As you read about how to borrow private money, you will begin to understand some essential facts about the process:
- Private money lending is a real estate investment option that doesn’t come with all the hard-to-fulfill terms.
- Several individuals may be willing to lend you money for your real estate transaction.
One of the safest and smartest ways to build wealth is by investing in real estate. With the proper knowledge and strategies, real estate investing can be a lucrative career or side-gig. There are several ways you can go about doing this, with private lending being just one. How does one go about borrowing private money?
Understanding What Private Money Lending Is
When one individual lends capital to another individual, it is considered private money lending. As an alternative solution to big banks and other traditional lenders, private money lending allows you to gain the funds you need to invest without all the strict terms and penalties. Private money lending is less risky than owning real estate, offering you a safe way to grow assets.
Knowing Where To Turn To Borrow Private Money
If you have decided borrowing private money sounds like something you want to try for your real estate investment, you’ll need to know where to turn. There are several individuals you might approach, including:
- Real estate investors looking to expand their portfolios
- Estate or trust fund owners
- Lottery winners
- Individuals with sizable retirement accounts
- Professionals with a high income
To find these individuals, you’ll want to take a careful approach. First, look within your immediate circle of family and friends. Maybe you have an uncle with a surplus of cash. He might be willing to loan you the money. Maybe your best friend recently won a significant cash award. She might be someone you could turn to. Keep in mind that doing business transactions with family or friends could get ugly, so you should be careful turning to those closest to you.
Second, look slightly beyond your immediate circle to the friends, colleagues, and family members of those in your circle. For example, your best friend might have an uncle who won the lottery. You could get his contact information and discuss a private loan with him.
Finally, there may be several individuals looking to invest in real estate with other investors like you. You likely don’t have a personal connection to these people, so networking could take some time. When you’re together with a group of people, let them know what you’re up to so they can look for lenders on your behalf. Check out a public record search and make some cold calls with potential lenders.
Structuring Your Private Money Deal Correctly
As you work with a lender for your private money deal, you’ll want to consider how the loan will be structured. If you’re participating in a buy-and-hold investment for real estate, these loans are typically structured like conventional loans. The lender will give the entire amount for the purchase and rehabilitation of the property, and the borrower will repay the loan in full, including interest. You can discuss terms, fees, and rates with the lender, though many are typically around five years or less. In some cases, the lender might refinance when the term is coming to a close.
If you are looking for a fix and flip loan, you might consider some type of profit-sharing contract. The lender will give the entire purchase and rehabilitation amount, and when the flip takes place, and the property is sold, the lender and borrower split the profits as outlined in the initial contract.
Real estate investors involved in building and developing can also structure a private money loan correctly to benefit both parties. Many traditional lenders don’t give money when development is speculative, so this is a great way to get a project up and running.
Private Money Loans: Tips to Borrow
As an investor you may be looking to close on a deal quickly, and you don’t need a 30 year loan for an easy 3-6 month flip. By choosing to work with a private lender you are given a bit more flexibility to work with. However, just like any other loan process, it is still possible to mess up, so here are a few tips on borrowing from a Private Money Lender:
- Be up-front and honest with your lender. If something from your past comes up from a source other than yourself it could damage the relationship and your chances of closing a loan. If you provide all the information that they request, rather than having the lender find it out later and asking you about it, it will save time for everyone, as well as give you a chance to explain your past rather than letting the lender make stronger judgments.
- Patience is key. Yes, private lenders are going to move faster than a traditional lender, but by being overly pushy and checking in too frequently or too aggressively you may actually be distracting the lender from getting the loan completed. Typically the lender should be the one following up with you letting you know where your loan is at in the process. So take a breath, and trust that we know how time sensitive the deal is.
- Keep things realistic. Having large goals are great to shoot for, but having realistic goals is even better. We want to see you achieve goals and not just claim you can do everything and more.
- Keep your word. This may go in line with keeping things realistic, but if you state that you’ll have a portion of your work completed before you request a draw you will be expected to have that amount completed. If you fail to perform you could hurt your integrity, and the relationship with the lender could also be hurt as well.
- Find an experienced local lender. You know how there is a “small business Saturday” to promote shopping at local stores in your community, so the money stays in the local economy? You can do the same with your lender, but you’ll also get the experience of someone who is invested in seeing the community you are working in thrive.
- One last tip to keep in mind: private money has different rules. No matter where the lending is coming from there are regulations and rules associated with it, and if you’re working with a private lender they may also have other rules to follow so make sure you know them, and are able to work with them in place if necessary.
Understanding How the Lender Gets Paid
Borrowing private money is different for every transaction made. Lenders don’t always earn money in a traditional sense with interest payments on the loan because they can develop their own terms. Instead, they can make money through exit fees, points, and joint ventures. You should always speak with private money lenders in-depth about how they intend to go about making money off your transaction.
Getting Started by Speaking With a Professional
Regardless of how your private money loan plays out, there are some things you should understand. First, you need to be honest with the lender about your financial past and current situation. Second, you should be patient and keep things realistic. Third, you should always keep your word, so you don’t put the lender in a difficult situation. Finally, you should speak with a professional lender to understand the process and what some of your options are. Get started with your loan by contacting the professionals at Capital Fund 1 today.
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