How to Find That Very First Private Lender To Buy Property
With real estate, as in life, the first one is always the hardest
The first one is always the hardest.
That’s true with most things in life, but it’s especially true in real estate and when especially when it comes to getting that first private lender to actually up and lend you money.
You’ll endlessly hear various gurus and even well-intentioned “real estate intellectuals” say that the best way to BRRRR or buy and hold in general or flip for that matter, is to find a private lender.
While this is true, unfortunately this advice is pretty close to useless. It’s just not that easy to find someone to lend you $100,000 plus when you have no experience and little money nor credit to speak of.
“Just get rich,” they might as well say.
But fear not. Finding a private lender is by no means impossible. We’ve done it many times and yes, we had to start somewhere. You can do it as well.
Private Lenders Are Not (Usually) the Best Way to Start
Shockingly enough, I am going to advise new investors to start investing without using private lenders. Of course, there is no “one-size fits all” solution and so there are exceptions here. (The most obvious being if you have a family member with some money who’s willing to go out on a limb for you.)
Generally though, private lenders want to see you have experience. Indeed, long before they consider what kind of return they will get, they want to know that their principal investment will be returned. And the amount of experience you have is instrumental in convincing potential investors that yes, they will get their money back.
Unfortunately, you can’t gain experience buying real estate with private loans without getting said private loan. Thus, the private lending version of the chicken and the egg problem presents itself.
But there’s a simple way out: Don’t use private lenders on your first deal(s).
In my humble opinion, the best way to get started in real estate is either house hacking or buying a home to live in and then keeping it when you move on to the next one instead of selling it as most homeowners do.
House hacking is simply buying a property that needs to be fixed up but is still livable. Then you move in and fix it up while you live there. Obviously, this is easiest for the young and handy. For those interested in this strategy, it would definitely be worth checking out Craig Curelop’s book on the topic.
The other strategy is similar but much easier. There’s no fixing up involved. The key point is that you can get much better financing on a home to live in than you can on an investment property. For example, this is a comparison between the loans we’re getting on investment properties right now and the one I got my own personal residence six months ago:
Investment Properties: 4.5% Interest, 75% Loan to Value, 20 Year Amortization
Personal Residence: 3.0% Interest, 95% Loan to Value, 30 Year Amortization
Yeah, I know. Interest rates right now are absurd.
The loans home owners can get are beyond absurd though. Indeed, in many cases the conventional loans from banks are about as good as FHA loans these days (which goes up to 96.5% LTV). FHA and many banks will also lend up to a fourplex, so buying a fourplex, living in one unit and renting out the other three is an absolutely great way to get started as an investor.
The important part is that you want to buy a property that’s a step or two below what you can afford. This way, it’s much easier to buy the next house and hold the one you are currently as a rental when you’re ready to move on.
It also highlights just how wrong the gurus are. Gurus love to say how stupid having a job is. It’s basically their MO as James Jani points out so well in this classic video.
But having a job is essential to getting started in real estate (for the most part). Banks love W2 income and getting those great home owner loans is the best way to get your foot in the door as a real estate investor. So having a job is critical, at least at the beginning.
It’s critical both in getting your first investment properties, but also in giving you the opportunity to prove your experience and use that experience to convince private lenders to lend to you.
How to Find Private Lenders
Can you think of ten people who may have money that they would be willing to lend? Perhaps they have had it up to here earning 0.2 percent in the bank while watching inflation rates soar over 7 percent. Or perhaps they don’t mind. But you won’t know until you ask.
So can you think of ten people in your circle that might be in that boat?
Can you think of 20?
Can you think of 30?
Write these names down and then start going down the list and reaching out to them. Invite them out to lunch. Who would turn down a free lunch?
This is the method my father used and recommends and has helped him raise over $10 million in private loans.
Start with those closest to you who already trust you. Make sure to put together a “brag book” with your previous experience (those deals you bought with homeowner financing for instance) and any other relevant experience you might have. For example, are you a real estate agent or contractor? Do you have a business degree or a college degree in general? Have you worked in a law firm or have experience negotiating or whatever. Everyone has something so put it in there.
Also make sure to include your business plan that elucidates your strategy. Include a lot of pictures. Remember, a confused mind say “no.”
And make sure it’s a no pressure sort of thing. A pressured mind also usually says “no.”
We offer eight-percent, interest only and pay no points. (Each point is one percent of the total loan paid up front to the lender.) But you may want to start a little higher, say 10-percent interest with one point to make it more enticing.
We also make sure to give them a mortgage or deed of trust (which allows them to foreclose on the property if we don’t pay), a personal guarantee (which makes us personally liable for any losses) and add them as the lienholder on our insurance.
Once you have gotten a bit of experience and pulled in a few private lenders, word of mouth will begin to help. But you can also aid this process by actively seeking out private lenders. Make sure to attend plenty of networking, business and real estate events and always mention you are a real estate investor and offer X percent to private lenders.
It wouldn’t be a bad idea to start blogging or vlogging too. Not only might you pull in an interested party that way, but you can also use your posts and more proof of your experience in your “brag book.”
Finally, they loosened up the advertising rules for investors seeking private lenders with the JOBS ACT of 2012. This law makes it easier to advertise that you are seeking private lending on your website, do SEO marketing or direct mailing to potential lenders. (One good way to find them is to look for individuals who have made loans on properties such as what you will be buying in your city on websites like ListSource.com.)
Just make sure to consult with an attorney before doing any advertising like this.
Conclusion
Private loans are essential for investing in real estate in my judgement. Private loans facilitate all sorts of flipping and buy and hold opportunities. They have been the backbone of our growth strategy for over a decade.
But they aren’t nearly as easy to get as many gurus would make you think.
What’s paramount to remember is that what private lenders care about the most is getting their money back. So the most important thing to do in order to convince one to lend to you is to build trust. And for that, proving your experience is critical.
Thus, the way to a private lender’s heart is through (or more accurately, after) getting one or two homeowner loans under your belt to prove you know what you’re doing.