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in Real Estate Investing, Series: Getting Started in Real Estate · October 20, 2022

How to Fund Real Estate Investments – Part 3: Private Money

Private Money Loans

Private money loans are generally asset-based loans secured by real estate. Private money loans are basically loans from people you know or that you have been referred to. For example, your friends, family, co-workers, or acquaintances. The difference between hard money and private money lenders is that you are dealing directly with “Ryan” or “Kat”, the individuals with the money. This allows for more flexibility compared to hard money lenders or institutional lenders. 

Let’s say you and I know each other very well. Therefore, I trust you very much. I may be willing to give you a loan that is super flexible because it’s my money and I don’t have to follow an underwriting process. This is where private money is better than hard money. Honestly, Private Money is THE BEST way if you can get a hold of it. When you are getting started, you may not YET have people in your circle with the funds you need to get deals. Therefore, hard money loans may be the only option. 

Like hard money loans, the interest and fees will likely be higher than traditional loans. However, you have more room for negotiation. 

Private Money Terms and Structures

The beauty of private money loans is that you may structure them in so many different ways. It’s just a matter of coming to an agreement with the private money lender. A few examples of how you can structure a private money arrangement:

  • Amortizable loan: like a regular mortgage, there is an amortization schedule for monthly payments. 
  • Interest Only: 5-year interest-only loan at 8% annual interest paid monthly with a balloon payment of loan balance at the end of the 5 years.
  • Zero money down: 100% financing of purchase price for 1 year with 10% annual interest.
  • Balloon payment: Interest is payable at the end. For example, a $100,000 loan with 12% interest would receive a $112,000 payment at the end of the 1 year.
  • Profit-share: 
    • The investor provides 100% financing of the purchase price with 5% interest payable at the end in addition to 20% equity profit share after the sale. For example, a $100,000 1-year loan with 5% interest and a flip profit of $20,000. Investor gets paid $100,000, $5,000 interest, $4,000 profit share.
    • In a fix-and-hold, a similar structure can be set where the investor provides financing for 100% or a percentage of the purchase price plus rehab at 5% interest plus a 10% profit-share of rents for a period of 24-months.
  • Collateral vs. no-collateral loan: Collateral is something of value, like a property that the lender can use to collect payment. If you have a great reputation or know your private lender very well, you might be able to get loans without any collateral and only personal guarantees. This is how we have gotten some of our loans from friends and family. The loans are to our business with just us as personal guarantors. There is no property attached to the loan and we can use for any purpose. This usually means we pay higher interest to compensate for the risk 🙂

I could go on for hours with ideas on how to structure a private money arrangement. These are just some of the ones I have encountered, but you can do anything. Depending on your situation or a specific project, you may need certain terms versus others. Before you propose your terms, make sure you understand what your private money lender wants as a return. You don’t want to present a deal that is only advantageous for you and end up losing the private money lender altogether. 

Like hard money loans, the more risk associated with a loan, the higher the interest you may have to pay your lender. A private money lender may want to be compensated more for a loan that has one lump-sum payment compared to one that has monthly payments. Basically, the more creative you get, the more the investor will likely want in return.

How to find Private Money Lenders and/or Investors

Networking is going to be the BEST way to find private money lenders. Go to your local Real Estate Investor Association, attend local or virtual meetups, or join a mastermind. You can find meetups in the  Meetups App, Eventbrite, Instagram, or Facebook. The more involved you are in the real estate investing community, the more chances you have at finding private money. When you go to these events, you may not meet the private money lender, but you may meet “Kat” who knows a private money lender. 

Tell everyone that you are looking for investors to fund your deals. Don’t forget about your family, friends, coworkers, etc. They are also great sources for private money lending. For example, all our private money loans have come from our co-workers, friends, and family. 

Remember that you are not asking for free money, you are offering them an investment opportunity.

Building Credibility

Private money lenders are people like you and me that are looking to put their money to work. Their main concern is, “Is this someone I want to do business with, and will this person be able to fulfill the agreement?” When borrowing from an established lending institution, there are fewer biases and emotions about the person. Normally lenders are looking at the numbers first, and the person second. In my opinion, it is the opposite for private lenders. They want to know the person, then the numbers. So, how do you build credibility and trust?

