Other than finding deals, securing private money is the most common barrier for real estate investors looking to expand their rental portfolio or do more fix-and-flips.
Unless you’re extremely wealthy, you’re going to need to work with private lenders to grow your investing business.
That’s why, here, we’re going to walk you through exactly how you can find private lenders… and how you can convince those lenders to work with you.
Check out the video below if you’re more of a watcher than a reader — it’ll cover a lot of the main points in this article.
The Qualities of Great Private Money Lenders
Before you start working with private money lenders, it’s important to know what type of people you’re looking for. Here are some characteristics of people who make great private money lenders…
They Have Money to Lend
Of course, one of the most important qualities of a great private money lender is that they have the cash available to invest in your deal.
Ideally, you’re looking for people who have at least $10,000 to $20,000 that they’re willing to lend.
Anything less than that and you’ll likely have a difficult time finding enough money to fund your entire deal.
They Understand the Risks
When you’re raising private money, it’s important to find people who understand the risks involved in real estate investing.
Ideally, you want to find people who have experience with investing… or at least a strong understanding of what they’re getting into.
This way, they’ll be more likely to trust you and invest with you.
They’re Willing to Lend
Not everyone who has money available to invest will be willing to do so… which is why it’s important to find people who are actually looking to invest in real estate.
Ideally, you want to find people who are actively searching for opportunities to invest their money.
The best way to find these people is to attend local real estate investing meetups or events.
By the way, we have a gift for you. We know you’re here to learn about private money lenders… but real estate investing is so much more than that. Below, you can enter your email to get some proven marketing strategies from real investors.
How to Find Private Money Lenders
Private money lenders are people.
More specifically, they’re people with access to a lot of cash — cash that they’d, ideally, like to invest.
The first thing you need to do is find private money lenders. Here are six easy ways to do that…
1. Real Estate Meet-Ups
If you live in a decent-sized city, there’s probably a real estate meet-up group near you.
These are groups of investors that get together to network and talk shop. They’re a great place to meet potential private money lenders.
To find one near you, do a quick Google search for something like “real estate investing meetup near me.”
Then get in the habit of attending these meetups. The more active you are in your local real estate community, the more natural opportunities you’ll have to work with private lenders.
2. Online Forums
The BiggerPockets Forum is one of the biggest (if not the biggest) online communities of real estate investors.
And while you’ll find a lot of newbies on the forum, there are also plenty of experienced investors — many of whom would be great private money lenders.
In the same way that you would network at an in-person meetup, dedicate some time to interacting with members on the forum.
Answer questions, ask questions, and get involved in discussions. You never know who you’ll meet or what relationships you’ll build.
3. Your Existing Network
You probably know a lot of people with money.
Your parents, grandparents, aunts and uncles, family friends, the list goes on.
And while it can be tough to ask people you know for money, it’s worth having a conversation if they want to invest and you want to do more deals.
After all, if they’re willing and able to invest, it’s a win-win for both of you.
4. Real Estate Agents
Real estate agents interact with all sorts of people — buyers, sellers, and investors.
Not to mention that many real estate agents are investors themselves.
So, if you’re looking for private money lenders, real estate agents are a great place to start.
Many of them will be willing to share their connections with you, and they may even have money that they’re looking to invest.
5. Cash Buyer List
That’s a great source of possible private money lenders.
Reach out to most loyal buyers and ask if they’d be interested in funding a deal. If they’re interested, then pass them the details of what that looks like.
6. Title Companies
Title companies work with a lot of people in the real estate industry — from buyers and sellers to agents and investors.
Like real estate agents, title companies are usually willing to share their connections with you.
How to Secure Private Money Lenders
To be honest, finding private money lenders is the easier — or at least, less daunting — part of this process.
You might be able to find them.
But can you convince them to work with you? Do they trust you enough to give you a big chunk of money?
That’s what this next section is all about.
Here are some critical tips for persuading private money lenders to work with you.
1. Speak in Hypotheticals
If you can, it’s a good idea to meet face-to-face with your private money lenders (especially if you’re new to this process).
Doing so will build a lot of rapport, clarify the process, and reaffirm that you and the lender are on the same team.
When you do meet with them — whether in person or over a phone call — start by speaking in hypotheticals.
Ask them what kind of deal they’d want to invest in, how much they’d want to get in interest, how much they’d be able to invest, and how long they’d want their cash tied up.
Be open and honest.
If you’re just getting started working with private lenders, then this is a critical part of the process.
And it’s how Ryan Dossey closed his first private lender.
Check out the video below.
