What is Private Money and how to raise it?
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What Is Private Money?
Private money is money lent by individuals where the real estate investor helps create the terms of the investment such as interest rate and length of loan. A private money loan can also be structured as a partnership agreement if you give away a piece of the upside as part of the terms and typically cover the entire purchase price of a property. So in its simplest form private money is an arrangement for you to use someone else’s money to purchase real estate and is the only way to truly buy investment properties with no money down using none of your own credit.
Now private money is different than Hard Money. Hard money is money lent from an individual or institution that is “asset based” and typically has higher rates of interest and shorter terms. This means that the loan only takes into account the properties value compared to the investors purchase price. Typical hard money loans last 6 months to one year, require the investor to put in some of their own money, and have interest rates around 15% - 20%. Using Hard Money is fine when you are quickly flipping a property that has a big spread but can be risky and expensive if you end up holding the property for any length of time.
How To Raise Private Money
One of the biggest motivational factors for someone to lend private money to a real estate investor is because they can earn good returns secured by a real asset. By investing in the stock market they are “investing” in a companies future profits where lending private money is simply a loan on a piece of real property you can drive by and touch. Using the current news to your advantage one can show that real estate prices are at an all time low and bound to increase once the market returns. By showing a person with money you have the skills and understanding of your local market will comfort them into lending you the money. Here are a few places to search for private money:
• Individuals with Self Directed IRA’s. Self Directed IRA’s typically earn individuals 5-8% returns where you could structure a deal showing the potential lender returns between 10% - 20% or more. Spend some time and learn the process and paperwork involved with having an individual with an IRA lend you money so you can walk them through getting their Custodian to release the funds.
• Family Members. While this source is a natural starting point it can be a touchy subject and there is little room for error. Make sure you have all your ducks in a row before soliciting private money from family members.
• Spread the Word to Friends and Co-Workers. You never know who is earning low returns on their money or investing it with other individuals. By talking about your investment opportunities you are effectively marketing your business to potential lenders. Keep a couple of case studies of successful investments you have done in the past to prove your expertise.
• Volunteer at a Retirement Community. Ok so this is a little aggressive, but it works. The elderly have money (in most cases) so find an upscale retirement community and see how you can get involved. Over time you will make some friends and raise some private funds.
• Hold Free Seminars about Investing in Real Estate. By becoming the local real estate expert individuals that either don’t have the experience, or the time will want to invest with you. This is a great way to spend your time marketing yourself, your business, and raising private money at the same time.
Things to Think Of When Raising Private Money.
Whenever you structure a private money transaction always try to pay any interest payments to the lender when the property sells instead of monthly. This cuts down on monthly paperwork and frees up cash flow.
How do you deal Private Money Structuring For Real Estate Investments?
You can easily get confused when it comes to raising private investor capital for your real estate investment initially as you have too many choices for structuring your private money deal. Hence, it is essential to know the different ways through which you can bring private money into your investment deals. Next try to keep the rule “one lender per investment opportunity” if you can. This keeps things clean and keeps your liability as an investor down to a minimum. Along with this concept is to keep any investments you purchase in separate LLC’s so you are not personally liable for the outcome of the investment. Lastly do not sign a personal guarantee. Sell the fact that you are both investing in the real estate even if you structure the investment as a loan instead of a partnership. They are investing money and you are investing time and experience!
Therefore, when raising private money it is essential to do your research first and be prepared to make a case as to why this investment is a good opportunity for the lender. Pre-structure the loan or profit sharing program before you go out to raise the money and always come prepared with the supporting evidence to your initial meeting. Becoming an expert in raising private funds is key to investing in real estate using none of your own money or credit and will help you realize your financial dreams.
Article Source: Articlelogy.com
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