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.