Private Lending for Real Estate – The Ultimate Guide
No Bank Hassles + Faster Closing Time = Private Money
Whenever I ask real estate investors what their biggest problem is, they inevitably say:
Not Enough Capital To Grow My Business
Let’s face it: real estate is a capital intensive business
If you flip, you need lots of money, and you need to turn lots of money.
If you buy and hold, you will never grow a substantial business without a lot of money/
Private lending can be a powerful tool you can use in your real estate financing arsenal. A lot of real estate investors use private lending exclusively. This is certainly a valid strategy, but I would recommend real estate investors simply use private lending as a part of their financing needs.
The more diversified your funding sources are the more stable your real estate investing company will be.
[Tweet “You Will Grow Your Real Estate Company By How You Easily You Can Get Funding”]
I wanted to create an in-depth guide to explain the benefits and risks with private lending.
What is Private Lending
Private Lending is when a real estate investor receives a loan from a private individual. There are significant benefits to the individual loaning the money. Including, but not limited to:
Higher yield on their money than a traditional savings account
First lien on the real estate
Investing in “real estate” without any of the hassle
Why You Need It
Obviously, it’s ironic that I’m teaching about private lending even though I’m a banker. However, I’m not saying you need to completely go without banks (even though many successful real estate investors do).
I’m simply stating that private lending can be another tool in your arsenal so you can grow you real estate business faster.
Let’s look at Warren Buffett, arguably the greatest investor ever. Berkshire Hathaway’s Clayton Homes division, lends money and also borrows money. In capital intensive businesses (like real estate), you have to have multiple sources of funding to grow.
Think about it:
It is highly likely that every year, you see a great deal. You probably see several GREAT deals! Why didn’t you buy the property? It’s not because you weren’t willing. It’s not because you didn’t know how to buy it or rehab it. It’s because you didn’t have the money.
Growing a real estate business requires very careful liquidity planning and capital planning, when done correctly.
How To Get It
A book could be written on how to get private lending. However, since we don’t have that much space I’ll just stick to the high points.
It begins with asking!
Let’s face it, everyone wants to be involved in real estate, but very few people want to actually do the work. Have you ever heard the expression: Nobody wants to know how the sausage is made?
Most people don’t want to clean toilets, mow yards, deal with tenants who don’t pay. However, they do want to be “involved” with real estate investing to take part in the great returns real estate investing offers.
Private lending offers investors this ability: to be involved with real estate investing, without a lot of the work. This is a key selling point when attracting new investors.
First, you want to work on a quick (read: less than 2 minute) pitch on what your company does.
I wouldn’t recommend talking about private lending at this point. If they say they are interested in “doing a deal together” which a lot of people offer. Set-up a follow-up meeting.
We will go into deal structure in the next section.
How To Structure The Deal
There are a million different ways to structure a deal in real estate. Since I don’t have a million pages (and you don’t have a million hours to read this) I will break down the different ways I have structured deals.
For simplicity sake there are really only 2 ways to structure a deal if you are taking ownership: Debt or Equity Inevitably, most people simply want to be equity investors with you.
This is obviously just my experience. However, also from my experience this is the worst kind of partner. You have all the experience with real estate investing, yet they want to be 50/50 partners? Additionally, they want you to put up your money with them?
This equation seems lopsided. This is why I’m a big fan of private lending. This is fair for both parties. Your new “partner” can participate in real estate investing while not having to deal with. Here is what you need to SHOW them in your follow-up meeting:
- 1-2 sentence description of the business goals
- Case-Study – using an actual example Explanation of how you use private money
- Referrals How You Structure A Private Money Deal
What are the Advantages and Disadvantages of Private Money
Advantages Usually Faster than a bank Can be less costly More flexible terms Disadvantages More work to get a private lender – initially Rates can be higher Amortization terms can be shorter.
