– A Private Money411 Exclusive –
Getting started as a new Real Estate Investor or to bring your existing business to the next level of success will generally require investment capital. More and more investors are taking advantage of using private lenders to achieve their business goals.
The advantages of using a Private Lender over conventional lenders or Hard Money lenders can be summarized as follows:
• You may be able to agree to terms more suitable to you
• You may be able to finance 100% of the project plus expenses (many traditional banks and lenders will require you to have some “skin in the game”)
• Less underwriting scrutiny of you and the particular project
• Quicker response
• Avoid the oversight that many lenders are now putting in place during the life cycle of the project
• Private lenders may not require you to have any documented experience
Finding Your Private Lenders
Once you have decided that using a private lender is the right and perhaps the only possible direction for you to take, it is now time to explore your opportunities of locating people who may be interested in funding your projects. Generally, a great place to start looking is among your personal and business circle of influence.
This may include the following:
• Local real estate groups
I do get some pushback from people when I suggest that they approach family and friends for investment capital because some feel uneasy asking them for money and the possible implications if things don’t work out exactly to plan.
Just keep this in mind, you are asking them to participate in a business opportunity, not a hand out. Furthermore, many of these people are already taking some form of investment risk; so why not in you?
Keep it Legal and Get it Down on Paper
Just because using a private lender may be a simpler and less formal process than what you would typically experience with either a Hard Money lender or conventional lender, this does not mean you will forgo all of the required documents and due diligence that will protect both you and your private lenders. Make sure to discuss the terms and conditions of the private loan with your attorney and have them prepare all of the necessary documents. It is always advisable to encourage your lender to also have their attorney review the documents.
Positioning Yourself as a Solid Borrower
Even if you personally know the people who will be providing the capital to fund your project, this does not take you off the hook from properly preparing yourself as a reputable borrower. There are some characteristics that your lenders will be expecting from you and include the following:
Knowledge of the Business
Even as a new investor, it will be critical for you to have the basic skill set in order to effectively analyze opportunities that may come your way. In the excitement of the hunt for your project, you will need to know when it is time to move forward or pass on an opportunity.
In fact, as part of your discussions with your lender, you should illustrate why the project is a solid deal by sharing the assumptions and results you have made. In addition, you should proactively identify the barriers and risks you may face and how you plan on mitigating them.
Remember, by identifying this upfront you will go a long way. Keep in mind that most lenders (or their attorney) will inquire about risks anyway, and it looks much better coming from you without being asked. As part of your Business Plan, you should have identified all skill set shortfalls you may have and include a specific action plan on overcoming the deficiency. If you are a new investor with no or limited experience, it is advisable to have someone who can shadow your decisions and path and guide you along the way.
As a Performance Coach, all too often I see new investors jumping into their first project without the proper skill foundation and many experience some challenges that could have been prevented.
If there is one thing that can ruin any business relationship is holding back information that is critical to your lender. With real estate investing, things may not always go to plan.
However, what is important here is how and when you communicate when there are challenges. Always share information that affects your lenders as soon as possible and during that discussion, communicate possible ways to get back on track and avoid a future reoccurrence.
In order for your business to grow and continue to have your lenders coming back for more opportunities, it will be critical to leverage off of the success of prior projects. Once they see what you can do and have performed as planned, you will find that the people around you will be literally throwing more money your way. In addition, they will be asking if they can bring their family and friends along as well. Talk about free marketing, it doesn’t get any better than that!
I can’t tell you how many times I have seen this play out with my Students. Properly documenting your past performance in your Credibility Report will go a long way in securing new lenders. As a great way to demonstrate your performance is to invite your lenders and potential new lenders to your projects both before you get started with the project and after it is completed.
During this time you can share with them both the initial expectations and how the final results compared. Just think how powerful this can be. During this exchange, if the specific performance you were planning was not completely achieved, you should elaborate on the root cause. Evaluating lessons learnt can be a great way to mitigating future errors on the next project.
Have an Exit Strategy
As part of your overall project or business plan, you may need to consider your exit strategy from the private lender in advance of moving forward with them.
There are generally a few options to consider when exiting private money that include:
• Selling the property upon completion of a renovation, the lender will be paid from the proceeds (this is common with a Rehab and Flip project)
• Refinance the property with a cash out conventional mortgage (this is very common on a Hold to Rent property)
• Repaying the loan from the sale of other assets or investment sources
In conclusion, building a solid base of reliable private lenders will help set the stage for you to respond very quickly to the opportunities presented, This can clearly be the path for you to scale the business as large as you want! Once the people in your network actually see that you have the bandwidth to move forward they will bring you even more opportunities.
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