Networking

You start building credibility and reputation by showing up to networking events. The more they see you, the more likely you will be kept top of mind. You want to build relationships with the people that can make the introduction to these potential private money lenders. Don’t focus just on looking for private lenders. 

Social Media

If you like social media, that’s another great way of building credibility. Post your projects, let everyone know what you are working on, and interact with other accounts. The online real estate community is amazing, and you are missing out if you are not taking advantage of that. I have seen so many people leverage Instagram to obtain private money. 

You don’t have to go all fancy and make videos, great captions or grow a big following if you don’t want to. Keep it simple. Having social media helps when introducing yourself to new people.

Credibility Package or Pitch Decks

I highly recommend that you create a credibility package. This is just a brief presentation of who you are, your experience, and what you are asking for. Have it ready for when the need arises.

The presentations can be customized for your specific audience. If you are dealing with a sophisticated investor, then maybe you need to provide more numbers. Generally, keeping it simple is the best.

Key items of a credibility package: 

  • Investor Resume: What is your experience, how many deals, what other sources of income do you have?

Example of what mine looked like when we got our first private money loan.

We got our first private money loan in July 2020 and it was only for $20,000 to help with loan rehab.
  • The Deal Details
    • Market Overview –What market is it in and why invest there? It shows that you have done your homework and understand the market you are in. 
    • Deal Analysis- What do the numbers look like? If the property is currently rented, provide actuals vs your estimated future cash-flow based on new rents. How much money are you putting toward repairs, etc.

Here is an example of one I have provided. 

Timeline

Description automatically generated with low confidence
  • Rent Roll – If multi-unit, provide a rent roll.

Example of one I have provided:

  • The Ask: You need to tell your investor what you are asking for, but also be open to negotiation. You may provide them with different options. 
    • What is the investment amount?
    • What type of arrangement are you looking for?
      • Is it a loan? 
      • Is it a partnership?
      • Is it a joint venture?
    • What are the terms?
      • How much money down, what interest rate, repayment period, etc.?
      • If a partnership or joint venture, what is the structure, who does what, etc.?

Here are a few samples pitch decks from other investors:

  • From Sarah King @nerdsguidetofi: https://www.instagram.com/p/Cgmdfwiujow/?utm_source=ig_web_copy_link
  • From Soli Cayetano @lattes.and.leases: https://www.lattesandleases.com/shop/private-money

Website

I think websites are not given enough credit. Probably because they are not as easy to create compared to Instagram or Facebook. However, when it comes to building credibility, websites take you to a whole new level. Personally, I’ve failed at doing this myself. Mostly because of impostor syndrome (who I’m I to have a website?!), but I now realize its value. I am currently working on building a website that will serve as my online investor resume. It will provide an overview of our portfolio and strategy. It won’t be fancy or expensive by any means. I am outsourcing to someone from Fivver.com. You can find someone to build your website starting at $100.  

If interested, you can use my Fivver referral link for 10% off your first purchase: http://www.fiverr.com/s2/1c682e9157

The Wrap-up

Private money is a powerful tool to have in your investor toolkit. In my opinion, if you can master getting private money, you will win the real estate game.  Time to get out of your comfort zone, start networking and build that credibility! It might take some time to get that first private money loan so the sooner you start, the better!

This post may contain affiliate links. I may get commissions for purchases made through links in this blog.

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New Blog Post 🚨 In this week’s blog post I am New Blog Post 🚨 In this week’s blog post I am going over why we bought a short-term rental, our experience so far. Plus what we did prior, during and after purchasing our first short-term rental in March 2022, a Cabin in Blue Ridge, GA.

Check it out at www.beyondjustnumbers.com or link in bio @beyondjustnumbers
I can’t stress this enough. Some investors are l I can’t stress this enough. Some investors are looking to make money from day one, but that’s not always the case. It wasn’t for us and I’ve talked to a lot of rookie investors who have told me “Thank God I have my personal finance situation together.” 

