By Trevor Mauch
Let’s face it. Getting financing for your real estate deals is a good bit more challenging in 2008 than it was 2 or 3 years ago.
In the past investors had their pick of financing options. From conventional bank financing at 110% LTV (loan to value) to owner financing and even private money.
But when you look at today’s marketplace for investment real estate financing the picture, you might be inclined to see a much bleaker picture.
Today it seems that conventional real estate investment financing has all but dried up (unless you have 20% down), hard money is increasingly more expensive (12-16% and higher in many cases), and the overall credit crunch is trickling it’s way down to real estate investors like you and me.
What If You Had More Cash To Invest? What Could That Do For Your Business?
While conventional financing options are all but gone for investors and hard money is getting more expensive, many are finding that private money is actually getting more and more attractive…
- The economic slump,
- The downturn in the stock market,
- Consumer confidence is down,
- Real estate markets are steadily declining…
All of these factors sound terrible, but they’re actually excellent for investors who know how to leverage with these things to their advantage. With the economy in a rough spot, the stock market continually taking hits, and interest rates (for CD’s, savings accounts, money markets, etc.) at meager rates… I’d urge you to consider that this is actually the perfect time to begin to recruit private money lenders for your real estate investing business.
Think about it…
People are losing money in the stock markets, are earning peanuts in their investments, and don’t feel confident enough in themselves to begin investing in real estate.
It’s almost the “perfect storm” for private money… however, most investors are still struggling to raise the cash needed to complete their real estate deals and grow their business in this buyers market.
What if you had a small list of private money lenders who were ready and willing to write you six figure checks at a moments notice?
Well… that’s the secret to many of the most savvy investors around the U.S…. and it’s a lot easier than you may think.
4 Essential Factors To Remember For Private Money…
1. You can be creative with private money
Many investors are confused between Private Money and Hard Money. While they’re pretty darn close… they’re not the same.
Hard Money is traditionally similar to conventional financing in the sense that there is an application process, you are usually charged an interest rate and upfront fees (or points), the terms are dictated by the lender (meaning you essentially have no power), and they are very expensive (usually from 10-16%+).
However, Private Money is a bit different. Private money lenders are usually individuals who have some extra money sitting around and want a better return. It could be your local dentist, another real estate investor, a retiree who is tired of his 401k earning negative returns, etc. Essentially, a private money lender can be anyone. Even better, the terms are highly negotiable and tend to favor you (the investor) more than hard money loans.
When you’re borrowing from a private money lender, you can basically set the terms… then tweak them to further fit BOTH of your goals.
2. Structure private money loans so they are easy to maintain and increase cash flow
A stumbling block many people get when trying to talk to potential private money lenders is that they are stuck in the mindset that a private money loan has to be like a conventional loan (i.e. – monthly payments, PI, etc.).
Well… that shouldn’t be the case. Savvy real estate investors need to be creative not only in how they set up their real estate deals… but also in how they set up their private money loans.
While you as a real estate investor might think that people will always want monthly interest payments… that’s not usually the case. For example many private lenders will agree to be repaid with a singlular payment when the property is sold (with a max number of months pre-built into the loan).
So, rather than making 12 separate interest payments if it takes 12 months to sell… why not make just one payment (principle + interest) when you sell? Isn’t this so much easier from an admin standpoint? And lenders love it often times because they get one big ol’ check in the mail rather than an array of smaller checks. It’s just easier all around.
You should structure the loan so it works out well for both of you, and try to ensure there’s there is the least amount of maintenance and administration possible for everyone involved (you’ll thank me later).
3. Avoid “pooling” investors’ money together
Many new investors just don’t think of this “little detail” until they come face to face with it… and then panic because they don’t have any idea what to do.
Let’s say you need $200,000 for a property acquisition… but you don’t have a single lender on call who can bring the entire two hundred grand to the table. So instead, why not combine the resources of a couple of your private money lenders… one for, say, $150,000 and another for the remaining $50,000.
Whoa, hand on there a second, partner.
In most cases it’s usually not a good idea to lump their funds into one single loan – and might even be illegal.
First of all, it may get confusing come time to make payments on the note (no biggie… but a bit of a pain).
Next, what if you default on the loan? Who gets to foreclose? Who actually owns the note? That could be a sticky situation for the two lenders… and for you if that were to happen.
Thirdly – and I won’t go into detail here – but when “pooling” funds together, you can often get into a sticky mess with securities laws without even knowing it. Ignorance is most definitely not bliss in this case.
It’s usually advisable to place one lender (the one with the largest sum) with one note in 1st position (they get lien on the property just like a bank would). Then, place the smaller lender in 2nd position (they get a separate note and a separate lien on the property… but they are behind the 1st position)
4. Always have integrity and do what you say you will
This should go without saying, but the key to successfully recruiting and keeping private money lenders is to always do exactly what you say you will do, WHEN you say you will do it..
If you promise to pay 10% on a 16 month note with an option to pay it off early without penalty… well… you better live up to your word and do just that.
If you say the property will sell within 6 months and you promise your lender they’ll get their money back when the property sells (with interest)… you better do just that… and ensure that you sell as close to on-or-before that 6 month mark as possible.
Here’s a good rule of thumb: Treat your private money lenders as if they were your grandparents.
Just ask yourself: “Would I do this same exact thing with my grandparents? Would I feel good about it?” Many people are afraid to ask their family members to be private money lenders because they’re scared of their own ability to make wise investment decisions. But often the same investor won’t bat an eye at having someone else’s grandma make that same loan to them. More than just a tad unethical, don’t you think?
The bottom line is this: If you always do what you say you will do, not only will you be more profitable in business in general, but you’ll enjoy all the private money lenders you need, hungry for the opportunity to lend you money. It sounds crazy… but it’s true. These people WANT to lend their money out! They’re investors!
But you only get to mess up once. The first time you fail to follow through and do exactly what you say… well, you’ll probably ruin your chances to recruit any private money lenders in the future altogether.
So, whether you’ve realized it before not… if you’re going to be successful in today’s real estate market… you NEED to have a private money lender on your side – and ideally several of them.
Private money gives you the ability to act fast, have flexible terms, access the cash you need for your deals, and last but not least… it lets you keep your own cash liquid.
If you don’t have any private money lenders, I urge you to go out and recruit some today.
And remember…of everything covered in this article, the most important is #4. As long as you’re honest and do what you promise throughout the entire process… getting and keeping private money lenders should be a walk in the park.
The REI Brain