Last Updated on: 11th January 2023, 09:26 am
Whether you’re fixing and flipping or fixing and holding on your property as a rental, finding a good private money lender is one of the best business strategies you can do in real estate. Good private money can literally change your business and life for the better. But what does it mean when we say “Private Money Lender”?
Private money lenders are just simply the people giving out loans most commonly for real estate investment purposes. It can sometimes be a company or organization but more often just a single person.
But who are they?
Who are the Private Money Lenders?
They can be anyone from any of your networks of people. It might be your parents’ boss, uncles’ friends, acquaintances of your acquaintance, or even from one of your relatives.
These people are usually the ones that have extra money to put into investment (they don’t necessarily have to be rich). Most of the time, they have the same interest as you do in real estate, they just don’t have all the time and knowledge to do it themselves.
Steps to secure a loan from a Private Money Lender and what are the requirements for eligibility.
There are a number of things that private money lenders look at particularly before they can decide to lend you cash. So, this means you will have to prove to them that you are worth the investment and that their money is safe with you. Here are some things you can do to get a private money lender to give you a loan:
- Be professional and create a business plan that you can show them.
- Make a personal guarantee on the loan: That means putting your personal assets on the line for that loan as collateral. This will show that you are serious about it and that their money is assured with you.
- Give them a promissory note from your LLC: This means putting your LLC on the line by providing them with a promissory note stating that you are going to pay them back with interest. Note that this letter has to lay out the terms of the loan, including all the little details on the interest that they’re going to collect and when they’re going to collect it.
- Make them an “Additional Insured” on the property: This means that in the event that there was some kind of damage that happened on the property, the check that the insurance company would give would have their name (including yours) on it. This will show that you are not the only one that has ownership of that property but also them.
- Allow them to put a lien on the property that you’ll be investing in: This will allow them to have control over the property through foreclosure if you don’t pay them back.
Let’s move forward and discuss interest.
How much interest do private money lenders charge on your loan?
You can negotiate it to be at around 8-12% but it ranges depending on your relationship with them. Note that a private money lender can fund your real estate business from the entire purchase price to rehab. So, think about what can be a fair range for them.
When do you pay off your private money lender?
That depends on what type of private lender they are. And what that means is how much can they afford to loan, because typically lenders that lend less money may want to have their money back in just a couple of months, depending on how the negotiation went. But when you start running into other people that have more money to lend, very rarely that they want their money back asap.
Now that you’ve read the fundamentals, let’s now talk about the pros and cons of private money lending from the lender’s perspective.
Pros and Cons of being private money lenders in real estate investing
- Having a monthly interest income.
- Ability to set whatever terms you’re happy with, this includes collateralizing your loan and setting up the rules on how and when you’re getting paid.
- It takes more attention, a little bit more skill, and sophistication than just throwing your money at anyone.
- You are not entitled to any of the appreciation value of the property.
- There is no inflation protection on your end. This means that if the value of the property rises in sync with the cost of living, you’re not getting more than what the percentage of interest was negotiated.
If you ever want to become a private money lender and have that extra money of yours put to good use, then keep reading.
How do I become a private money lender?
- Find a borrower. Do this by working with industry professionals such as mortgage brokers, realtors, and appraisers, or you can simply speak to your own network of people to see if there is anybody looking to borrow a decent amount of money and that are willing to put up their property as collateral.
- Assuming that you found a borrower, you then now have to understand the marketability of the property that your borrower is putting your money on. Marketability includes property location, the type of property, the equity, and so on. This will give you an understanding of how much interest should you be charging your borrower.
- If both parties do decide to move forward and agreed to a set of terms and conditions, it’s time to get a lawyer to start legal work and put everything on paper.
Note that it’s gonna be hard to find deals if you have less money to lend. That is because mortgages are usually in large amounts.