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Using Private Money to Fund Your Real Estate Deals

Apr 18, 2008
One of the most valuable abilities you can have at your disposal as a quick turn real estate investor is the ability to raise cash from private sources to meet any funding need. If you become an expert at raising private money you will have developed a skill that is highly valuable to you as well as to those you work with.

The potential uses of funds from private money are limited only by the bounds of your creativity, but there are some common scenarios where they can be applied to great effect. For rehab investors (you or your buyers) private funds can be used for purchase and repair costs and paid back when the property is sold or refinanced.

If a juicy deal is about to go down the tubes due to a premature foreclosure, you can use private funds to postpone the foreclosure and save the deal, paying the money back when it closes. Another instance where fast private funding can come in handy is any time you want to execute a double closing and the title company requires that you have the cash on hand for the purchase.

This money can be borrowed and paid back extremely quickly, perhaps within a few days. There may also be a circumstance where an individual who can't qualify for conventional financing has enough equity in a property to convince a private lender to lend money for a purchase or refinance.

Who are private lenders? Basically they're ordinary people, with the qualifying feature that they have some sort of substantial savings or assets that are not earning them a significant return. This might exist in the form of cash in a savings account or CD, in the form of low yield bonds or stocks, or it might be held in the form of a self directed IRA.

It is important to realize that your private lender does not necessarily have to loan you the cash themselves, but can use their assets to secure a loan on your behalf from a conventional lending institution. For example, if your private lender owns some municipal bonds earning 6% which she is willing to pledge to secure a loan on your behalf, you could offer her a 6% return on the cash you borrow and she would double her earnings, since her bonds would continue to earn 6% while you are using the cash.

Knowing who private lenders are is important, but so is knowing how to acquire their contact information. If you handle your business appropriately finding these individuals should happen on a regular basis.

There are three techniques to build your list of private lenders.

The first is networking; as you talk to your colleagues and others in the business, make a habit of asking what private lenders they use and granting favors in exchange for referrals. The second is canvassing your existing wholesale buyers by asking them if they lend money for real estate transactions. The third is cultivating new private lenders by asking "Have you considered investing in real estate?" whenever you encounter a qualified individual.

Negotiating with private lenders should not be difficult. Simply offer them security with a low LTV and guaranteed repayment and an interest rate that will be better than what they're already getting, and ask for reasonable terms in exchange: long term or short term amortization, a balloon note at the date of your choice, no monthly payments; these are all reasonable things to ask for if your deal is solid.
About the Author
Omar Johnson is a successful real estate investor and author of the home study course "Secrets To Making Big Money In Real Estate With Little Cash and No Credit" For more info visit http://www.gettingrichinrealestate.com
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