Table Of Contents
- Three different types of private lenders
- Why real estate investors seek out private lenders
- How to find private lenders
- How to show private lenders you're the real deal
- How to nail your pitch to private lenders
- Building relationships with private lenders
- Why do private lenders invest in real estate?
- What you should give private lenders (other than returns)
How To Find Private Lenders To Fund Real Estate Deals
When investors can’t secure financing from banks and traditional financial institutions, private lenders can swoop in to save the day. This piece goes into detail about how to find a private lender for your real estate investments.
We'll cover the different types of private lenders, how to prepare a great pitch, and the importance of building a relationship that benefits both parties.
Three Different Types Of Private Lenders
Private lenders come in various shapes and sizes, each with its unique advantages and disadvantages. Here's a breakdown of the three main categories:
1. Individual Lenders
These are regular folks with extra cash who want to invest in real estate projects. They could be friends, family, or even acquaintances. The best part? They might have a personal interest in seeing your project succeed. To find individual lenders, start by talking to people in your personal and professional circles. You never know who might be interested in investing or who can introduce you to someone who is.
2. Hard Money Lenders
These professional companies specialize in short-term, high-interest loans. They're more focused on the potential value of the property and your ability to make a profit than your credit history. To find hard money lenders, you can search online or ask for recommendations from fellow investors. Keep in mind that interest rates can be significantly higher with hard money lenders, so be sure to factor that into your budget.
3. Private Equity Firms
These big players pool money from multiple investors to fund large-scale real estate projects. They have stricter requirements and higher minimum investments, but if you've got a big project in mind, they might be the perfect fit. To find private equity firms, attend industry conferences and events, and network with other investors and professionals in the field.
Why Real Estate Investors Seek Out Private Lenders
Access to private money gives you the flexibility and speed to get the best deals done more quickly. You gain the control that your business was lacking and you avoid paying unnecessary fees. Working with Private Lenders will eliminate the burden of a financial obstacle and allow you to focus on the next course of action once you’ve secured a piece of real estate.
It also gives you the flexibility to decide with your Private Lender what the return will be on the money that they invest with you. As you develop relationships with your Private Lenders, they will become more enthusiastic about lending you money with every deal, assuming that you pay them back in the terms and time frame that was agreed upon.
Unlike the stock market, CD’s, and typical savings accounts, a Private Lender’s investment is backed by real estate and can return a much higher rate on their money. Private Lenders can even use retirement accounts for lending private money.
How To Find Private Lenders
How Do You Find Private Lenders? Network, Network, Network
To find private lenders, you'll need to mingle and build relationships. Here’s a few ways to do that;
1. Join Local Real Estate Clubs And Associations
Attend meetings, workshops, and seminars to meet like-minded investors and learn about lending opportunities. These events are a goldmine for networking and can lead to valuable connections.
2. Take It Online
Use social media and real estate investment websites to connect with potential lenders and join relevant discussions. Platforms like LinkedIn, Facebook, and online forums can help you find people who are interested in investing in real estate. By engaging with them, you can expand your network and discover potential lenders.
3. Ask For Referrals
Your real estate agent, attorney, or accountant might know private lenders who'd be a perfect match for your project. These professionals often have extensive networks and can connect you with the right people.
4. Find Investors Through Direct Mail
It may sound crazy - but send personalized letters, postcards, or newsletters to potential lenders that showcase your investment opportunities can actually help you to at least start the conversation with private lenders.
Research your target audience and craft a compelling message that highlights the benefits of investing in your project. Don't forget to include a call-to-action and your contact information.
How To Show Private Lenders You’re The Real Deal
Before you approach a private lender, you have to establish your credibility as a good investor. Remember - investors are not only investing in your project - they’re investing in you. Establishing your credibility helps reassure potential lenders that you're a good investment.
