Using your own money to fund real estate deals is a difficult (and slow) way to grow your business…
… assuming that you’re a normal person who doesn’t have millions of dollars sitting in the bank.
Heck, even if you do have money to fund your own deals, securing private money is a great way to do more deals and grow your business.
But how do you find private money lenders? How do you build trust with them, especially if you’re just getting started? And how much interest should you pay them?
That’s what you’re going to learn about in this guide.
What is a private money lender?
A private money lender describes a person or private company (sometimes, just a wealthy individual) that provides loans to individuals or companies. Technically, a private money lender could provide funds for growing any type of business, but in our case we’re talking about private money lenders as it relates to real estate investing.
Here’s the general definition of private money lenders from CFI:
“Private money loans – or simply private money – is a term used to describe a loan that is given to an individual or company by a private organization or even a wealthy individual. The organization or the individual is known as a private money lender.”
The benefits of using a private money lender (instead of your own money or a traditional loan) include…
- Easy Qualification — Qualifying with a private money lender usually just includes A) building a trustworthy relationship and B) showing your trackrecord of past successful investments.
- Fast Money — Private money allows you to grow your investing business more quickly because you have immediate access to the funds once an agreement is reached.
- Consistency — Finally, if you build strong relationships with your private money lenders and prove to them that you’re an investor who’ll pay them back on time, they’ll likely want to keep investing with you. This gives you a massive financial advantage over your market competitors.
Private money lenders don’t usually check your credit score (unless you’re working with a private money lending company) and they aren’t as regulated as bank loans.
We recommend building your own little army of private money lenders to support and grow your real estate investing business, but there are also a few private money lending companies that you should be aware of.
Beware, however, that these companies sport some wicked-high interest rates, sometimes up to 20%. From our experience, you can secure private money at a much better rate by finding your own lenders.
In this guide, we’ll show you 12 ways to find private money lenders to fund your deals.
The Difference Between Private Money and Hard Money
You’ve probably heard the terms “private money” and “hard money” being used interchangeably.
And that’s because they’re basically the same thing.
But in today’s most common usage, there is a slight difference.
Private money is typically a loan that comes through a wealthy individual.
Hard money is typically a loan that comes through a private company with a more clear-cut application process.
(The companies we mentioned in the previous section, then, would be hard money lenders)
Almost always — because of the meaningful relationship between you and a private money lender (a relationship that can’t be formed with hard money lenders) — the interest rate with private money lenders will be more affordable.
How to Use a Private Money Lender
Now you should understand what a private money lender is, but how do you use those funds?
When it comes to real estate investing, there are two things you can do with private money…
- Buy — Purchasing your next investment property takes a good chunk of cash… and private money lenders are great for expanding your portfolio.
- Refinance — If you’re using the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat), you can use private money lenders to do a cash-out refinance on a bank loan… which allows you to repeat the process with a new bank loan.
Note: Don’t misunderstand our usage of the word “Use” in the heading above. You shouldn’t not seek to “Use” your private money lenders… you should treat them with respect, pay them on time, and build trust. Treat them well and they’ll likely keep investing with you well into the future.
1. Create Your Portfolio
Here’s what every private money lender is afraid of: losing money.
In real estate, the bets are big — often upwards of $100,000 — and the last thing that a private money lender will do is place their chips where the ball is unlikely to land.
Your job in meeting with a new potential private money lender is to show them that you mean business, that you’re trustworthy, and that you have a trackrecord for doing profitable deals and paying people on time.
The more impressive your portfolio is, the more likely the private money lender is to invest with you.
Of course, if you’re just getting started and you can’t show them your proven history of successful invesments, then do what Ryan did to raise his first $100,000 — he created a hypothetical deal, showed it to a private money lender in his community, and asked “If I can find a deal like this, will you fund it?”
The private money lender told Ryan that he would fund it, Ryan found a similar deal, and the rest is history (learn more about how this happened in tip #9).
2. Tell Your Inner Circle
The first thing you should do to find private lenders is tell your friends and family about what you’re doing. This is the lowest hanging fruit.
It’s even possible that someone in your existing inner circle might be willing to fund your next deal.
Call your family, text your friends, and message connections on Facebook. For those who you don’t know super well, you can use say something like the following…
I hope you’re doing well. I’m reaching out because I’m looking for private money lenders to help me grow my real estate investing business. And I know you’re super well connected.
I was wondering… if you or someone you know is looking for an investment opportunity will you let me know or send them my way?
I’d really appreciate it!
3. Network, Network, Network
The investors who grow their businesses the fastest have a lot of private money lenders who fund their deals.
But the only way to build this type of network of lenders is to… well, network.
In the same way that you might seek out cash buyers (if you’re a wholesaler), you should also seek out private money lenders… people with access to a lot of cash who’re looking for passive investments.
This means meeting with potential private money lenders consistently (check out tip #9), being active on social media, and attending local business-owner meetups. The more well-connected you are to people online and offline, the more natural opportunities you’re going to find for securing private money.
