Warren Madison

Short-term private lending is becoming increasingly popular. It is a fantastic way of getting funds together for property investors, for instance, who often only need a sizable influx of cash for a short period of time. For instance, they may want to purchase a property and sell it again after just a few weeks. The problem for a short-term private money lender, in that situation, is that it becomes very difficult for them to earn any money. There are some great benefits to becoming a private money lender.

“One of the great benefits of acting as a private moneylender is that you can gain the benefits of participating in the real estate industry even if you do not have any prior experience.”

However, the downside is that because the loans are generally very short, the earning potential is very small. However, it is possible to structure short-term private money loans, if you are a borrower, to make them more interesting to your lender. One great tactic is to include a prepayment penalty.

“Prepayment penalties are usually expressed as a percent of the outstanding balance at the time of prepayment, or as a specified number of months of interest.”

This allows your lender to know exactly how much they will earn at all times. Consider for a minute that a loan of $100,000 at 8% over one month would only earn your lender $700 dollars. Hence, if you were to then cut your loan period short as well, they will earn even less, making it no longer worth their while. However, if you can guarantee their earning regardless of whether you make the term shorter, you will make it a lot more interesting straight away.

Go for 50/50

Another option is to make your private lender an investor. Basically, they invest the money, but you do the hard work. This is a tactic that is used by a number of people in Florida who are really making a difference in the world of real estate.

“Justin Wilmot, one of our students kicking serious butt in the Florida market (he’s done more than a dozen deals in the last year since getting started), structures all of his deals straight 50/50 partnership with his private lender.”

This tactic is known as equity investment, and it basically means that you take equal risks. Perhaps your investor won’t earn a lot of money, but then nor will you. And your lender doesn’t have to do any hard work, since you will be the one doing that. As such, it is like sitting on free money, whether that is a lot of money or only a little bit.

It is very important to make it clear to your lender that you understand the risks that they take. There are various tactics you can use to ensure the risks are mitigated, including making it clear that if you do not stick to your agreement, the property becomes theirs. Of course, outlining the various benefits is perhaps an even better tactic.

Private lenders have become incredibly popular lately and for good reason. Sure, hard money lenders have a place in our society, but we are starting to wise up to the fact that it is the private lenders that really keep our economy going. This is because they currently offer exactly what we are all looking for.

Most importantly, this means that they don’t cost as much, looking for a return of between 4 and 10%, rather than the 12 to 15% (and then some) that regular lenders will ask for. Furthermore, they help you to get the properties you want without having to deal with all sorts of limitations that you would get from more conventional lenders.

“Many investors don’t know there is a limit to how many mortgages you can have before commercial lenders decide you are too much of a risk. The limit has been as high as ten mortgages and as low as four. Seriously? If you’re an investor, a portfolio of 8 – 10 houses is a starting point, not your investment ceiling.”

Added to this, good private lenders are quick. This means that once you have built up a relationship with them, they will be more than happy to provide you with some more cash for your next investment.

This is very different from high street banks, where you are nothing but a number or statistic, and where you can end up waiting for months before the paperwork has gone through.

Private Lenders and Public Records

Clearly, we need private lenders. That being said, how do you find these lenders, since they aren’t on the high street? One way to find them is by turning to public records.

“Search by your state and counties. […] Look for Document Type on the left of the screen. […] Select TD (Deed of Trust) from the long list of document types.”

You can also go to the Clerk’s Court Office and request the information manually. However, doing so online is generally a better idea, particularly since you will be provided with a huge list.  Remember that this list will include both traditional and private lenders, meaning you will have to do a bit of digging in order to actually get what you are after.

You will have to go through the mortgage records one by one, until you find the name and details of the private lender. Not only will this tell you who they are, but also how much they like to lend. Sometimes, this is as much as 100% of the value of the property, other times it is as little as 10%.

What it basically means, however, is that you can immediately start to learn about which private lenders you should and shouldn’t approach.

How to Approach a Private Lender

Asking for money is never easy and it never feels nice either. However, remember that it is a private lender’s business to deal with money, so they are actually waiting to hear from you. It is your responsibility, however, to make sure that they hear what they were hoping, rather than something they don’t want to know. It is always best to keep your initial contact simple, just tell them who you are and what your plans are, without going into too many details about what you can guarantee.

There are, basically, five things that a private lender wants to know. Tell them more and they will get bored without lending you the money. The first, and most important thing that they will want to know is whether or not they will get their money back.

