5 Steps To Securing Private Money
By JD Esajian on March 8, 2017
Did you know there is a way to make money in real estate without using any your own funds?
One of the biggest hurdles new investors face is finding financing for their deals. Many investors know that by using other people’s money you can easily enter the business and start closing deals. It is no secret that the real estate business is currently in the midst of an upswing in popularity. There are many people you know who have a desire to invest but don’t have time or education to do so. By bridging the cap you can find a financial partner to fund your deals while you handle the everyday grunt work. The process of using other people’s money, or private money, has changed the fortunes of many inexperienced investors. If you are looking for financing for future deals why not start with the people you know. Here are five steps to securing private money.
- Develop A Contact List. A simple definition of private money is any type of financing from a private individual or institution. Instead of getting money from a bank or even a hard money lender you find financing through friends, family members, co-workers and anyone else you know. As we mentioned the popularity of real estate is currently at an all-time high. Without even realizing it you probably know at least a few people who are interested in investing. If you are looking for financing this should be your starting point. Go through your contacts and make a list of everyone on your email distribution. Be sure not to pick and choose between people you think would have an interest. You truly never know who may have money to invest or know someone that does. Sending your list an email may be slightly uncomfortable or embarrassing but you don’t know what they will say unless you ask.
- Plan & Pitch. Sending an email won’t do you any good unless you have a plan of attack. As you accumulate your list you should start by putting together exactly how you plan on turning an interest investor into a partner. Your email should state that you are actively involved in real estate and are looking to bring on a financial partner either for the short or long term basis. You want to find a balance between having enough information to get them to respond without making the email too long and technical. The final piece of developing interest is coming up with a pitch. You can expect, and hope, that your email gains an immediate response. However you need to be prepared for when the calls or emails start pouring in. You should have a brief overview prepared and be ready to answer any questions they may have. You should not expect them to commit over the phone. Your approach should be to get them to commit to a meeting where you will discuss everything about the process and answer any further questions they may have.
- Meeting. Regardless of the relationship you should treat meeting with a potential lending partner the same as you would with anyone else you want to secure funding from. It is important that you have a clear vision for the types of deals you want to pursue, what markets they are located in and how you plan on generating leads. From there you need to address the elephant in the room. Every potential lender wants to know what their expected returns are and the risk. Never throw around any numbers that you cannot back up. There is risk involved in every deal and this cannot be ignored. Some deals have higher upside than others but you need to always take a conservative approach with your estimates. Discuss timeframes, expectations, returns and potential variables that can pop up. By the end of the meeting you should have a pretty good idea of just how comfortable they are with you or if there are lingering issues needed to address.
- Follow Up. Even if you get a commitment your work is far from over. A commitment today may soon be forgotten in a couple of weeks if you don’t stay in contact. A private lender who is interested should be emailed every week or every two weeks tops. You should tell them what is going on in the market, any properties you looked at and you have been doing. They may never respond back but you should assume your email has been read. You should take a similar approach with lenders who were lukewarm but not ready to commit. Keep reaching out to them by sending email updates. Eventually they will see or hear something they like and be ready to act. If not they will ask to remove them from your list and you don’t lose a thing.
- Seal Commitment. If there is a deal that is a perfect match you should be ready to move forward. You can expect your partner to have a handful of questions about the process. Fight the urge to get annoyed or frustrated and take a proactive approach. Even if there is nothing new to report keep them updated with every detail. You should also anticipate what will happen next and always be straightforward with them if trouble is on the horizon. The goal is to not just secure financing but build a relationship for the foreseeable future.
There is financing out there if you are willing to look for it. In most cases you may not have to look further than the people closest to you to find it.