Banks vs Private Lenders
Using Banks for loans is one way to obtain funding for your real estate investment however it is wise to consider the hoops you must jump through before that loan can be obtained:
- Slow process: Investors that find great properties at low prices need money fast.
- Red tape
- Seasoning issues
- Borrowing caps
- Endless paperwork
- Not knowing whether the loan will even be approved.
- Often banks will only loan on the purchase price of the house and not on the value of the house, thus penalizing him/her for being a superb investor.
- Will only allow you so many loans before they cut you off; This is NOT dependent on your financial situation.
- Funds offered can be used for:
- Down payments
- Re-instating a loan
- Cash for a short sale
- Moving money for seller, etc.
- Purchase multiple properties with little or no money down
- Loans do not appear on your credit report so your FICO score is not negatively impacted
- Closings can be done within 7-10 days and sometimes sooner
How to find private lenders?
Many private investors are looking to make a quick, good return on their cash that want to make a good return on their cash and Investing in CD’s or 401K is high risk, low return proposition.
- Find investors in your inner circle – People you know that trust you:
- business contacts
- Fellow real estate investors from your local area
- Your lawyer, accountant, doctor, etc.
- Other ways –
- direct mailing to CD holders
- inviting people to an information luncheon
- advertising in the newspaper (make sure you read the SEC rules)
Have a Private Lending Plan
- Create a detailed private lending plan in clear concise words to show you know what you are doing
- Create a presentation to display details, examples, and graphs / diagrams of how it will all work IMPORTANT: Offer a note, mortgage (deed of trust), add them to the insurance as additionally insured, get them title insurance, etc.
- Tell them how you will pay them back –
- monthly or when your received payment, etc.
- How the interest will work – simple or compound When interest begins
- Minimum interest (i.e. at least 2 months)
- Decide on the minimum investment
- Do you pay higher for second liens?
- Plan for objections
- If Seller wants to get his money out earlier
- Do you pay partial months in full? etc.
- Answer all questions BEFORE they have an objection
- Network and tell people how you can give them a good return on their money
Create a brochure / credibility kit
- An overview page includes
- Information about your history in real estate
- Number of deals
- Training programs
- Show you are a serious real estate professional
- Discuss how the program works
- Explain how private investments get a high rate of return, and are a secure investment
- Show and explain all the proper paperwork
- Explain the sources of capital they have available for making the investment such as HELOC, IRAs, 401K, CD, Savings accounts
- Give examples of past deals
- Page for frequently asked questions
Your private lenders do not necessarily need to be wealthy. Someone with $5000 – $50,000 in a retirement plan could help you do a lot of deals!