Compared to hard money lenders, private lenders are generally more flexible in their terms, the properties they will lend on and how they are compensated. They’ll invest in a deal as long as they get the rate of return they are looking for and the terms make sense. Keep in mind that each private investor is different, so be prepared to work with them to meet their personal requirements. This includes the rates of return, types of properties and timeframe of the deal.
Private lenders are generally people who have available funds for real estate ventures but don’t want to deal with the headaches and paperwork of managing tenants, negotiating with sellers and buyers or repairing properties. They can acquire the money they lend you from a number of different sources, including retirement funds, corporate or personal lines of credit, equity pulled from business or real estate, personal or business loans, profit from a real estate or business liquidation, inheritance and court case winnings.
Potential private money lenders include family members, friends, co‐workers, retired real estate investors, retired entrepreneurs, promissory note investors, customers and referrals. Don’t let yourself get offended if family and friends are unwilling to lend you their hard‐earned cash. Treating potential lenders professionally is always important and is particularly true when it comes to accepting rejection.
As with any other investment strategy, working with private money involves unique advantages and disadvantages.
|• No credit check – doesn’t show up on your credit report• Unlimited funds
• More control – you set the rules
• Get some of the profit when you sell and pay off the loan
• Cash flow possible
• Can make offers with confidence
• Can structure quick and profitable exit strategies
• Can be cheaper than a hard money lender
• Can be the foundation for a profitable real estate investing business
|• Locating investors can be difficult• Investors may have different financial goals than you
• Investors can change their terms and conditions from deal to deal
• Investors may run out of money
• You have to keep investors interested by keeping the rate of return attractive
• You have to know what types of deals investors like and don’t like
IMPORTANT NOTE: Because raising funds from outside sources involves complex elements, the Securities and Exchange Commission (SEC) has regulations that both protect and restrict average investors. For example, you can raise money to buy real estate investments through private investors, but you cannot publicly solicit for private investors nor can you guarantee any rate of return. Private investors, however, can advertise the money they have available. Each state has different rules and it is crucial that you do your due diligence before proceeding with any real estate deal. If you are uncertain of applicable SEC and state laws, always consult with an attorney with experience in real estate law.