2. Send a One-Page Lending Packet
Assuming that your private money lender wants to move forward, the next step is to find a killer deal and send them a one-page lending packet with details on the investment you’re inviting them to make.
You’ll want to include pictures of the property they’ll be investing in as well as details such as…
- Purchase Price
- Expected Rehab Cost
- Interest Rate
- Loan Term
- Their Monthly & Yearly Cash Flow
Here’s an example of what this looks like…
Check out the video below to see Ryan Dossey walk through this one-page lending packet he sends to potential private money lenders…
3. Use These Documents
If you hate paperwork like me, then this might be the main hurdle that keeps you from working with private lenders.
But don’t worry.
We’re going to take you through the four documents you need to work with private lenders. First, however, you’ll need to do a quick Google search to determine if your state is a trustee or mortgage state. That will change the paperwork you use with your lenders.
We highly recommend consulting a local lawyer to put these documents together.
A loan agreement is a contract between you and your lender that outlines exactly how the loan will work.
This document should include:
- The amount of money being lent
- The interest rate
- The repayment schedule
- The terms and conditions of the loan
This is important because it protects both you and the lender.
If something goes wrong, you can refer back to the loan agreement to figure out what needs to be done.
The way this document is structured will depend on your state laws.
A promise to repay the money is created by a promissory note, which is a short and straightforward document that places a repayment obligation on the person borrowing the funds. The borrower agrees to repay the money with interest determined by an agreed-upon timetable at a certain time in the future.
In general, the repayment obligation outlined in the loan agreement is implemented via the promissory note.
Here’s an example…
The security agreement is what gives the lender collateral in the case that you default on your payments.
The collateral is usually the property you’re purchasing with the loan… but it could be something else so long as you and the lender agree on it.
In other words, this document gives the lender the right to take possession of the collateral in the case that you default on your payments.
This is very important.
Many investors will want collateral before they agree to fund your rehabs.
Whereas a typical loan agreement contract puts the liability for repaying the loan squarely on your business’ shoulders, a personal guarantee puts the liability on your shoulders as an individual.
This isn’t required, but it’s a great way to show lenders that you’re serious about paying them their money back.
(And honestly, if you can’t personally guarantee the investment, then you should be using other people’s money)
In other words, if you default on your payments, the lender can come after you for the money.
4. Establish The Collateral
If you want to work with private lenders, you need to be able to offer collateral.
The most common form of collateral is the property itself… but it could be something else as well.
Some investors will use the following as collateral:
- Savings accounts
- Properties held free and clear
- Stocks and bonds
- Valuables (jewelry, art, etc)
This gives the lender something to fall back on and minimizes the risk involved for them.
And it’s absolutely critical for getting new lenders to fund your deals.
5. Pull a Copy of Your Credit Report
For the most part, lenders aren’t going to work with you because you’ve got a great deal… they’re going to work with you because they trust you as a human being.
This means you’ve got to illustrate to them that you’re the kind of person who pays off their debts…
… that you’re a person with integrity.
How are you going to prove that to someone you just met?
Pulling a copy of your credit report (assuming you’ve got excellent credit) is a great way to show a potential lender that you have a lot of experience borrowing money… and that you have a track-record of paying it back with interest.
6. Offer a First Position Lien
Another way to give a lender faith in their investment is to offer them a first position lien.
This means that, in the case of a default, they would be the first ones to get their money back (before anyone else).
This is obviously a very attractive proposition for lenders and will increase the chances of them working with you… because it minimizes their risk.
7. Get Your Investor Additionally Insured
Another safety net that you should offer to lenders is insurance on their investment.
This way, if something goes wrong (for example, the property is damaged), they’re protected.
It’s an extra layer of safety that gives them peace of mind… and ultimately makes it more likely that they’ll want to work with you.
To get this setup, you’ll need to work with an insurance agent to see what kind of policy makes sense for your situation.
8. Overcommunicate With Your Lenders
We can’t overstate the importance of being open and honest with your private money lenders throughout the entire process.
Not only will this reduce the likelihood of problems between you and the lender, but it’ll make them more comfortable with their investment… increasing the likelihood that they’ll invest again with you in the future.
So keep them updated on your progress, both good and bad.
And if anything changes with the deal (for example, if you’re going to close sooner or later than expected), make sure you let them know as soon as possible.
This will show them that you’re responsible and that you respect their investment… both of which are critical for building a strong relationship.
Final Thoughts on Private Money
Raising private money isn’t as hard as it sounds… especially if you follow the strategies in this post.
Remember: your job is to minimize the risk for potential lenders while simultaneously increasing the potential return on their investment.
Do that, and you’ll have no trouble finding people who are willing to invest in your rehabs.