“This is the number one question that private lenders want to know when approached. If they do not feel like they can trust you enough to know that they will get their money back, they will never invest with you. Essentially they are asking themselves if they trust you to do what you say you are going to do.”

Hence, you have to explain to them that you are trustworthy, but in such a way that it doesn’t sounds like you are trying too hard. The second thing is that investor want to know how they will benefit from their investment. They don’t really want to know how it will make your life better, in other words. Think this particular issue through, because it is actually a very difficult question to answer.

The third thing is that investors want to know what their risks are. They want to make sure that you are honest about what could go wrong and what sort of contingency plans you have in place.  Answer all the possible “what ifs”, in other words. Next, they want to know how you secure their investment, particularly in terms of property.

This means you have to already know whether you have hazard insurance and title insurance, whether you have first position on the mortgage, what kind of cash flow you expect and so on. Last but not least, private lenders want to know exactly what your plan is. What do you intend to do with the money and why?

Do you have measures in place to figure out whether you are achieving the success you had anticipated? What will you do if you come up short? How realistic is your plan in general? This is all about proving that you know what you are doing and that the chances of you losing out on money are incredibly slim if not non-existent.

Write all of this information in a business plan with covering letter to the private lenders you were able to identify through the public records. Keep a schedule or a spreadsheet of who you have contacted and when, as well as nothing whether you have received a reply.

Give each private lender a few weeks to respond, but follow it up with a reminder if you haven’t heard anything. If you still haven’t received a reply after an initial letter and a reminder, you can assume that they do not want to lend to you.

Two terms that you may come across in the financial arena are “hard money” and “private money”. These two are often confused, because they have so many similarities. This is because both loans are based on assets, and both are based on the assets that a borrower has, rather than their credit history. Furthermore, neither hard money nor private money comes from a bank or another type of national lender. However, for all their similarities, there is a difference between the two.

What Are Private Lenders?

First, let’s take a look at private lenders.

“Private lenders are just what their name suggests–private. They could be a friend, family member, business associate, or maybe just a professional referral. In any case, their role as a provider of funding is strictly as you agree upon with them.”

This essentially means that their primary business is not one of lending money. They may set certain terms to borrowing someone money, but these terms are not contractual and used across a range of different borrowers. They are set as and when required, usually through mutual agreement. For instance, someone who borrows of their parents will agree to pay it back within a certain period of time.

What Are Hard Lenders?

Then, there are hard lenders. Hard lenders are far more comparable to conventional lenders, in as such that they have interest rates, contracts and criteria for acceptance that a private lender generally doesn’t have. They tend to be a business of some description, even if that business is not primarily one of lending.

Why Do the Two Get Confused?

So why do the two get confused? The reason for this is because it is possible to be both a private and a hard lender. In fact, more often than not, a lender is both at the same time. Technically, if someone were to lend money of their parents (private money), yet sign a document that agrees the terms of repayment, which may even include some interest, these parents would become hard lenders, even if they are classed as private lenders. Indeed, most would agree that the terms are in effect interchangeable.

“Hard money and private money are basically interchangeable terms but in practical use, “private” typically implies a lower rate than “hard money.” Some hard money lenders are funds (groups of private lenders) and others are individual lenders. Both set their own rates, terms and types of property they’re willing to lend on.”

Essentially, both private and hard money lenders are lenders that are different from a bank. If that money is borrowed by having to follow a number of rules (be that payment terms, paying interest rates or having to meet certain criteria in order to actually access the money) would technically make it hard or private. However, what matters most is that both these forms of lending are generally more relaxed and far more affordable than lending from a bank or other more conventional financial institution, and this is why both types are becoming more and more popular.

At the moment, house prices are low and interest rates are low too. Hence, now is the time to start to invest in properties if you can. Take a look at the following five tips to help you find that fantastic real estate investing opportunity.

Always Choose a Rental Property

Investing in rental property is a great idea. Home prices are low and the interest rates are fantastic. Hence, now is the time to become a real-estate investor. Also, there are strong signs of recovery on the market as well. Yes, the value of houses is still dropping, but these prices are dropping much slower. For instance, in 2009, prices dropped by a total of $489 billion, a huge amount but only a drop in the ocean compared to 2008, when prices dropped by $3.6 trillion. It has been a long time since prices were this low and since borrowing was so cheap. Hence, the time for investing is now.

Tip 1 – Understand your Options

Different properties have different pros and cons. Hence, what sort of strategy best fits you is the first question you have to answer. You could become a landlord, or you could restore and sell properties. Perhaps you want to buy apartments or commercial real estate, or may you want residential properties, or even land development. It is all about understanding your strategies.

