Private Money Lenders: Who They Are How to Find Them
Get the Ultimate Beginners Guide to Real Estate Investing
Private Money Lenders: Who They Are How to Find Them
Real estate investors spend days, hours, weeks and months finding the next deal. Some get lucky and find their deal within the first few prospects but for others it make months viewing prospect after prospect to finally find The Deal. Now comes the second part of the real estate investment equation:
Without money the real estate investment equation is incomplete. Real Estate Investors need to actively work on bringing in private money lenders to both tie up their deal and fund their real estate investment opportunities.
(Before we get too deep in this post, we want to invite you to download our book The Ultimate Beginners Guide to Real Estate Investing which will help you build a solid foundation for your financial future. In other words you are going to learn exactly how to get started building wealth with real estate! To get the book, justclick hereand join BiggerPockets, the free real estate investing social network!)
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
Definition: A private money lender is a non-institutional (non-bank) individual or company that loans money, generally secured by a note and deed of trust, for the purpose of funding a real estate transaction. Private money lenders are generally considered more relationship-based thanhard money lenders.
Check out the Webs Largest Directory of Hard Money Lenders Right Now, For Free! VisitThe BiggerPockets Hard Money Lender Directory!
One of the biggest mistakes that new real estate investors make is that they spend an inordinate amount of time learning about finding and typing up deals but a small amount of time on how to raise equity capital from private money lenders. Its just as important, if not more important, for real estate investors to understand the ins and outs of raising money as finding the deal. Finding a deal is great but if you do not have earnest money to tie up a deal or funds to purchase it, then all that time and effort is for nothing. (Ankit Investing Life Rules: Work Smarter Not Harder). When you make an offer on a piece of property, it is expected, and usually required, that you place a earnest money deposit down with your offer. If you are currently living paycheck-to-paycheck, coming up with even a few hundred dollars can be a big hurdle in launching your real estate investment business, let alone thousands needed for a purchase. Hence if you work on raising capital from private money lenders while locking up deals then you will have a greater chance for investment success.
The goal of this post to help you learn how to raise capital from private money lenders so that you can successfully tie up and invest into real estate projects. The first question that most investors come up against is who should I approach to raise the equity capital? Lets try to answer that question
The primary investor circle is composed of Friends & Family. Many real estate entrepreneurs/investors (okay lets face it we are all investors whenever we raise capital for a new investment) turn to friends and family for their first funding needs. Friends and family financing is popular because it is easy to get in front of these people who know you best and they are positively inclined to say yes. But there are negative parts of raising money from friends & family as they may not be sophisticated enough to know what is a good deal and what is a bad deal and this can lead to problems when a deal goes sour. Hence when you take funding from friends and family by very clear about the risks and downside.
I would also suggest only taking capital from friends and family members who can afford to lose the investment. That way, if the investment does turn out to be bad, at least you wont lose valuable relationships. In addition, friends and family often cannot come up with a lot of capital so friends and family can get you into business by providing you initial earnest deposit money so consider this source your angel investment source of funds. The money from friends and family will give you time to create value by locating and locking up deals so that you can either raise additional money from this circle of investors or raise money from secondary and third party circle of investors.
A really good BiggerPockets article that talks about how to raise money from your friends and family isRaising Private Capital: How I Raised $50,000 over Dinnerby Arthur Garcia
The best way to explain this circle of investors is to draw an analogy to LinkedIn Connections. When you login into your LinkedIn account and look up a person that is not your network then on the right hand side of the screen you will see how you are linked to that person from other people within your network. When you are linked to a person directly through one of your current network contacts then that is said to be a second connection.
The secondary circle of investors consists of the Friends and Colleagues of your current primary circle (Hint:the bigger your primary circle then the bigger your secondary circle of investors; get out there and make more friends and contacts through theBiggerPockets Forumsand other social networking groups). This is the second best source for raising capital compared to the third party circle as this group will be more receptive to listening to you given that you have been provided a nod of approval from your primary circle mutual contact.
In addition, this circle is a bigger capital pool as there are more people in this group than in your primary circle which will allow you raise equity for your investment projects once you have locked up your deal using the primary circles capital. There are negative parts of working with this group as it is likely to take more time to raise money from this group as they are less positively inclined to say yes as they do not know you personally. To raise money from this group, you will need prepare to an investment presentation and spend time meeting these investors at luncheons, happy hours, and dinners.
