How to Find Private Money Lenders for Funding Your Real Estate Deals
There is an old adage that says it takes money to make money. Just about everyone has heard this comment, and it holds merit. However, when it comes to investing in real estate, there is one tiny factor missing from this statement—nobody says it has to be your money.
Whether you are investing in a rental home that needs rehabbing or you are looking to invest in a turnkey home, private money lenders (PML) can be your saving grace. Utilizing a private money lender allows you the ability to work with a much larger scale than you are able to and—in many cases—can help you surpass any blips on your previous credit history as a PML wouldn’t scrutinize a credit score nearly as much as a bank.
Who Are Private Money Lenders
When considering private money lenders, one thing is for sure—they are a much more generalized category than financial institutions. Private money lenders are simply private individuals or companies who are willing to loan money in a more informal manner. This can be anyone from an anonymous lender established by a mortgage broker to a family member with a little extra cash lying around. Most of these private lenders tend to require secured note and/or deed of trust on the property itself. Of course, this can depend on who you borrow funds from—Uncle Bill may not require it, being a trusting family member, whereas the PML you secured through a third party may demand such protections prior to handing over any funds.
Before you can begin to approach a network of PMLs, you first need to determine whether this deal will require the PML to be the primary or secondary lender/investor. Are you looking to finance a property through a bank, but require extra funds to rehab? Do you have a cash net yourself that will be utilized but are falling just short of the amount required? Or are you looking to contribute as little to the purchase as possible, allowing the PML to be the primary source of funds?
Knowing the answer to whether the cash you are requesting will be the primary or the secondary source of funds will help you understand what type of PML you are looking for. If the private money lender is going to only supply a small portion of the funds, you can use more informal methods to seek out a candidate. If you are looking to have the primary source of funds provided by a PML, then you need to seek out other avenues for your search. Asking Uncle Ben for $100k when he is a retired plumber most likely isn’t going to be a successful venture, but if you’re only looking for $10k, it might not be a completely futile undertaking.
Where to Find a PML
Once you have determined what type of funding you are looking for—primary or secondary—then you are able to begin looking for a PML. On occasion, you can find a PML simply through personal relationships.
Perhaps you have a distant cousin or other family member who tends to fund start-up projects or has their own real estate portfolio. Or maybe Aunt Susie is friends with a gentleman who is looking to expand his investing from stocks to something more tangible and she is able to make the introduction.
Networking is a great way to find lenders, too, albeit this takes quite a substantial amount of preplanning. Attend local meetings of real estate investment associations, visit open houses and meet the realtors. Find groups which mentor or coach single-family rental home investors. Knowing and keeping in touch with real estate professionals will allow you to shoot out a few emails or make a few phone calls when you have a good deal on the table. Networking with those who are involved in the industry will give you access to a pool of lenders you may not have found otherwise.
Websites like BiggerPockets.com or LendingClub.com are great places to find a PML as they allow you to post your deal and await responses. Other sites, like DirectMail.com or ListSource.com give you access to research “private party loans” that have been registered in your area over the last six months.
How to Pitch a PML
Pitches vary by the formality of the relationship. If you are friends or family members, then obviously your pitch will be different than cold calling a lender you located online. Regardless, you need to create a business plan. Just telling someone you have a good deal isn’t going to be enough when asking for something a little larger than $50. You need to prove it to them. Organize a packet that shows the analytics for the property you are looking at. Visually seeing their return on investment (ROI) rate is more likely to help you secure funding than simply saying “We are going to make money.”
If you are cold calling or direct mailing lenders you located online, you will need to establish an elevator pitch. This is a short summary of your intentions that will grab their attention. Private money lending is more of a relationship-based process than a simple bank loan. You need to earn trust, develop a connection, and display a sound track record. Once you’ve got your foot in the door, you are then able to discuss details and go from there.
How to Avoid Potential Mine Fields in Raising Private Money
When seeking private money lenders, it is important to be familiar with certain aspects of the law. There are restrictions on PMLs in some cases that are highly monitored by the SEC. In fact, up until 2012 it was actually illegal to advertise for a PML unless you were a registered, licensed broker. Even today, there are strict regulations regarding using 401ks, pension plans, or IRAs. Knowing these laws—and consulting with an attorney versed in the aspect—will help you avoid any tax liabilities on both your part and the lender.
Using PMLs for financing your investment properties is a great way to expand your investment portfolio quickly and easily, as you are not operating under the strict restraints of a financial institution. While finding the funds can be daunting at first, securing a solid network of real estate investment professionals will help guide you on the path to creating a pool of possible PMLs and filling your portfolio with successful ventures at a faster rate than going at it alone.