And remember… don’t be quick to judge someone.
You never know where your next chunk of cash will come from.
4. Attend Foreclosure Auctions
Who goes to foreclosure auctions?
Answer: People who have access to a lot of cash and are ready to purchase an investment property sight unseen.
(After all, the rules for foreclosure actions require any serious bidders to fit those two criteria)
So it’s not a bad idea to attend foreclosure auctions — not just for the purpose of finding good deals or finding cash buyers... both of which foreclosure auctions are great for — but also for the purpose of finding potential private money lenders.
Be courteous about when you interact with people at a foreclosure auction (and don’t interrupt them when they’re bidding), but when there’s a lull in activity or if it’s clear that someone isn’t interested in the current property being auctioned, introduce yourself, tell them what you do, and ask if you can get their email address or phone number to follow up about investment opportunities when they come up.
A few days later, contact those people and ask them if they’d be willing to meet and discuss the possibility of becoming a private money lender for one of your upcoming deals.
5. Master Your Pitch
Okay — so you’ve found someone who is interested in being a private money lender. Or at least, they’re willing to meet with you and talk about it.
But what are you going to say to them?
Here are a few pieces of advice to make your pitch as compelling as possible…
- Don’t Neglect Small Talk — It might seem silly, but starting the conversation with a bit of small talk can work wonders for building an authentic relationship with the potential private money lender. And as we mentioned previously, the relationship matters a lot.
- Get Detailed — The number one thing that the private money lender will want to see is how the deal you’re doing is going to work out in their favor. Explain the deal like it’s already happening, how it’ll likely go down, and how much the lender stands to make if all goes as planned.
- Show Your Due Diligence — This is where the rubber meets the road. Showing the private money lender thorough due diligence will help overcome their objections and make them feel comfortable investing with you.
- Reference Your Track Record — If you have a track record of paying your lenders back on time (even if those lenders were banks), then talk about that… talk about how seriously you take it when someone gives you their money and your commitment to paying them back on time.
6. Build an Email List
As you’re growing your investing business, you’re going to meet a lot of people with a lot of money.
And whenever you meet someone who you think might be interested (at some point) in becoming a private money lender for your business, then add them to an email list.
In fact, check out the video below to learn how Drew Wiard has successfully (and ethically) raised millions of dollars of private money through a simple newsletter!
7. Meet With One Person Every Week
Ryan Dossey — the founder of Call Porter and a successful real estate investor — raised his first $100,000 by meeting with a well-known money lender in his area before he even had a deal.
Check out the video below to learn how he did it.
In the end, the only way to find private money lenders is to commit to meeting new people, building relationships with them, and discussing the investment opportunities you have available.
If you’re serious about raising private money, then set a goal to meet with one new person every week who you think might have access to a good chunk of capital.
8. Overdeliver on Your Due Diligence
The biggest objection that private money lenders will have (especially when they’re working with someone new) is that they want to make sure they’re not going to lose money.
This means you have to build trust with them and show them that you’re going to take their investment money very seriously and that the properties you purchase are low-risk.
So it’s a good idea to overdeliver on your due diligence.
Walk the investor through all of the comps, show them pictures and give them a breakdown of repair costs. The more honest, transparent, and confident you are about the deal they’re investing in, the more likely they are to lend you money.
9. Make The Investor an Equity Partner
You probably won’t want to do this once you’ve built a reputation and it’s easier to find private money lenders, but at the beginning (and for larger projects), you might consider making the investor an equity partner in the deal.
That is, rather than paying monthly interest payments, the investor gets a percentage of the profit from the deal.
You can decide what percentage that is, but 50% is a pretty compelling number if you’re really trying to convince someone to lend you money.
10. Use a Tiered Interest Rate System
At some point, lenders will want to know how much money they’re going to make by investing with you.
After they are convinced that the investment is safe, this is likely going to be their second biggest concern.
(This is assuming that you’re not making the investor an equity partner)
So how much are you going to offer private money lenders? 8% is a good starting place but you might consider offering a tiered interest rate system to incentivize people to invest more money with you.
- $100k or less – 8%
- $100k to $200k – 10%
- $200k to $300k – 12%
You might be surprised at how many people increase their investment amount in order to secure a higher interest rate.
11. Bump The Interest Rate To Defer Payments
What if you could secure private money but not have to pay monthly payments on those funds until after you finished the deal?
That’d be pretty convenient, eh?
Well, here’s a trick that you might use: after you offer the investor 8% (or whatever interest rate you’re offering), tell them that you’ll bump their rate 1% — to 9% in this case — if they’ll defer payments until after the deal is finished.
Most investors are trying to make as much money as possible… and they’ll be willing to wait a little bit longer in order to make a little bit more.
If you’re serious about growing your real estate business, then finding private money lenders and convincing them to work with you is going to be a critical part of the process.
This will allow you to grow much more quickly than your competitors who are funding their own deals.
And above you’ll find 12 different strategies for finding private money lenders.
Test them out for yourself!