Learn how to raise money from your secondary circle through this great Biggerpocket Blog Post:How to Raise Money Anytime, Anywhere. Even over Chicken Wingsby Clay Huber
In your third party circle are investors that are most removed from your network as you dont know them personally in any manner. This circle is the biggest capital pool that you can access but it takes the longest to convert them into capital partners. The key question that comes into the mind of real estate investors is how do I find these potential capital investor? To help bring clarity to this question, I will provide two ways on how to reach these potential investors:
You can utilize websites such asBiggerPockets MarketplaceLending ClubProsperGo Big NetworkorLendpostto post your investment opportunity and actively contact potential third party capital investors.
Please make your contact is within the confines of the Securities and Exchange Commission at both the federal and state level.
This a guerilla approach to getting in touch with potential capital investors wherein you work with a list broker such as Melissa Data and Click2Mail to ascertain a list of potential investors who match your pre-established criteria of Median Household Income, Net Worth, Likelihood to Invest, and Responsiveness to Direct Mail.
Use this article as a guidepost as you work on raising equity dollars. Balance your experience with your capital timeline needs as you consider who you should approach for your equity capital.
I would love to hear your thoughts on how else you can approach private money lenders. Leave a comment, thought or suggestion below.
Join BiggerPockets and getThe Ultimate Beginners Guide to Real Estate Investingfor FREE – read by more than 100,000 people – AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly!
Discover the 10 Most Lucrative Real Estate Niches,
Learn how to get started with or without money,
Explore Real-Life Strategies for Building Wealth,
Sign up below to download the eBook for FREE today!
Ankit Duggal(G+) is the Investment Director of aNew Jersey Income Operating & Consulting Company. Ankit is a seasoned value investor who enjoys achieving a zen through surfing, hot yoga, and snowboarding.
The Pros and Cons of Becoming a Hard Money Lender
How I Find Private Money Lenders to 100% Fund My Deals ( How You Can, Too)
8 Things Real Estate Experts Wont Tell You About Hard Money
Borrowing from friends and family can be great when things go well. However, If things go bad, or payments are late, its a sure way to loose friends and make the holidays uncomfortable around family.
Agree entirely. Hence it is important to make them understand more than anyone the risks associated with the investment. They need to understand that its not a guarantee rather an investment. What is the best method you have found to advise your family and friends of the risks of the project or when things goes bad?
Agreed! Dont borrow from friends and family. Its not worth it!
Ankit this is an Epic post. Ive probably used circle one, and now circle two but never the third yet. Im building my confidence to start working that direction ? Thanks for the great article and keep up the great work!
Thanks Brandon. Epic is really kind. You will do great reaching out to third party investors. Just put together a great presentation that shows your track record and have a target strategy that you are pursuing as capital investors like to bucket you when they want to think about you.
Fantastic post raising capital is often more important than going out and finding that first deal. No money to start with usually means no money to finish with! Im at the stage where I move more deals coming than I have capital for not a bad place to be. I also find that showing potential lenders a current flip youre working actually meeting them at the property can go a long way in establishing credibility.
Michael you are absolutely correct. Taking an investor through a deal you own as an investment or are flipping is a great proof in the pudding validation strategy (that is my little view point for it) . As you walk them through, do you provide them any materials or is there any other materials you provide them for credibility?
Ill direct them to my website early on in the introduction process to establish credibility, but I dont have anything for them if were doing an actual walk-through except for perhaps some before photos if its near completion.
Great idea. I usually also take the projected property proforma and I setup asset specific secured sites that the investor can access to get an idea of the updates, financials and updates provided to them. So that is a good thing to provide to them
I have a question, how can i convince lenders when i have no credibility? is it possible to do so?
Awesome post, Ankit. One of the best Ive seen to date on the topic. Thanks for putting it together and to Brandon for the neat little circles.
Thanks Josh. That is huge compliment coming from you but it was Brandon neat little circles that made the post amazing. So thank you Brandon for putting those together and making this post awesome.
