How To Find Private Financing
By JD Esajian on August 23, 2019
The number one misconception about investing in real estate is that you need personal capital to get started. While it can certainly help, it is far from a necessity. With the way real estate has changed over the years, there are numerous financing options that can help you get started. Most of these will come from non traditional sources such as hard or private money lenders. These lenders work as a bank without the strict rules and guidelines of traditional banking.
Private lenders can be your brother, uncle, high school buddy or co-worker that has money to invest but doesn’t quite know how to go about it. They are tired of seeing minimal returns on their money and want to dip their toe in the real estate waters. If done right it can be a mutually beneficial partnership that can last for several years. If done poorly, you will lose a financial option and put a strain on your relationship. Before you talk to anyone about financing, you should do these five important steps first.
- Know The Business: There are many times in business when being too overzealous will come back to bite you. You need to toe the line between aggression and discipline. Such is the case when you are looking for financing. By going into a meeting without knowing what you are doing you can ruin your chances before getting off the ground. You are better off taking your time and knowing every facet of the business first. Understand deal structure, financing, specific markets and the best properties to achieve your goals. You will never know everything until you get started but you can’t watch a few investing shows and think you know the business either. Start going to investment club meetings, scour through websites and read as much as you can. The more you know about real estate the stronger your financing pitch will be.
- Understand The Math: In business it is important to put yourself in the shoes of the people around you. If you ask someone to invest with you the most obvious question is what is in it for them. Here is where you need to cite specific numbers and not just estimates. Private investors, and investors in general, want to know their return on investment (ROI). If you don’t have a property already picked out you can use projections, but make sure you don’t use the best-case scenario. You need to be realistic with your materials, budget and timeframes. If not, eventually your partner will see that the estimates given don’t make sense and they will be greatly disappointed with their return. They won’t be as willing to work with you again and you will be right back where you started. If you don’t know the math, find a fellow investor at a meeting or talk to someone who does. There are many seemingly hidden items in a rehab that aren’t apparent if you have never flipped a property before.
- Have A Strategy: You need to know as much as you can about your investing strategy prior to looking for financing. There are several important questions you need to answer. Do you have a few investing markets you are going to target? Do you have a property type in mind? What kind of price points will you go after? Do you have a lead generation niche? Is there a real estate agent that can handle the transaction? Only when you answer these questions, and more, should you even think of seeking financing. Not only will your private money lender ask these questions, but they are the backbone for your bottom line as well. The goal isn’t to simply find someone who is willing to invest with you. You want to be able to make a profit yourself and start building your bottom line, so you don’t have to use any outside capital in the future.
- Take Personal Inventory: There are many private financers who don’t want to be actively involved in the process. They will give access to capital and wait for their return. You need to know what role you are going to fill in the transaction. In most cases, you will need to do a little bit of everything. You should take a minute to evaluate your strengths and weaknesses and try figure out where you will be used best. It is not enough to simply find the deal and step out of the way. You still need to see the process through from acquisition to end sale. You don’t have to be the project manager, but you should oversee the budget, work to be done and timeframe. Without knowing your role, you will either end up doing too much or you may be disappointed with your share of the profits.
- Start With Someone You Know: Unless you come from a sales industry you can bet that your first few financing pitches will be less than stellar. It is advisable to start with someone you know, and trust. Your pitch doesn’t need to wow a room of 500, but you should know what you are talking about. Use your first few pitches to find answers to the most common questions asked. Understand the process and try to be one step ahead for your next pitch. Hopefully, you can find one reliable private financer, but even then, you will probably need to find a hard money lender for certain deals along the way as well.
You always want to put your best foot forward when looking for private money. As close as your audience may be, you may only get one chance to leave a positive impression.