Private Money means Plenty of Money
Listeners to the Best Real Estate Investing Advice Ever Show: Thank you for coming to check out our blog! The direction our conversation went on the show tended toward private money and I want to give you a bit more here on that topic. Read along to see why I would loan to a complete stranger. If you missed the show you can find the link by clicking HERE. See older posts for other lessons we’ve learned along the way. Subscribe if you like what you read. My book recommendation for this post is The Millionaire Next Door by Thomas J. Stanley and William D. Danko. The people portrayed in this classic money book are your potential lenders.
That FIRST Private Money Deal Before:
When I’m asked what the biggest factor to our success has been, I generally state the fact that we took action and follow that with “PRIVATE MONEY”! You see, saving money on a firefighter and educator’s salary was slow and it took a few years between rental house purchases due to the need to save up down payments and renovations. See this post for more on those. We were still excited and believed in the goal so we trudged along working overtime and scraping together all the funds we could.
Private money was like gasoline on the fire we had been slowly stoking. In our case, private money found us. We talked with friends about our small business with excitement and enthusiasm and it got them interested. One couple asked us if we would be interested in partnering and we explained how a debt partner could work. This was based solely on what we had read because we had never done this before.
They were in! We didn’t have a lot of confidence so we didn’t even ask for the full purchase price and we funded the difference plus the repairs. Luckily we had some savings at that point. The most amazing thing to us was that as soon as we paid them off they texted us “go find another one of those”! We were taken aback. We tapped into our network and found another deal and this time we asked for purchase AND renovation funds. They didn’t hesitate. Now they were investing in US more than the deal. This may be the biggest difference in private money and hard money – two terms that are often used interchangeably. Hard money lenders are generally sophisticated lenders who know real estate well. This can be a good thing in that they are going to underwrite your deal. If they don’t want to do the deal, you may take that as a sign that it isn’t as profitable as you thought it was. Private lenders can be other real estate investors (some of ours are) and they will ask thorough questions about the deal before committing. But many are people in other industries who won’t have the same level of sophistication regarding real estate. This makes lending simpler sometimes but it puts the onus on you to underwrite the deal and make sure you understand the risks. You may have to do more “educating” of your lender on what the deal will look like and how their investment is protected.
Our non real estate investor lenders now typically lend after one text with an address and an estimated ARV (after repaired value). We tell them the amount and they wire the money. They get first lien position and love the returns. I tell you this to show you how this can seem so daunting at first but can become so easy. Gaining the trust of your lenders and building momentum is critical.
So what do you do if you don’t have experience? Go get some. How can you do this? Offer to help other investors for free. Just give them value. Maybe you know something about websites or marketing or painting houses. Don’t ask for them to give you something. By being close to them you’ll gain experience. Or bring a good deal to another investor and partner with them and let them bring the money and expertise. Even if you don’t profit, you’ll have a deal under your belt.
Your modern-day resume is what you post on social media. Make it smart. Make it positive. When you walk a property, take pictures and make a post about something you learned. Don’t get mired into politics unless they are more important to you than half of your audience that could be lenders to your business. My theory is that I’ll vote as my political contribution but social media is for family picture, adding value to others, and attracting deals and lenders. If you are posting polarizing articles, you could ostracize half of the network you have access to. Think about this from the lenders’ perspective if they happen to hold different political opinions than you.
How can you make your loan more attractive if you are having trouble getting anyone to loan to you? Why would I loan to a stranger? If the loan to value (LTV) were very low (50% LTV) and I had first position lien on a property I would like to own, I’d loan the money if everything else checked out (including a look at their social media). In this case, if they default I would have a house for half price. Do you see how this reduces risk for the lender? But how do you get the LTV that low? By getting amazing deals or by kicking in some capital of your own.
Where can you find the capital to contribute? Unsecured loans are risky but an option. Less risky: Take on an equity partner to bring some cash and you do the work. Look at everything you own. Do you have equity in a car? A boat? A retirement account? Collectibles? The ability to earn money from a side gig? Uber? Tutoring? Any place that you can find money. Recently access to retirement accounts has changed as part of the CARES act and some of the penalties have been lifted for accessing money in qualifying account types. Taxes still apply though. This is a temporary change and expires soon so act fast if this could benefit you.
Some private lenders don’t even know that they have money to lend. Seriously! Most of the people I talk to don’t know anything about self-directed IRAs or how to use them. If you learn more about this strategy, you may “create” lenders who didn’t even know they had money to lend. We gladly paid high interest rates to our lenders’ IRAs and then realized we could do the same thing they were doing and began lending to other investors we knew from our retirement account. Some of our lenders have become borrowers too. The rules prohibit us from lending to ourselves so this arrangement works out to be a true win/win. If you are interested in lending please reach out to us as we are co-lending with other lenders to provide loans to more investors and to keep our money working for us. This allows us to lend alongside other people who may not have enough funds to fund an entire deal or who may want to diversify amongst several projects.
Why does any of this matter? It matters because reliable private money that can fund quickly can be the difference in closing deals quickly and not closing them at all; the difference in getting great deals where timing matters and competing with the entire marketplace for properties that can wait on the slow money. Flaking out on a closing with a wholesaler because the funds weren’t available can mar your reputation in the relatively small world of investors. Don’t let this happen. Communicate regularly with your lenders without being annoying. You need to know if they have a change of heart or finances before you need them to fund a deal with short notice. Eventually you will develop multiple private lenders and can rotate between them and have backups. If you have several people express interest, nurture all of those relationships so that one can be utilized if the first cannot fund. This should be the ultimate goal: to have several lenders whose money you can put to work on different deals but not a lot of lenders that you’ll never need to tap. Later you will begin to eliminate lenders who are more hassle to deal with or who charge higher interest rates and add more that work well with you and your business. As you build that track record, you become less of a risk to lenders and thus may be able to pay lower interest rates as risk and interest tend to be directly correlated.
If you want to read more about our inspiration and our “Big Why” you can read what planted the seed.
If you take anything from the podcast or this post, I hope it is that there is plenty of private money available. You can tap into it. It may be on your first deal or your 20th deal, but it’s a tool worth developing. Private money has absolutely been critical to our business. Although we’ve borrowed and paid back somewhere close to two million dollars, we have re-used a lot of those dollars and many of the lenders could not fund that all at once. It was borrowing and paying-off and borrowing again to get to that amount. So rather than thinking you need a contact with 2 million in liquid cash, think more about needing someone with 75-150k cash (depending on your location and cost of deals) or retirement accounts that can be self-directed. You need to believe in yourself and your ability to help lenders. You need to come to understand that you have something to offer lenders; not just something you need from them. You are offering an opportunity! Best of luck and as my grandfather always used to say, “keep the main thing the main thing.”