Great post. Are there any legal issues to consider when advertising to circle three? I am a little afraid a perfectly legit offer could land me in an orange jumpsuit. Cant imagine, rates way better than CDs would violate any laws, but you never know
Jared that is an awesome question. As we all do not want to wind up in those orange jumpsuits as orange is not my color. You need to be cognizant of the SEC rules of your state and federal level to make sure that you have the proper disclosure and process & procedures requirements followed. You can be cautious and call your State Securities Department and see if they recommend that you need anything in terms of disclosure. But in the meantime if you want to read more about the subject then read the Reg 504 and Reg 506 within Regulation D.
Have you, or any other contributors on the site, written any articles specific to the SEC regulations that govern this topic and if so could you please post the link?
Ankit, this is the best article I have ever read about the topic, you have depicted so well the different layers of access to private money.
The family layer is certainly the primary and more logical, but I personally dont feel comfortable with it. Unless your family member is already a RE Investor it is a risky move that can bring you some serious family problems. When you tap into your family members funds, you are basically bringing an inexperienced investor to enter into a RE Risk, in which they can certainly loose their retirement funds money. In my local REI Club, Im continually listening success stories in which a family member made the transaction possible loaning 100% of the acquisition. And this even worst because you are inviting an inexperienced person to the circus pretending that he/she assumes 100% of the risk, when the professionals just take between the 65% and banks up to 80%. To me, this is not good family manners.
Anyway, Im working hard on the second and third layers and will use your good advice to approach them on a smart way. Thanks for sharing this valuable information with us.
Thank you for the kind words. I appreciate the compliment. You also need to thank Brandon as he helped make the article even better with the images and being an awesome editor.
I agree with you that bringing in family money is messy at times so it is best to approach with caution. Keep working hard on raising money and I will try to add a post in the near future on how to draft your fund raising presentation for third party investors.
I have several questions please reply asap I would greatly appreciate it.
Great article. Did you ever end up posting on how to draft a fundraising presentation?
Im so glad to have run into this post! I have been stalking this site for about a year now and have always found awesome information.
My situation: After raising my own cash to cover appraisals/home inspections and binders fees, I also invested 12,000 with a private fund manager to secure funding for the deal. The deal consists of 2 quadplexes in North Florida which would provide a net cash flow of 1200$ per month. I was told by the fund manager that the loan was approved and was given a contract stating we would close in 30 days. Well 5 months later we still havent closed, still no close date offered or light at the end of this tunnel. First I was told they wanted to wait until after the elections. Then it was the fiscal cliff. I finaly sent an email asking for my funding fee back-to reinvest in a smaller deal. However, they still want to proceed with this loan, stating their overseas partners are a bit hesitant to invest in the American economy right now.
Its all just starting to sound like an excuse..
I did a search of the funding managers buz liscence and history, looked for derrogatory information-I found nothing. I even pulled up their primary residence/title/deed/taxes and used google earth to put eyes on the building (the buz is run out of their home)
I beleive if it was a scam, they would have stopped taking my phone calls by now.
Im a fairly new investor, any advice/comments would be greatly appreciated.
Has anyone used Private funding before and how long did it take to secure financing?
The author mentioned Please make your contact is within the confines of the Securities and Exchange Commission at both the federal and state level can someone explain/go into detail on this. Is this some sort of list I can review.
Let me see if I can provide some feedback to your issue. Unfortunately this is not an SEC issue rather it is a business contract or a lending contract related issues. Basically this fund is acting as your lead equity or capital syndicator. I have used private funding in the form of hard asset financing/bridge loans and it took about 30 to 60 days to come together. I have never heard of something like this before. Why dont you just request your $12k back and go to another lender. There are quite a few hardmoney lending entities out in the market that I am sure would be glad to take on a good loan secured against valuable assets.
I officially requested my funds back a few days ago. They replied as usual, we are still proceeding on this loan in a positive manner
All in the same email Im being told that they are in a holding pattern and that they are trying to shed a positive light on the American economy to their overseas partners. Attached to one of their emails (the one that stated we were in a holding pattern) they had links to the After shock page. Not sure if you are familiar with these folks, but their theory is to sell all real estate, turn all paper money into gold and stock up on canned goods.
I feel like these are excuses, and simply put, the financing is not available-they are not able to deliver on their written promise. Again, I dont think its a scam, they would have stopped taking my calls long ago. Ill check out the web site you mentioned and see about securing other funding.