Tip 2 – Partner with Someone with Experience

If this is your first time investing in property, make sure you work with a respectable realtor who has proven experience in property deals. They can help you find the best properties and will continue to do business with you even after you have chosen your property. They can teach you about investment and property management alike.

You don’t have to work with other investors if you don’t want to, but having conversations with them is always useful. They can warn you about common pitfalls and challenges that they face. Take the time to find out what sort of landlords and investors operate in your area and have meetings with them to learn from their trade.

Tip 3 – Location, Location, Location

If you want to purchase a property and rent it out afterwards, you have to consider the location. The best homes are those in densely populated areas, or in those areas that have high rents. Do not look at rural properties with low populations, as it will be very hard to find a renter. Try to find homes with more than one bedroom and preferably more than one bathroom. Check on the crime rate in the area as well, as this is something that renters look into and base quite a bit of their choice on. Tenants like to live somewhere safe, so low crime rates are fantastic selling points. Other attractive points include being near a mall, public transport networks and other amenities such as schools and sports facilities. Remember, the more that is around the property that people can use, the more desirable it will be.

Tip 4 – Have the Money Ready

Before you start looking, start to speak to a financial planner or a potential lender. You have to make sure you have the assets available to deal with the ups and downs that investors have to deal with. You are likely to want to rent the property out, but that doesn’t mean your property will never be vacant. Try to save up at least six mortgage payments, so that you have that safety net available. You also need the money available to deal with any repairs that the property may need every once in a while.

Tip 5 – Have a Support Cast

You have to be ready at all times for any eventuality. Don’t wait for your property to break before you start to look for a builder. Have a network of maintenance people on file for any challenge that can happen, so that you always have the right people at your beck and call. Build a relationship with a lawyer as well, just in case you have legal issues with your tenants. You also need an accountant to deal with all the financial aspects, including taxes.

Remember that a real estate investing opportunity is very different from buying a home for yourself. There are certain risks involved that you have to be able to deal with. It is also very different in terms of finding the property, as you don’t need to build an emotional bond with your property.

Before diving in below checkout what Zach has to say.

It seems counterproductive to find a buyer before you even have anything to sell. However, in wholesale real estate, you must have the buyers on file first. You need to know which sort of properties they want. This process is known as “reverse wholesale”, meaning that you don’t buy a property until you actually know that you have a buyer in place.

The best place to find these investors is through dedicated meetings. You can find your nearest one online if you don’t already know where they are. Most major cities have investor meetings that you can sign up to. If, however, you find there aren’t any, you may want to consider starting your own.

Some of the questions you need to ask the investors include what properties they want and which areas they are interested in. Once you get this information, you can ask the investors whether you can contact them if you find a property that they are interested in. Generally, they will be more than happy to give you their details.

Finding Sellers

Once you have spoken to your investors and know what they are looking for, you need to start finding sellers. You have to get to know what your local market is, know how much properties are retailing for, what the rent prices are, what the properties look like and so on. Make sure you only look at properties that actually fit what your buyers are interested in.

Once you have the property that you are interested in, and the seller is willing, it is time to find out how the seller can give you the best deal. Set yourself a maximum price, and if you play the game right, you may just end up paying far less than that. Negotiating is a skill that you have to learn about. Sometimes you have to walk away for a while, if a seller doesn’t want to meet your demands. It is possible that they will then contact you at a later stage to accept your offer after all. This is why you always have to leave negotiations on a friendly term, so that the seller knows they can contact you at a later stage.

Sealing the Deal

All being well, you now have an interested buyer, a property and a motivate seller. Now it is time to really seal the deal. You must offer a price that covers all the costs for cover and holding, covers any repairs that have to be done and your wholesale fee and still leave you with a profit. Once you have done this, you need to write a contract subject to inspection. Make sure you postpone the inspection as much as possible, because it is during this time that you will try to sell your deal to the investors you have picked before. Make sure you have an assignable contract, which makes the purchase far more interesting because it avoids the need for double closing.

Wholesales tend to use specific marketing systems, which means the investors may know what is happening even before you do. Try to get on one of these systems so you can show pictures of your pictures. All necessary details such as price, retail price, number of bedrooms, size of property, neighborhood and so on. Do not ever try to skew the price in your favor; investors know exactly how much properties in their neighborhoods are worth. They will be able to make a decision pretty quickly.