It is less formal and there could be more subjectivity to it. The great thing about it though is that it is typically flexible and quick to obtain. Since these private money lenders are not formal institutions, they often do not have hard and fast rules when it comes to lending, thus, terms are highly negotiable. You will also be saved from the nuisance of paperwork since they will not require as much documentation as formal lenders do. Nonetheless, it is crucial that you rustle up some things that the prospective private money investor would be looking for in any deal. These are discussed below.

Things Private Money Investors Would Be Interested In

Private Money Investors Image by sushi♥ina via Flickr

1. Return on Investment. This is the focal point in any investment and may the first thing that private money investors would look for. Some private money lenders, especially those who have already been in the trade for quite some time already, may already have fixed rates for certain real estate deals. However, rates could hinge on the deal. As much as possible, do not take the stance of a borrower, needing money from financiers. Rather, position yourself as a potential business partner who has an investment opportunity to offer. By doing so, you can propose the interest rate, as well as the specific terms, rather than them imposing their conditions.

2. Payback Period. Of course, the next concern of private money investors is when they will get their money back together with their earnings? They very well know that time is a crucial factor in investments. The sooner they get their money back, the better since the exposure to risks is cut short, and they can again invest the amount in another opportunity.

3. Risks. On the other side of the investment coin is the risks involved. Private money investors are risk takers, but they do not blindly bet their money without weighing the risks. No matter how lucrative the ROI may sound, but the deal is too risky, investors may balk at putting their money in such a deal. This does not mean though that you conceal the risks from them. On the contrary, you need to be forthright about them and explain to them the risks to manage their expectations in the event that the risks do occur. It is possible that it may take longer to sell the property in the deal, hence, it would also take longer for you to return their money and interest, or you may not be able to sell the property at all. Cushion them from these risks by presenting your strategy in case a risk does occur.

4. Safety Nets. You do not stop at just discussing the risks. You must also assure the private money investors that you have set safety nets for them should the risks arise. The property is often used as collateral to make the investors feel secure about the deal. Securing the investment by a first position on the mortgage, title insurance and hazard insurance would help put the investors at ease.

5. Game Plan. You need to win the trust of prospective private money investors to get their backing. The best way to do that is to convince them of the viability of your real estate deal and your game plan on how to carry it out. You have to show them that you know what you are doing. Either you write this down or memorize it by heart so that when asked, you can confidently spell it out to them. You can also write down a summary of these details, together with the other items discussed, into a proposal for them to study.

Remember that once you gain the trust and confidence of private money investors, they can invest in your future deals. So show to them that you have the capability to carry out the plan and make sure to make good on your word of returning their money on the time you have set and their interest.

Cash is still king when placing offers on foreclosed properties.  Lower cash offers are often accepted over higher purchase offers that require financing, within reason.  Banks have a glut of REO’s on their books that they are trying to liquidate as fast as possible and they are sick of all the financing (this includes hard money) deals that fall apart prior to closing.  So a cash deal with no appraisal clause is a much stronger offer than one with a financing contingency.

Private money investors are typically short term lenders, 6-12 months, so they tend to look for rehabbers that are looking to fix and flip a property or refinance out of there private loan into a long term loan upon completion of the project.  Many private lenders have been in the property rehab business before and can offer valuable advice on analyzing a deal.  If a private lender won’t fund your deal, take a close look at the reasons why.  They may be saving you from an underperforming investment.  They want to see you succeed as much as you do so they can grow there money back with the least amount of headache.

Where to find Private Money Investors?

Your local real estate investment club provides a great networking forum for finding everyone you need on your real estate team.  I have seen private money investors stand up at these meetings and say, “I have money to lend and I’m looking for good deals to fund”.  Savvy rehabbers will put together an analysis of the deal they are looking to fund with exactly what kind of terms they are looking for.  This shows others that you know what you are doing and you are willing to pay for it.

Other private money lenders have never flipped a house before in their life.  They are your doctors, dentists, attorneys, and other busy professionals.  These professional are so busy that they have little time to invest there money in anything other than the stock market.  Offer them a 12 – 18% APR return on a 3-6 month loan backed by a property that will have at least 30% equity once completed.  This is a good deal in any economic cycle.  I know a couple of investors that have long term financial relationships with their dentists.  The dentists earn 15% on their money and the real estate investors can concentrate on their core business of finding great deals and performing cost controlled rehabs.  A real estate attorney can structure the whole deal for you.

Self Directed IRA’s

The majority of people do not even realize that they can transfer some of their retirement funds to a self directed IRA and become private money lenders themselves earning 12-18% on their retirement funds.  Read up on self directed IRA’s at www.trustetc.com and show others how you can make their money work harder for them.  This is a seldomly tapped source of funds that every rehab investor and property flipper can use to catapult their real estate portfolio to the next level.  This is truly a win-win situation for the private lender and real estate investor.