender — that begins with the establishment of a strong network of investors.
Commencing to develop a network on two fronts is a smart idea. First, get to know your industry professionals, such as real estate agents, fellow investors, title firms, lawyers and private investors. A lot of private lenders will come through referrals within your own network of real estate.
Second, building your contact list from people outside the real estate sector is a good idea. This involves acquaintances, family, colleagues and everyone who isn’t an investor at the moment but may be searching for new opportunities. Many ambitious investors can wait for a good chance to come around before they get started. Alternatively, some of your friends and colleagues can have useful connections outside of your current network.
Always politely approach future partnerships, and keep these tips for networking in mind. Remember, building meaningful relationships with fellow professionals will take time but it will open a lot of doors in your career. Building a large network of investments is key to seeking private lenders to work with.
Get Your Materials Ready
Put together the materials which you would share with private lenders during your presentation. This includes a summary of the business that includes your background, ambitions, previous deals and experience and what makes you the best candidate for their funds.
You’ll want to plan a slideshow or video along with this information that details previous assets that you’ve worked with. This will summarize previous deal progresses, including photos, numbers and relevant information. You don’t have to include every single property you’ve completed, but you should instead select the properties that show your best work. Remember you want to make a good impression and put your strengths to the fore.
One more thing to add to your to-do list is to have a good understanding of the private investor cycle, which might not be as tangible as a business summary or introductory video. Look at the paperwork that you need to send to an lender, such as a promissory note and insurance. Write out crucial details such as how long the process will take, when they should expect to see the loan paid out in full and what happens if there are several creditors. Coming in with this knowledge will make sure that you’re primed for any questions that come up during the presentation.
Select Your Private Lender
It may be difficult at first to find private borrowers, but it is important to bear in mind that the partnership is a two-way street. While you will spend time pitching and trying to convince potential investors, you will want to make sure that the lender you actually select meets your needs, and not just the other way around.
First, make sure you ask them about the loan term and interest rate they suggest, and what the loan would be focused on. This will help you figure out for how long the loan will have to be repaid, and how easily interest will accrue. Additionally, you’ll want to know if they’d rather make their loans dependent on the current value of the house, or after-repair value. Be sure to inquire about possible fees that they are charging, whether they are upfront or in the form of sanctions. Finally, find out the timetable for the lender to allocate their funds to you.
On the basis of this knowledge, you’ll be able to determine which private loan will provide you with the least risk.
Make the Pitch
Finalizing an arrangement with a private lender requires far more than describing the numbers and going over the land. You need to make sure your new partner is at ease and that you’re both on the same page.
Go into your initial pitch meeting centered squarely on informing them about the process. Keep the relationship growing piece by piece. Resist the temptation of going for a quick sale, or a quick deal, it won’t work — and it may leave you in worse shape than when you get started.
Instead, focus on answering questions, especially those relating to splits in income and timelines. That is what worries most private investors. And the more you can make them feel confident talking about issues from their point of view, the more likely you are to secure private financing.
Pro Tips For Securing A Private Lender
Private lenders in real estate aren’t as difficult as many new investors make them. In reality, a lot of private lending firms still look for investors to lend their money. However, the trick is proving you are able to manage their money well. Try following these steps for more of an idea on how to find private money lenders and convince them you’re the right choice:
- Understand Negotiating Tactics: Creditors will need to know how to use the language of private money lenders in order them. That being said, there are two specific strategies to consider: hard selling, and soft selling. The former is a more professional approach, which would make investors build a compelling elevator pitch. The aim is to sell the private money lender on an enticing offer to fund it. In this particular case, it is important to note that private lenders are just as willing to work with investors as investors are to work with them; on a good transaction, both parties stand to make money. Then investors would want to approach lenders with all the details they need to prove to the lender that the figures are correct. In doing so, lenders should be persuaded that they are making the right decision. On the other hand, the soft sell is usually reserved for friends and relatives, and generally may require an indirect approach. More precisely, by subtly slipping an opportunity into a conversation, the soft sell will attract the investor’s attention. How ever you look at it, investors need to know who they are talking to before starting negotiations.
- Find Lenders Online: Use every possible method to find lenders, not the least of which will include online searches. There are a number of online sources designed to connect private money lenders with potential investors, all of which can be found with a simple, localized search on Google. However, one of the strongest online searches investors can start is one who looks for meet-ups of local real estate investors. Look for a group of local REI, and find out when they meet next. Attending a local REI meeting will connect investors to several industry professionals, many of whom may themselves be private money lenders.
- Cold Call: Investors will seek out each channel open to them, and cold calls are no exception. Get a list of lenders online and start calling every name. Be as up front as possible when doing so and lay it all out on the table. Go on telling them all they want to hear about the deal, and be prepared to answer a lot of questions. That said, it is more of an introduction to the initial phone call. Instead of hashing out the agreement on the phone, arrange a meeting at a later date to go over issues in greater detail.
- Start A Marketing Campaign: Investors will compete for private money borrowers, not unlike as if they were searching for a deal. There are a variety of marketing strategies to consider, but investors should not confine themselves to only one; seek all of them. For example, a direct mail marketing campaign would have investors applying for potential lenders via a highly targeted mailing campaign. Another idea is to put a sign on every property currently undergoing work. Place a sign in the yard that indicates you’re searching for a private money lender to finance and ask about the next contract.
Best Private Lending Companies
Private lending companies will offer the same advantages of operating directly with a private lender, but the process of application and approval can look different. There are plenty of personal lending firms and peer to peer lending platforms that investors can consider. Below are some of the biggest private lending companies out there:
- LightStream: This particular source offers loans for auto, home improvement, and just about everything else, at low rates for those who can show a decent credit tendency.
- Upstart: Upstart is an online lending marketplace specializing in personal loans using non-traditional variables for creditworthiness determinations.
- LendingClub: The LendingClub is a peer-to-peer lending company based in San Francisco, California.
- Citizens Bank: Citizens Bank provides personal and corporate banking, student loans, home equity goods, credit cards, etc.
- Best Egg: Best Egg is a simple and efficient platform for lending investors that can tap to secure fairly low interest rates.
How Much Do Private Lenders Charge?
Private lenders charge varying rates of interest ranging from 4 to 12 percent. The amount they charge will depend on a variety of factors like your investment background, the numbers of the deal in hand, the duration of the agreed term and more. The good news however is that interest rates are always negotiable. Remember that as you practice your pitch, you are not only trying to secure financing but also the best possible terms for loans.
When negotiating with private lenders, the goal should not be simply to land a deal and move on. Instead, you can look for someone to whom you can present deals in the long term. If you concentrate on building a solid partnership, you will secure financing for both your current investments and potential ones.
When developing a network, a good portfolio and a positive presentation will go a long way in securing a deal, so remain professional. By establishing good ties and maintaining positive relationships with each lender you are dealing with, you can help ensure that you still have choices when it comes to funding a contract.