Private Money Investing
Getting Started with Private Money
First of all, let’s define private money. Private Money is when someone who has the capital, such as a friend or family member, allows you to borrow that money to support your investment in real estate properties.
It comes down to this: for just starting out in investing, you don't have the upfront capital to buy these deeply discounted properties to either flip or hold on to — that’s where private money comes in. Meanwhile, for experienced investors, private money offers the opportunity to access bigger deals or more volume of investments at a time.
What to Look Out For When Lending
What are things to be cautious about when it comes to lending? Number one, just making sure that you understand the terms with the investor or the private money lender is the most important.
A very attractive investment for someone is a deal with a great interest rate that is secured against the property itself. For example, if they say, “Hey, I'm going to give you a 10% return on your money in a six, nine or 12 months term,” where are they gonna get that anywhere else? Secured against the property itself, it's even collateralized.
You never want to be overpaying interest. For example, if you're getting 15% or 20% interest, you really need to be buying that property. Also factor in how the interest is being paid. Does the lender want an interest-only payment for the six, nine or 12 months? Or do they just want one balloon payment at the end of it? If there’s a choice, I would recommend the balloon payment.
It really depends on the lender and your relationship with them. If they're comfortable putting the money out for six, nine or 12 months and then getting paid back everything with the interest at the end of the balloon payment, the next question is how do you find private lenders?
Finding Private Money Lenders
Even if your friends and family don't have the money, maybe they know somebody who does. The goal is to really spread the word, speak to anyone and everyone about your ambitions and your ability to find flip properties and investment properties.
Explain that you're willing to pay and make the concept as attractive as possible. Considering the alternative to investing: if someone has $150,000 in a money market account or a savings account, they're not even getting 1% return on their money.
So when you say, “Hey, you can put something into real estate.” That's backed by that piece of real estate. And I'm going to get you 9, 10, 11, 12% return on your money in six, nine or 12 months — It's pretty much a no brainer.
Other ways to find private lenders is to get out and network, talk with other realtors, talk with people in the community such as attorneys, doctors, department heads — people that tend to have money or would love to invest.
In Gainesville, we're fortunate that we have a university and we have two or three hospitals between the VA, Shand's, and North Florida. A lot of the people working there are high paid physicians and professors who love putting money in local real estate, especially being a college town. So just get out and talk to people. Talk to your financial advisors and your accountant, just let them know that if they come across people that are looking to invest in real estate, but don't know how to go about it, you can be that connecting point.
Private money lending and real estate investing simply implies that you're getting money from an individual investor or an individual as opposed to a lending institution. Using private money is great in real estate investing because typically they're going to provide you with the funds that allow you to purchase real estate via a cash transaction.
Typically in private lending, the individual — whether it's a friend, a family member, a colleague, a past client, another investor, etc. — doesn't want to do the heavy lifting with regards to flipping a home or getting it ready to rent.
Potential Downsides of Private Money Lending
The downside of private lending is that the terms are typically six to 12 months and they're at a higher interest rate than conventional lending. But again, the added benefit is that you can typically close quickly with private money. Flip or rental properties can be severely distressed and wouldn't even qualify for conventional financing. So having access to somebody else's money to purchase these transactions is key in real estate investing.
Another one of the downsides is that the interest rates are typically higher and depending on how well you know the lender determines the interest rate. For example, a family member may give you as low as 6 - 8%. But typically when dealing with a private lender, they're going to want to secure the loan with a note and mortgage against the property. They're going to want to be paid off in 6 to 12 months. And the typical interest rates are going to be probably between 10 and 12%, and can even go as high as 15%.