Posts Tagged ‘Private Lenders’

Private money is different from hard money. Hard money is people who are in the business of lending money. They lend money to real estate investors on a short period of time (3-12 months), they charge a high interest rate (12% – 20%) as well as points (2-5 points) upfront. And they only lend up to 70% Loan-To-Value (LTV).

Private money on the other hand is people who are just looking to get a higher rate of return on their money that they don’t normally get somewhere else. If they have money on savings or Certificate of Deposits that are only earning  3% a year and you offer to pay them 6%, they would more likely to want to invest with you. The added benefit to them is the fact that their money is secured by real estate so they feel like they have a better control of their investment. And they don’t charge points upfront. 

Also with private money, they are not short term. They want to keep their money invested for as long as possible and don’t like to turn it over and over to where you pay them back shortly. With hard money, they like to turn it over immediately because they make money upfront plus they are earning interest.

When you work with private lender, you can design your own program that works for you. You can set your own terms whether you want 6 months or 60 months, you can set the interest rate that you want to pay 6% – 12%, whether you want to pay interest only or fully amortized, and whether you want to make monthly, quarterly, annual, interest accruing, or balloon payment. Once you decide on your private lending program, then you can match your program with the right private lender.

That’s the benefit of working with private lender versus hard money lender. You have more flexibility and you’re not subject to their own criteria. They are typically more lenient than hard money lenders and so they are much easier to work with. They don’t require credit check like most hard money lenders.

When you utilize private money in your real estate business, it allows you to take your business to a new level. It allows you to leverage other people’s money without having to use your own or use your credit. There is no limit on how many properties you can buy. Unlike banks, you are limited to the number of loans that you can get which limits your ability to buy more properties.

I received an email from Tim Redding the other day. He bought a copy of my Private Lending Essentials CD set the about a week ago and just received them in the mail. Here is a copy of his email:

“Hey Paul, I got the CDs in the mail yesterday and I listened to the first two. I believe what you say about finding private lenders but I am having trouble getting my head wrapped around one thing. Why would someone want to lend money on real estate when the value of real estate is going down all over the country? How can I talk them into lending me money that is risky like that?”

Tim, thanks for sending in your question. I first want to address the underlying tone of the question okay? You seem to be thinking that all real estate is risky and that all real estate values are going down. I can see how you would be of that opinion based upon the overall negative attitude regarding the Economy and Real Estate in the news.

If you think this way then you will not be confident in your business or in the deal. That will show through to the potential lender as doubt and lack of confidence. You will not be successful finding lenders with this attitude.

First realize that real estate values are local not national. I know of specific areas that have increasing values right now this week in my target market. The increasing values have slowed down in these areas but not stopped inching upwards.

Another thing is that you cannot nor should you ever “Talk” anyone into anything. I explain the benefits and inform people what is in it for them. I let them determine whether or not they should invest based upon their own criteria and values.

I show them a professional credibility kit and a professional property package. The credibility kit shows them why work with me. The property package informs them of the pertinent deal information including the property value, loan to value and my intended exit strategy. It explains why this deal may be right for them.

You are really helping people by offering them the opportunity to earn a good rate of return on their money. If you look at it as an exercise in selling rather than assisting someone meet their goals then you are only looking at it from a selfish perspective and people won’t trust you.

I played racquetball with a friend the other day, he was planning on moving his IRAs over to a self-directed IRA last summer but he let it slide. I reminded him several times last summer but never pushed him. He was telling me that he lost several hundred thousand dollars last September and October.

Do you think he would have minded if I had been a little more aggressive in reminding him to switch to a self directed plan? Then he would have been a little ticked. But he would have been thanking me now. Instead he decided he can’t afford to take the money out of the market because he wants it to recover before he does.

Please remember that you are only helping them by getting their money working harder for them. By adjusting your attitude and mental thought you can do many people a lot of good. By working with them properly and utilizing the proper professionals you are the hero in today’s economic climate.

I am amazed by the fact that more often than not I will attend a networking meeting or a REIA club meeting and always hear people stand up and say “I am a real estate investor and I am looking for private lenders on this property I am buying.”

I am amazed because in many states, and in most circumstances, doing just that is against the law. Now, I am not one of those hard nosed guys who think that everything is black and white. If you jay walk or speed you are a dirty rotten law breaker.

I was a cop while I was in the military, but I have been known to speed occasionally, to tip back a few too many beers at parties, and to walk across the street in the middle of the block. But overall I am a law abiding guy, especially when it comes to business and borrowing other peoples’ funds to do my business.

According to the SEC, if you raise money for your business by selling securities you need either to register your security or file an exemption. Typically, exemptions fall under Regulation D – rule 504, 505 or 506. Which one you file depends on how much money you raise.
Most small business people raise money using the 504 exemption, with which you can raise up to $1,000,000 in any 12 month period. Also, in some states you can advertise for investors provided that you only advertise for accredited investors.

An accredited investor is someone that meets the criteria defined in Regulation D Rule 501. They have a net worth greater than $1,000,000 or an income of $200,000 per year for the last two years as well as the expectation of the same income for the current year. If the investor is married then they and their partner need a combined income of $300,000 per year for the last two years, with the same expectation for the current year.

Many states do not allow advertising at all for a rule 504 exempt investment. When you ask for money in a meeting you violate that guideline.

Often I get asked if there are people around that are enforcing that law or if it is just some technicality that no one cares about? The answer depends upon your state. We have a section of Washington State where there are state employees that are actively looking for companies that violate this rule. Other states, no one really cares until it is brought to their attention.

Most often it is just used by the prosecution if something goes wrong. Let’s say that you borrow money from a lender and cannot pay it back on time. You get your property foreclosed on and the lender then sues you for fraud. The prosecutor will pile on charges to ensure that something sticks. Kind of like being called in front of congress on a political witch hunt. You have nothing to hide so you go there and tell them everything they want to know. But you miss something or you remember something wrong and then you are convicted of lying to congress. The first charge is thrown out but the others remain and you go to jail or get fined.

So I am telling you that before you advertise you need to be aware of what is legal in your state and then stay within the guidelines and rules. If you don’t you may pay for it in the future.

Besides, lenders who know about these rules will not work with someone that does not. If you don’t know this they will wonder what else you don’t know. The good thing is there are ways to advertise and still stay on the right side of the legal line. I will touch base about that next week.