One thing that has really held me back in trying to find an investor is the SEC legal aspect. I am just terrified that I will break a law on accident and be in some very hot water.
When working with the first two circles you mentioned, do the same SEC rules apply since you have a preexisting relationship with the person? Does this mean that they dont have to fall into the accredited investor bracket? Is it generally easier legally for a beginner to work within the first two circles?
If you could offer any insight into this I would greatly appreciate it!
Thanks for the kind words. Here is my understanding on the SEC rules. If you are raising less than $5.0 million per year then you can use the 504 Reg D exemption wherein you can raise money from 45 unaccredited investors. Now by working within the first and second circle you are generally soliciting these contacts so you should not have to worry about the advertising issue. Now my only recommendation with the second circle contact is have three forms of contact with them over a 90 day period prior to having them invest alongside you. So consider that a cooling off period so that they can vet you properly as an operator.
Regarding Nicks question about which circles to stay within, I teach investors how to make double-digit secured returns by loaning out their own funds, and funds of their relationships within the first two circles. I dont teach multilevel marketing but it works that way because everyone knows someone. As a private lender myself, I have found that once my partner and I start making money together by making small private loans to RE investors, they want to bring more principle to the table AND they tell their friends. Once you foster the new relationship, you have just gained a new source of funds whereby you can go make more private loans.
I dont like the third circle because you need to have a large amount of deals if you start advertising for funds. Speaking from experience, I have been overrun by money and not enough deals to fund. I teach my guys to build their private lending business one loan/borrower at a time and make safe, consistent, double digit returns doing it.
Question Lee, how does this plan sound. Borrow 120K, max 5 year plan. Interest only payments of 1,000.K monthly. Total 60K return plus 10% bonus on initial investment. Secured by deed and life insurance.
Although the devil is in the details, at inital glance, looks like a solid deal profitable and secured(if you are the lender). I am kind of a deal junkie, so the more info you give me the more I will review.
Be aware of too long of a term because that subjects your collateral to valuation considerations.
Lee, I would be the borrower here. I plan to occupy this foreclosed home and that is one of the securities. As to terms, just looking to take time to do repairs and let the market stabilize to get the most return on my investment. Home now selling at 119K, taxed at 282K last year. Agent says offer less, bank is desperate to sell. Thoughts. Jeff
I realize that this is an aged comment, but maybe others will find value in it. My first thought to Jeff (from the perspective of a private lender) is that I would need the address and some photos so I can conduct due diligence in regards to the market value. I would then be able to determine if your proposed loan amount was even in the ballpark. Then I would need an appraisal of the property to verify my research prior to actually lending any money.
Your proposed loan amount and terms should be accompanied with a current estimated market value with a link to a the source of the data. How about a quick little spreadsheet of recent sales in the immediate area (NOT listings) which you can easily get from a site like Zillow, so that the private investor/lender can immediately verify what you are telling him (or her).
Additionally, as a private investor I would like to know if the property need repairs or has it been recently updated or does it still have decor from the 1970s. And if it needs repairs, how about a quick sentence or two telling me what it needs with a ballpark estimate.
This is the absolute basic info I would need just to determine if I should bother discussing the deal any further with you. Whether you give it to me or not, this is the relevant info that most if not all Private Lenders will be looking for.
Ive always been a firm believer that I do whatever I can to make it easy for people to give me money. Oh and dont forget the oldie but goodie, He who holds the gold makes the rules.
You seem very knowledgeable and I would like to make contact with you, have a few questions on investment loans. Do you have an email account that I can contact you on.
Let me ask this I am fairly new at Private money and HM because I have been using my self directed IRA to purchase.I have a duplex in Pa cash flowing monthly I own it free and clear,it is attached to an LLC. Could use this as leverage to get a private lender or HML to loan against this property to go out and purchase another? If yes how would I structure it ithe the lender?
First question back to you: The duplex that is owned by the LLC; is that LLC owned by your LLC?
Depending on that response back I can give you a better idea on how to structure the purchase transaction.
Hi Ankit The property is attached to an LLC that I purchased with my IRA
hence- I own the LLC being held by my self directed IRA
The LLC with the property is an entity that sits alone.
