Using your own money to fund real estate deals is a difficult (and slow) way to grow your business…
… assuming that you’re a normal person who doesn’t have millions of dollars sitting in the bank.
Heck, even if you do have money to fund your own deals, securing private money is a great way to do more deals and grow your business.
But how do you find private money lenders? How do you build trust with them, especially if you’re just getting started? And how much interest should you pay them?
Let’s talk about that!
1. Meet With One Person Every Week
The first step is to find private money lenders.
And the only way to do that is to commit to meeting new people, building relationships with them, and discussing the investment opportunities you have available.
If you’re serious about raising private money, then set a goal to meet with one new person every week who you think might have access to a good chunk of capital.
2. Overdeliver on Your Due Diligence
The biggest objection that private money lenders will have (especially when they’re working with someone new) is that they want to make sure they’re not going to lose money.
This means you have to build trust with them and show them that you’re going to take their investment money very seriously and that the properties you purchase are low-risk.
So it’s a good idea to overdeliver on your due diligence.
Walk the investor through all of the comps, show them pictures and give them a breakdown of repair costs. The more honest, transparent, and confident you are about the deal they’re investing in, the more likely they are to lend you money.
3. Make The Investor an Equity Partner
You probably won’t want to do this once you’ve built a reputation and it’s easier to find private money lenders, but at the beginning (and for larger projects), you might consider making the investor an equity partner in the deal.
That is, rather than paying monthly interest payments, the investor gets a percentage of the profit from the deal.
You can decide what percentage that is, but 50% is a pretty compelling number if you’re really trying to convince someone to lend you money.
4. Use a Tiered Interest Rate System
At some point, lenders will want to know how much money they’re going to make by investing with you.
After they are convinced that the investment is safe, this is likely going to be their second biggest concern.
(This is assuming that you’re not making the investor an equity partner)
So how much are you going to offer private money lenders? 8% is a good starting place but you might consider offering a tiered interest rate system to incentivize people to invest more money with you.
- $100k or less – 8%
- $100k to $200k – 10%
- $200k to $300k – 12%
You might be surprised at how many people increase their investment amount in order to secure a higher interest rate.
5. Bump The Interest Rate To Defer Payments
What if you could secure private money but not have to pay monthly payments on those funds until after you finished the deal?
That’d be pretty convenient, eh?
Well, here’s a trick that you might use: after you offer the investor 8% (or whatever interest rate you’re offering), tell them that you’ll bump their rate 1% — to 9% in this case — if they’ll defer payments until after the deal is finished.
Most investors are trying to make as much money as possible… and they’ll be willing to wait a little bit longer in order to make a little bit more.