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.

• 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. 

• 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!