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How to find (or make) private lenders

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How to find (or make) private lenders

Talk. That’s right; talk about what your are doing in your business. Talk with enthusiasm and intelligence. It matters. It is magnetic! If you are familiar with Bigger Pockets and their podcast, you are familiar with Brandon Turner.  He is knowledgeable and passionate about real estate and it is infectious to listen to.  Do you think he has a hard time finding private lenders?  I seriously doubt it.  Now you may be thinking “but he has an international audience to speak to” and you would be right but that isn’t why he is enthusiastic about his topic.  He is enthusiastic about his topic which helped him grow that audience. We need to use the audience we already have to talk about what we are crazy excited about.  Do you think if I was lending money I’d consider lending to Brandon or to someone else I know who has rentals but never talks about them or who speaks negatively about them? How about someone who doesn’t speak with any level of confidence or understanding of how real estate works? Maybe someone who complains of chasing tenants for rent money and having no systems?  Brandon would be the easy choice.

So here is what we did when we accidentally found our private lenders.  We (okay, I) talk a lot.  We talked with excitement about our first few rentals which were bought the old-fashioned way of putting down big down payments.  But we were doing something we believed in.  We kept getting great tenants by learning better screening methods. We would try to debunk the old myths of “tenants, toilets, and termites” and two a.m. phone calls.  We’d talk about how great our tenants were.  And then a friend from church said they’d like to get involved if we ever needed a loan.  This was crazy.  They were offering us a loan instead of us asking for one!? It sounded too good.  Now we needed a property.  We found one and we borrowed from these friends on that project and on many more and continue to borrow from them today.  The interesting thing is that once you pay off a lender, they really like to loan to you again.  And when we started doing overlapping projects, we’d just put the word out within our network that we were offering (remember that word) a lending opportunity. It was shocking how many people expressed interest. Along the way we would post pictures of our projects and the work we did. Now people began to approach us whom we had no idea had money or were interested in what we were doing. It was amazing. We are very loyal to our lenders and we keep working with the ones who took a chance on us the first time but we’ve also developed many new lenders who like to be offered great returns with first position liens on real property instead of paper assets.  We have never been late with a single payment and we’ve always delivered above and beyond for these valued members of our team.  

We never use the words “asking for a loan”. We say we are “offering a lending opportunity”.  Do you see the difference?  If I ask you for something, you have to give me something.  If I offer you something, I am giving you something.  Both are true but we truly believe that these loans are opportunities for very good returns backed by very high quality real estate.  There is never any pressure because we now know there are many people who would like the opportunity to lend to us.  But we didn’t always know this.  

Having a track record of good work and reliable returns helps a lot.  I’m not going to deny that.  So what do you do if you don’t have a track record?  You have several options.  You can partner with someone on a project.  Even if you don’t make a ton of money you have done a project.  And that is experience.  You and your partner both can honestly claim you’ve done a project.  And you should probably post pictures and lessons learned on social media so people see what you are up to.  We all love a good before-and-after story.  If you don’t have a partner you could use hard money.  It’s expensive money but if it gets you in the game it’s totally worth it.  You could save up enough money to fund all renovations and part of the purchase price of a deal and only borrow a small percentage of the wholesale value.  This helps offset the risk from the borrower’s perspective who is lending to an inexperienced borrower.  They will have a very low loan-to-value (LTV) and much stronger collateral in a worst case scenario.  And always be honest.

One thing I hear a lot is, “but I don’t know anyone who has money to lend.”  This is often not true.  As I have discussed in previous articles, people are weird about talking about money.  You very well may know someone who has idle funds but who doesn’t broadcast it.  The book The Millionaire Next Door describes these stealthy wealthy (my term, I think) people who live modest lifestyles but have built considerable wealth.  They may think that the only option available to them is to let their money sit in the stock market and get whatever returns they can.  They may not know that there are such things as Self-directed IRAs that they can move their money to and keep the tax treatment that the IRA allows them but also to gain more control by lending their money out.  It then may be your job to inform them of this option.  Therefore you may have to do a little self-education so that you can teach them about this from an informed position.

Essentially, there are custodians you can move your retirement funds to (dependent on what type of retirement account you have) and then lend out of that account.  As long as you follow the rules and don’t put any of the gains in your pocket, you may be able to defer, or avoid, taxes on the gains.  This means that you could lend to an investor at 10-14 percent and really build your retirement nest egg.  But you can’t lend to yourself or other excluded parties that are too close to you.  This means that investor A could borrow from investor B’s retirement account and then Investor B could borrow from investor A’s retirement account and both would get the funds needed for their projects while also building their retirement account balances.  Pretty cool, huh?

I know one investor who lives tax-free because of wealth he has built, and continues to build, in his Self-Directed Roth IRA.  This means that all the gains he makes will be withdrawn tax-free.  I find this to be a fascinating idea.

So go out and talk about what you are doing.  Be excited.  Be positive.  And learn about self-directed IRAs so you can talk about them with some knowledge.  This could be your ticket to all the private money you need to build your portfolio.  Remember, the first deal is the hardest.  But it is so worth it!  Let me know if I can help you.  The purpose of this blog is to help anyone who wants to read it, to succeed.  This stuff works and we are here to help.  Stay positive and “keep the main thing the main thing”!

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