Here is an actual example: Let’s say you buy a triplex for $80,000 and do $20,000 worth of improvements. Note, this is an actual example: The bank required me to put $25K down for purchase and gave me no credit for the improvements. Therefore I had $45K in cash in this deal.
Nothing necessarily wrong with that, however, it constrained my company for several years, not allowing me to grow. The worst part, was that this was during the downturn, so I wasn’t able to capitalize on all of the opportunities around me. Using this same example, you could get a private lender to fund the purchase and the renovation for no cash out of your pocket.
Even if you did the renovations by yourself you would still be money ahead. Additionally, if you followed the principles in my course you possibly have a lower debt-service payment with a private lender than the bank.
Therefore, you have a CLEAR advantage for using private lenders. As you can see, the advantages and disadvantages are really based on what you negotiate with your private lender.
One of my favorite sayings: [Tweet “You Don’t Get What You Deserve, You Get What You Negotiate”] Most people pitch, completely wrong. They make it about them. I go into this issue EXTENSIVELY in the course, but if you take away anything from this article take away this:
[Tweet “YOU ARE THE PRIZE”]
You have something they want/need Most people pitch an investment, make it all about themselves, then they ask for money. That’s completely backwards! You need to: Qualify your potential lending partner Ask them their goals What are their objectives? What are their fears/questions? THEN and ONLY then do you PITCH
Objections to Private Lending
Let’s go over some ways that you can make your private lenders feel more secure:
Insurance on the property – with private lender named loss payee or mortgage payee
Promissory Note – legal description of terms and conditions of agreed upon financing
Deed of Trust – the actual deed to the property
Personal Guarantee – On top of the loan to your company you personally can guarantee the note
Testimonials – from other lending partners
You should do all of the above if you really care about your private lending stakeholders. These individuals are going to help you grow your real estate business. You should value them as such.
Quotes from People You Should Know About Private Lending
Private lending is often faster and more convenient than traditional financing. Ryan Stewman
Private Money has blown my house flipping business up more than any other means of financing. The best part is I am able to help and serve so many people who otherwise would have their money in the bank, low yielding CD, or in a volatile investment such as the stock market. I love that I am able to help friends, family and so many others improve their financial situation while growing my business at the same time. Now that is what you call a huge Win Win. Justin Williams
Private lending has been a great way for me to buy properties for the BRRRR strategy (Buy-Rehab-Rent-Refinance-Repeat.) The private lender funds the deal and possibly the repairs, then the home is fixed up and rented out. I then pay the private lender back by refinancing the property with a local lender. It is my primary method for investing these days, as it requires almost no money out of pocket but still allows me to secure a long-term, fixed-rate loan after the refinance. Plus, I get to build some major equity in the process. Brandon Turner
Some of the best deals on earth simply cannot happen without the help of a private lender. Generally speaking, I’ve always tried to avoid taking on new business and personal debt, but when I come across a deal that is virtually guaranteed to put automatic equity in my pocket on closing day and provide stellar cash flow for years to come and the only missing ingredient is the funding, it is critical to have a lender on call who is responsive, easy to work with and can meet closing deadlines in a timely fashion. My lender has made all kinds of opportunities possible for me, and even though I’m very cautious about leverage, I also know that private financing can be an extremely helpful and important tool, especially when you know how to use it properly. Seth Williams
Private Lending Resources
I hope you found this private lending guide helpful. I tried to cover everything to at least get you started. Regardless, of your opinion about private lending, all real estate investors agree that you will grow your real estate company on your ability to find deals and raise money. Most real estate investors I talk to don”t have a hard time with finding deals. Most real estate investors DO have a hard time raising money though. This is why I built this site and wrote this post. I want to reiterate that I personally don’t think everyone should solely rely on private lending for their real estate business. Rather I think they should simply use this as one tool in their toolbox, to diversify their funding sources. Having multiple sources of funding will greatly increase your stability as a real estate investor. If you have any success or feedback on any private lending resources mentioned in this post I would love to hear about it. Shoot me an email! Semper Fidelis, Jimmy