The LLC is owned by your self directed IRA and the property is owned by that LLC. If that is correct then you need to find a non-recourse lender to give you a cash refinance but that money would have to go back into your IRA and then you would have to use your IRA and another non-recourse grade loan to buy a new investment property. There are lenders out there doing non-recourse lending to IRA. Just be cautious of a UBT tax that may apply to your rental cash flow stream.
To consider making yourself more attractive to potential investors consider that they should be concerned as to what happens to the funds they invest with you if you are not around to complete the project.I recommend that you purchase a life insurance policy in the amount that you think you will be routinely your investors as beneficiaries of that policy
For examplelets say you know that you will be needing to borrow a total of $300,000 to fund your project and that you are targeting 3 private individuals to loan you $100K a piece.You should have a $300,000 life insurance policy and you will name each of these individuals as beneficiaries in the amount of $100,000. When the project is complete, you have sold the property and returned the capital along with agreed upon interest to your investors you remove them as beneficiaries of your policy, make your firm beneficiaryand than when you are ready to begin another project repeat the process
I think this is a very nice touch that demonstrates your thoroughness and professionalism.I think it would provide the potential investor with a high degree of confidence in your abilities as a business personwhich in turn should translate into them having a high degree of confidence in your ability to deliver what you are promising.
Ricks idea is also known as Key Man Risk Insurance as the capital investors are depending on you as the key man to finish the investment. So having that insurance policy is a great idea. Thank you Rick. How much do policies such as these cost? What are the key shortcomings?
Im looking to purchase a foreclosed home, but due to its earthquake damage a normal lender wont do a loan so looking for private investor. My profession in construction is the key to my success. Home selling for 137K, tax assessed at 282K. Like Ricks idea of using life insurance as collateral.
What an insight and eye opener, I now know exactly what private lenders do in just under half hour.. thank you!
My issue is a little more complex, but in a nutshell :
Bought a primary residence in Georgia 2009 co-signed, title solely in my name.
Co- Signor (Primary) skived on all payments Dec 2011 till April 2012 Ended in court, he moved out. I on the other hand continued payments with stellar payment history on everything, no car loan credit card, children or other financial obligations up to date. My obligation to him is that his credit is still attached to house and for as long as it is I have to pay him 1000.00 every April, the first payment to him was this past April 2013!
Have approached my bank to re-fi, two yrs tax required, besides other very prolonged wait period and paper trail all over again. Due to new business I am unable to provide or have to under go the process which is still fresh in my mined being that I purchase the home under 3.5 yrs.
What would be the best route, website , family/friend circle is not that wide..
etc, is this something I can approach private lenders with or what say you Ankit?
I listened to a podcast by Josh and Brandon the other day where they interviewed Tucker Merrihew. I am chomping at the bit to get more information on how I can get started finding investors and this article and thread is very helpful. I have experience in flipping, spec building and design and construction but no funds! I have a few clients that I would like to approach but what do I offer? Do I need to have a full on project or will some people consider ideas/concepts? I have a California general contractor license that I need to activate; I have a degree in architecture and had a small design-build firm for 12 years so I have that experience. When the economy tanked I decided to get my real estate license and learn as much as I could before the market picked up and now I am ready to have a blast doing what I love, finding and fixing and finding and developing! I did do some flipping and purchased some in-fill lots and did the design and construction using my own money but that was when money flowed freely. Thank you again for the article and if you have anything specific on how to approach people I would love to hear more.
Great to hear your zeal. In my personal experience, you can approach people with concepts but they need to be unique and interesting to capture your capital partners attention.
Great article. That was the wake up that I needed. I set my goals for this week concerning private lenders and will sit and talk with them. I was too worried about the deals and not the capital.
Great Brian. Glad the article could of use to you and your real estate investment business.
Hot yoga is basically yoga in a 100 degree+ room. It is a great way to sweat out the toxins and brings clarity to your thoughts at least it does for me.
Great display and article Ankit. I was loved the circle diagram, really shows the pool of opportunity and areas to target, thanks!
Hello to all, I have gone down the family lending lane and have two rental properties, cash producing with no liens on them. Just the money I own family so it was done without a leagle agreement. Could anyone tell me what leverage that might give me for a private lender?
Dear Ankit if the first circle and 2nd circle not work ,is there any chance to work with third circle, please suggest me i i dont have 1st &2nd circle but i have good project ,manpower and time. TH