Here are some ways to affirm your credibility to private lenders;
1. Craft A Rock Solid Business Plan
Map out your investment strategy, target market, and financial projections. This will show the lender that you've thought things through and are serious about your project. A well-researched and detailed business plan can make a big difference in securing funding.
2. Prove Your Track Record
Start with smaller projects and build up your portfolio. Successful investments will make you more appealing to lenders. Document your past projects, including the purchase price, renovation costs, final sale price, and profits made.
3. Put Together A Dream Team
Show that you're serious by partnering with experienced professionals like attorneys, accountants, and real estate agents. A strong team will not only help you navigate the complexities of real estate investing but will also make your project more attractive to potential lenders.
4. Dial In Your Personal Credit
A strong credit score and financial history will make lenders more confident in your ability to repay the loan. Pay off any outstanding debts, and make sure you have a history of on-time payments. If your credit isn't perfect, consider partnering with someone who has a strong credit score.
How To Nail Your Pitch To Private Lenders
When you've found some potential lenders, it's time to prepare a killer pitch. The goal is to convince them that your project is worth investing in. Here's what to include:
1. Paint A Picture Of The Property And Investment Opportunity
Describe the property in detail, and explain why it's a great investment. Include information on the location, neighborhood, and any unique features or selling points.
2. Perform A Detailed Market Analysis
Show that you understand the market, and discuss the potential for appreciation. Research local market trends, run comps on similar properties, and demonstrate the demand for real estate in the area. This will help the lender see the potential for a successful investment.
3. Outline Your Financial Plan
Clearly outline your projected returns, potential risks, and exit strategies. Break down the numbers and provide a realistic estimate of the costs involved, including purchase price, renovation expenses, holding costs, and potential profit. Be transparent about any risks involved and how you plan to mitigate them.
4. Make Your Presentation Pop
Use visuals, charts, and graphs to make your pitch easy to understand and engaging. This will help the lender grasp the information quickly and see the potential of your project. Tools like PowerPoint or Prezi can help you create a professional presentation.
Relationships With Private Lenders Go Both Ways
Negotiating with private lenders is all about establishing trust and mutual benefit. Here's how to do it:
1. Be Transparent
Be upfront about your expectations, needs, and potential risks. Honesty is the best policy, and it will help establish trust between you and the lender.
2. Offer Competitive Rates
Make sure you're offering interest rates and terms that align with the lender's investment goals, making the deal attractive to them. Research market rates and be prepared to negotiate to find a middle ground that benefits both parties.
3. Communicate Frequently, And With Detail
Provide regular updates and progress reports to keep the lender informed and engaged with the project. This not only demonstrates your commitment to the project but also helps build trust and rapport with the lender.
4. Seek Out Feedback
Show that you're willing to adjust your plans as needed to ensure the project's success, and be open to suggestions from the lender. This collaborative approach can lead to a stronger, more successful investment.
Why Do Private Lenders Invest In Real Estate?
Private Lenders are interested in building their wealth and a real estate investor can typically offer a return on a Private Lender’s money that is larger than what they’re getting in CD’s, stocks, mutual funds, bonds, and savings accounts.
It’s also a more secure way to build wealth more quickly, whereas investing in the stock market, CD’s, or a savings account can be slow and can result in breaking even or even losing money – a lot of money.
What You Should Provide To Private Lenders
Along with a return on their investment (obviously), private investors want to make sure their interested are protected with things like;
- Promissory Note – a contract that outlines the terms that you agree on.
- Deed Of Trust - A deed secures the private lender’s investment to the property and will allow them to foreclose if payments are not made on the property.
- Hazard Insurance – This gives your lender an added layer of security by adding them as additional insured.
- Detailed photo gallery of the property, aka a virtual walkthrough
- Repair estimate of the entire rehab project
- Deal analysis
- 3-5 comparable sales to show the After Repair Value (ARV)
Private lenders are one of the many ways to fund your next deal. But finding a killer deal makes securing funding that much easier.
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