There are few safer bets in investing than real estate. When you know the fundamental tactics and strategies, a solid foundation in real estate can set the foundations for virtually any form of portfolio and investment strategy.
While there’s a lot you can do with the money, saving it wisely can help you build a healthy investment strategy. Private money lending may be one of your best options. At Zumbly, we help you through the house-buying process with our home score algorithms and other real estate resources. Here, we’ll take a look at what private money lending is, how these deals take place, and who are the ones who can go for it.
Related: How to Make an Offer on a House
What is a Private Money Lender? How Do You Find Them?
A private money lender is someone who loans money using a note and a bond of trust. Private money lenders are individuals or companies that are not related to any financial institutions (like banks) who lend money to help fund a real estate transaction.
Private money lenders lend out cash in a scenario where the recipient either doesn’t qualify for a traditional loan or doesn’t have the time to wait for the loan approval to be processed. Private money lenders can often be found in your social or professional circles, and they can be divided into the following categories:
The Primary Circle (Friends and Family): Your family members and close friends form the first circle of private money lending. Since it’s easier to explain your situation to them, they’re more likely to lend you the money.
Negotiating the terms beforehand is always advisable, even if you know your family well. This will help you avoid conflict. Friends and family may not be the most robust source of capital and you might feel guilty about borrowing them, so this tends to be more of a supplemental choice.
The Secondary Circle (Friends and Colleagues of Friends): When you know someone through a close friend or family member, it’s known as a secondary connection. This group of people can also serve as private money lenders.
The bigger your primary circle, the bigger your secondary circle – hence, increasing the number of people who might be willing to lend you the money. However, since these aren’t your immediate connections, you’ll have to invest more time in convincing them to give you the money, such as through investment presentations, lunches, and so on.
The Third-Party Circle (Investors You Don’t Know Yet): This circle consists of people you don’t know personally, which is why it can take longer for them to become your capital partners, despite this being the capital pool that’s the biggest among the three.
You can do this in two simple ways. You can either go to a website that provides you with contacts of investors or get in touch with a list broker. The latter can help you come up with a few names that could be your potential investors based on specific criteria such as net worth, willingness to invest, etc.
Strategies for Private Money Lending
When opting for private money lending, there are specific tips to remember that will increase your chances of receiving the loan. Those tips are as follows:
Look for private money lenders that aren’t too far away. Explore the local marketplace and talk to the local experts. Your goal is to find a lender who gives primary importance to the investment side of the business and then the lending part of it.
You might think that keeping all the options open is a wise move, but more often than not, it leads to you having to wait for a longer time to require the capital you need. This is why it’s vital to stay within your niche. If you want to borrow $50,000 from the lender, there’s no use looking at lenders who don’t lend anything less than a million dollars or so.
Have a short speech prepared
This speech should enlist what you need the money for, and how you plan on paying it back. Clear statements often help in closing deals.
Attend events and look up people who have achieved success in the area of getting money from private money lenders. The more people you talk to, the more confidence you’ll have in your strategy.
If you’re trying to secure lenders from the first circle, try to ensure that these are people with whom you have a consistent relationship. You want to avoid personal and financial conflict mixing.
Get help with property investment by checking out Zumbly’s home score algorithms.
The Structure of Private Money Deals
Private money deals often have the same structure as a bank loan, where the lender lends the money and the borrower agrees to pay it back with interest and within a given schedule. The duration of these loans is usually five years or less and consists of balloon payments.
Private money loans can, at times, be used in addition to a primary bank loan to cover the costs related to a down payment. In that case, your private money lender should understand his/her role as a second mortgage holder.
Regardless of the path you choose, paperwork needs to be involved in protecting the assets of both parties. All of this is done in the presence of an attorney to ensure that both parties agree with what’s on the contract.
Related: What is Short sale
When Can You Use Private Money?
Although an individual can finance real estate investments in several ways, private money lending is often the best option to consider. A few of those situations are:
Real estate is all about grabbing the property that you have your eyes on as soon as possible. In case you can’t gather the money on time, you end up losing the property you liked in the first place. Private money lending helps in this case with its speed and efficiency. After getting the funds from a private money lender, you can quickly close the deal before you run out of time.
Banks and other financial institutions may be apprehensive about working with someone with a bad credit score. However, with a private money lender, you don’t have to fret about the traditional guidelines and requirements related to your credit history. Even if your credit score is below average, a private money lender may still loan you money if you demonstrate reliability.
Find your next property with the help of Zumbly.
Requirement of Cash
Sellers are often inclined towards cash offers, and if you go for private money lending, you can choose to offer cash, which is particularly useful if you’re aiming to acquire bargain deals or distressed property. This hard cash enables you to win bids and also increase your down payment, which saves you from having to pay a higher price.
Related: What is Due Diligence in Real Estate
Private money lenders can help non-traditional home buyers and prospective buyers who need to fund their purchase quickly. So what do you need to do? First, start thinking about whether or not the best lender for you is in your primary or secondary circle, or if you need to consider a lender from the third-party circle. Check out homes using Zumbly’s home score rating. With the right lender and confidence in the home you want to buy, you’re good to go.