This is just my opinion. Do you agree? Let me know in the comments!

Want to join a free community of like-minded individuals? Join our REI Coffee Chat Community where we talk real estate investing, personal finance and financial freedom, and much more! Link in bio @beyondjustnumbers

Want to learn more about investing in real estate? Read my blog www.beyondjustnumbers.com

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I used to think that investing in real estate was I used to think that investing in real estate was for the rich. I became in love with real estate while working for a real estate investment company that owned hundreds of units. This was back in 2011 and I was 20 years old at the time. I had less than 5 years permanently living the US, so I had no idea about anything. I grew up in Colombia and the only talk of money we ever had was the lack of it. 

The investors I worked for were a wealthy family, so naturally, I thought… Real Estate requires wealth. I don’t have wealth. Therefore, I cannot invest. 

I figured… well shit, I need become wealthy so I can invest in real estate. Eventually, after educating myself I realized how wrong I had it. You can build wealth BY INVESTING in real estate.

Took me a couple of years to figure it all out. Hence, why I didn’t start investing until 2019. I wish I had figured out earlier, but it is what it is. In just 3 years of investing in real estate, I was able to accumulate more wealth than I ever thought possible. 

Just to give you an idea…Did you know you could invest in real estate with as little at 3.5% of the purchase price? For a $150,000, that’s only $5,750. Buy a duplex that needs a little bit of work, fix it up, rent one side and live in the other. This will reduce your monthly expenses significantly, save the money and do it all over again.*

Of course it’s not that simple, but it’s also not that difficult. There are some particular steps and considerations which is  why I recommend doing further reading on the subject. 

Book Recommendation:
✅“The House Hacking Strategy” by Craig Curelop and ✅“Investing in Real Estate with No (and Low) Money Down” by Brandon Turner. 

#realestate #realestateinvesting
🚨 New Blog Post! Continuing the “Getting Star 🚨 New Blog Post! Continuing the “Getting Started in Real Estate Series” 

You’ve found a property either on your own or through a realtor, you’ve run your numbers, you’ve got a lender and now you are ready to make an offer. What’s next?

In this post I want to discuss a few items:

✅Key components of a real estate contract
✅How do you make a compelling offer to ensure you get the property you want
✅The main contract contingencies and how they work
✅Communicating with your realtor

I also provide real examples of what we have done personally. 

Check it out at www.beyondjustnumbers.com

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The fact that you are not where you want to be doe The fact that you are not where you want to be doesn’t mean you won’t get there. Greatness takes time. Focus on what you control.

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We see a lot of advice around hiring a real estate We see a lot of advice around hiring a real estate friendly CPA. However, when you look up  CPAs that specialize in real estate, they can be pricey.  However, that doesn’t mean that other CPAs or tax professionals aren’t good. They might not be particularly aware of certain items, but they can research and collaborate with theirs peers. Perhaps it may require you to do a little of work to compensate. Things you can do:
✅ listen to The Real Estate CPA podcast or join the Facebook group
✅follow social media accounts of the pricey Real Estate CPA and take notes of what they are saying
✅attend free educational events 
✅read BiggerPocket book on Real Estate taxes 
✅if you know anyone working with a really good Real Estate CPA firm, ask them what they are doing

Then use that to go your CPA or tax professional and be like “Hey, is this something we can do for me?” They’ll probably say, “Let me look into it”. 

If they are good, they are going to research it and/or ask their CPA peer group. (CPAs and tax preparers also have Facebook groups where they collaborate with each other).

Here is a piece of advice, if they tell you “No, we can’t use this loophole or no, you don’t qualify to use this strategy” —> Ask WHY and “How can I qualify in the future?.” This way you confirm they did their homework and aren’t just being lazy. Don’t just take no for an answer. You can then get a second opinion by asking a question in a forum or to your peers.

So don’t panic if you don’t have a real estate CPA or tax professional. 

Next video I’ll be answering the question… “Can I skip the tax professional altogether and do my own taxes?”

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