Posts Tagged ‘Real Estate Investing’

Private money can be used in a wide variety of real estate transactions. You can use it for buying the property, for rehabbing, for holding costs, or for marketing costs. In some parts of the country, you can borrow money privately for $20,000 – $50,000 and be able to pay for the purchase of the property because the price of houses are cheap. But in areas such as Seattle, where  the price of houses are so high, they are in the $200,000 – $500,000 it would be hard to fund these deals with private money. You will need to either find someone that has that kind of money available or put together a group of people and pool their money to buy the property. However, if you utilize private money in conjunction with creative real estate strategy like Subject To, Seller Financing, Lease Option, etc. it will be more doable to buy these high price houses. Then you don’t need to borrow a large amount of cash to fund these deals. There are so many people out there that have $20,000 – $50,000 that they can lend compared to $200,000.

When I buy a property that is in the $300,000 dollar range, I typically do Subject To so that I don’t have to pay off the underlying loan right away and then I borrow $30,000 in private money to pay for the closing cost, rehab cost, pay the underlying mortgage payments, and marketing cost. This allows me to buy the property with as little cash requirement as possible to cover all the expenses. And sometimes, I am able to put some cash in my pocket when I buy the property. This is a phenomenal way of utilizing private money.

So the more tools you have in your tool belt the better for you. Every deal is different. You need to use the tool that works for specific deal to get a better result. Same with private lender. You need to match them with the right property.  When you do this, then your private lender will be happy and everyone will be happy. You also need to tell your private lender where you are planning to use the funds so there is no confusion as to whether you spend it for something else.  Make sure that you spend that money wisely and accordingly because the worst thing that could happen is you run out of money to finish the project or not able to pay the mortgage payments and you default on the loan. Private money is available to you so that you can do the things you need to do to the property without having to use your own and be able to sell it quickly and make a profit.

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.

If I had a nickel for every time someone asked me that question I would have an extra million dollars just lying around and would be able to give it to someone to buy their house. Financing is really the key to opening up your investing business right now.

Over the last eighteen months or so the financing picture has changed drastically. In February of 2007 you could get a 100% LTV non-owner occupied loan with a mediocre credit score, no proof of income or assets and just a signature. Now if you can get funding at all, you have to have a great credit score, fully documented assets and income and a large down payment. Not only that but you need to have seasoned money for the down payment and reserves. The pendulum has swung back the other way almost to the extreme.

If you or your buyers are going to use conventional funding sources, you need to make sure to have your act together. Ensure that everything is documented perfectly. This is the main reason why it is much tougher to sell your rehabbed properties. Buyers are not prepared.  The good news is that if you buy the house right, you are sitting pretty to sell your properties creatively and to make a great profit.

This brings me back to financing, it is more important than ever to use private lending in your business. Learning the ins and outs of Private Lending can be the difference between thriving in this economy or shutting your doors and missing the best opportunity for wealth creation in our lifetimes.

Unfortunately most people don’t understand how to find Private Lenders, or how to be one for that matter. Investors are afraid to talk to people about what they do and ask them if they are happy with their investments. It is amazing what happens when you talk to people. You can find money coming out of the wood work. The other night I was flying home from St. Louis and chatting with a college professor about our lives and jobs. At the end of the 3 hour flight I had a potential new private lender and had sold one of my new courses about how to be a private lender.

Most people are in a position where they just lost some significant money in the stock market. Their mutual funds are stagnant or have gone down as well. People are afraid, very afraid. They don’t see any options available to them except a T-Bill that earns less than 3% annually.

I show them how they can earn a safe and secure return by lending me money that will be secured by real estate. I talk with them to find out their goals and determine if what I do will fit their criteria or not. I never try to force anyone into an investment. It will never work for either of us if I do. I am careful to stay well within the SEC and State department of securities guidelines.

I am careful to only approach people when I have a relationship with them rather than hitting someone up when I first meet them. I get to know them and their goals. I am not a financial planner. I do not present myself as one on TV or through what I say to people. By building a relationship you understand their needs better. You also stay well within the law, which is always a big thing for me. I really don’t look good in stripes.

Your assignment this week is to talk to people about your investing business and discover if they are happy with their investments. Find out what they earning from their investments. Don’t push them to reveal everything to you immediately; you can follow up with them later. Next week I will talk about what to say to get them to open up to you.