Money Source: Exploring Private Funds
Another source of money when financing your investment is private funds. This is one of my favorites because there are so many different definitions that people have for private funds. Some investors think it means that you get money from some sort of mystery Swiss Bank account, or that you don’t know where the money is coming from. Private funds in the real estate banking world simply mean ‘funds used to secure real estate from a non-institutional lending source.’ This means any source of funds used to buy real estate that is not linked to regular financing institution rules. Private money is not always as difficult to find. Just remember to use the money wisely, as it’s one thing to lose your own money, but it’s another thing to lose someone else’s money.
So, why are private funds a good source to use in real estate?
Some hot property deals need to close fast, and private lenders can typically close faster because they don’t need approvals, appraisals, work verifications and so on. Private lenders are not looking to sell the notes they place against the property, thus they can make quick internal decisions to close the deal quickly and without all of the red tape involved. However, private funds do expect higher interest rates, which helps offset the higher risk they may take by lending money (without appraisals and approvals in some cases).
Another reason for the quicker closing is that these loans are short term loans, typically, and therefore the intention is not to evaluate a risk based upon a 30 year note. You may not qualify for the first money source, of bank financing, so therefore this is your best bet for money. Private lenders may let you borrow more against a home because they believe in you and not care as much about the property…this is an extremely valuable point.
The biggest reason the real estate investing community loves private funds is because there is less red tape. You’re providing them with a way to increase the return on investment, as opposed to them investing in other sources. This type of money typically comes from an individual, not an institution with a committee. This source of money makes itself available when you can demonstrate three crucial items that are triggers for them to open their pocketbooks.
- The first one is that private lenders can earn better returns by investing in your ability to bring a great equity position deal to the table then they can by investing within the regular investment marketplace.
- The second is that their investment is secured by real estate at low loan-to-value’s (LTV’s).
- Lastly, the repayment terms are clearly defined.
Who can be a Private Money Lender?
Who are private money lenders? Anyone. Find me anyone that fits these categories: lost money in the stock market or 401(k), has an IRA, inherited some money, has tons of equity in real estate, has well-off family members, co-workers, or other investors, or are just flat-out rich, and I’ll show you a private lender in the making.
Anyone you know can be your next private lender. Then why would they want to work with you when you have done nothing yet? Don’t sell yourself short on this point. They typically do not want to do the heavy lifting and only care about a good return on a solid investment.
Where do I find these people? And when I find them how do I get them to lend to me?
Are you ready to know where the private lenders are? How about family, friends, co-workers, newspapers, craigslist.com, retirees, and neighbors? Now you have potential lenders in the making.
Finding private lenders is easy, but ensuring your next investment is worth your money and theirs isn’t always a breeze. Working with professionals like those at Starting Point Real Estate, and following are blog can help you ensure your next real estate investment is a deal. For more information about professional real estate investment, be sure to follow us on Facebook, Twitter, Pinterest, and Google+.