I have several private lenders that I use to purchase deals. These lenders come from : extended family members, friends from church, old class mates, and even previous sellers.
Before I go any further, let me put out this disclaimer: I am not an attorney nor a financial advisor. Please seek legal counsel before following any suggestion that I give here . I am only sharing my personal experiences.
With that said, a good idea is to find a local attorney who is verse in SEC regulations and lending practices. I consulted with one in Little Rock, and I can refer you to them if you want.
How to Raise it:
When people ask me what I do for a living, I mention that I purchase investment property, and I am able to buy a lot of them because I partner with everyday people who want to invest as well. If this peaks their interest, they will ask how that works. If not, they won’t even bring this up.. they’ll just continue the conversation.
This is really all that is needed to do in order to raise private money. If you make a habit of answering people this way, you will get lots of questions about it and you’ll be surprised how many people follow up with you wanting to know more.
If you can’t wait and want to raise private money really fast, then the simple method is to just get on the phone and start asking for it! Start with your network and ask this question: ” I am investing in Real estate and I come across discounted property. I like to use private capital instead of banks to make these purchases. Do you happen to know anyone that might have extra capital that they need to put to work?” (its always easier to ask them if they know anyone, instead of asking them directly. If they are interested themselves, they will let you know)
One thing to keep in mind (and again, this is a conversation with your attorney ) is some of the regulations regarding this. You can’t openly advertise securities, such as advertising a return on investment etc etc.. And, your lenders need to be your acquaintances. So I like to sit down and have a conversation over coffee if I don’t know them that well.
I actually don’t have that many lenders because frankly, I don’t need that many. Just a handful of lenders will get you plenty of funds to use in your business. If you’re buying and holding long-term, you’ll probably want to refinance them out with bank loans anyway… so their money isn’t sitting out for too long and you’ll be able to use it again and again and again. Eventually you’ll run into a new problem: Having enough deals for your lenders to invest in. 😉
How to Structure it :
The structure is the same as when using a bank… except no red tape. I’ll start with the side for you as the borrower:
The loan is collateral based. No credit app, no credit check, no personal guarantee, etc etc. No long paperwork, no waiting for appraisals or anything. Its very convenient for you as the borrower/ investor. You can close on stuff quickly (pretty much cash ) and easily.
You need to put in some safety guards for you and your lenders. Here are mine:
-My lender needs to understand the value of the collateral, so I always get them to look at the deal and approve it. (If you are new and not very experienced, I would highly highly suggest getting an appraisal for you and your lender). My deals are pretty much no brainers so it is easy for my lenders to see the value.
-Never exceed 65% LTV of ARV. I build in a strong safety margin for my lenders. It also gives me peace of mind that my deals are solid when borrowing on them. If I am buying a property at a price point that exceeds this number, then I either don’t ask my lenders, or, I bring money to the table for the remaining purchase.
Now the side for you lenders :
They commit to an amount. You tell them the most important question to ask is : “Is this property worth what _____ says its worth? Can I clearly see that value?”
They get a hazard insurance policy with them listed as the lien holder.
They also get assurance that the property is being bought with a warranty deed with title insurance.
They get a note payable, from your company to them, and, they get a recorded mortgage that binds their loan note to the property (collateral)
They collect payments each month, depending on how you structure it. Or, you can let interest accrue on flips and they get paid back all at once, which would be their principle plus interest earnings.
The terms is all up to you and how you want to run your business. You may have to compromise at first, depending on what your availability to capital looks like .
A quick snapshot of what a transaction looks like is this :
I have a property under contract, and submit it to the title company. I then reach out to the next lender in line and tell them the amount, and if they want it. Once they say yes, then I send them an email with the property and loan request information. This includes :
-My opinion on value
-Terms (interest, length of loan, payment terms, etc)
-Purchase price and repairs amount
-Comparable sales to support value
They let me know that they approve, and we move forward.
Before closing, I have the insurance policy in place, and they get their copy with them listed as 1st lien holder.
The title company sends them wiring instructions. Or, they drop off a cashiers check to them, whichever the lender preference is.
At closing, I sign a note payment and a mortgage to them. I send them the note immediately so that they have it. The title company has the mortgage recorded with the county, and then mails it to the lender after it is recorded.
Thats pretty much it. I then set up payments, or, wait until the property is sold or refinanced. At this time, I inform the title company what the payoff is, and they get paid !!! They then sign a release of mortgage, which they have to have notorized.
So the only “work” that is needed from my lenders is this:
1)Read my property email info, understand it, and hit ‘I agree’ and reply.
2) Submit funds to the title company via wire or cashiers check
3) Sign a release deed or release of mortgage, either at their convenience which can be mailed back, or, at the title company
4) Get paid interest earnings.
Well, I hope this helps. If you have not brought on some lending partners and have wanted to… what are you waiting for ? There are plenty of people out there that want an additional asset to invest in.