Private money investors, also known as private money lenders, are non-institutional (non-bank) individuals or companies that lend money—often secured by a deed of trust and a note—for purposes of real estate funding.
Private money investors verses hard money lenders
You must understand the difference between private money investors and hard money lenders. Both lend money for real estate funding, but the two have differing expectations.
Private money investors lend “private money.” You will have a lot of control of the money without interference from the investors providing real estate funding. As long as the investors get a specified amount of return on the money they lend, they will not care about the details of the business arrangement.
Private money investors verses hard money lenders
You must understand the difference between private money investors and hard money lenders. Both lend money for real estate funding, but the two have differing expectations.
Private money investors lend “private money.” You will have a lot of control of the money without interference from the investors providing real estate funding. As long as the investors get a specified amount of return on the money they lend, they will not care about the details of the business arrangement.
Hard money lenders, on the other hand, lend “hard money.” With hard money, the lender has a lot more control over how the money is spent. In fact, a hard money lender will only lend money for certain real estate projects, but not others. For instance, some lenders may be open to financing raw land deals, but not rehab projects. Even after the real estate funding is provided, the investor often follows up to make sure that you are only spending the money on agreed-upon projects.
5 Steps to getting real estate funding from private money investors:
Private money investors, especially for real estate funding, are sometimes much better than banks. With so much freedom in spending the money and not so many rules to follow, they afford you greater peace of mind than you can get through banks.
5 Steps to getting real estate funding from private money investors:
- Find a private money investor: You can get real estate funding from two types of private money investors: family and friends with some money they might be willing to invest; and private money investors already in the lending business. Conduct your own research, get referrals from friends and family, and ask other real estate investors to help you find reliable private money lenders who can, outside your circle of family and friends, provide real estate funding.
- Make contact with the private money investor: Once you have identified three to five potential investors, make contact by writing a letter to each of them. State that you are a real estate investor looking for people interested in receiving a good return on their money, secured by real estate. Offer to set up a lunch meeting to discuss potentially lucrative real estate funding further.
- On the first meeting, bring your plan: You are going nowhere without a business plan. In the plan, describe what types of properties you buy, how you intend to improve them, and how you will sell them. Highlight the profit margin you foresee.
- Carry proof of past deals: You want to look professional, right? Well, you need to prove that you have, indeed, been in the industry and done similar deals before. Provide pictures and details about your past deals, including timelines and numbers. Private money investors love this. Or, lacking these past deals, arrive with potential deals needing real estate funding and a thorough analysis of each deal.
- Prove that the investor's money is secured: As excited as investors may be, they can only provide real estate funding if they are guaranteed some profit. You need to make them know that their loan will be secured with the first lien deed of trust. Other lenders may even want a personal guarantee, especially if you buy your properties using entities such as a limited liability company (LLC). You need to have an attorney draw these up for each loan.
Private money investors, especially for real estate funding, are sometimes much better than banks. With so much freedom in spending the money and not so many rules to follow, they afford you greater peace of mind than you can get through banks.