Private Money: How to Get Private Money for ALL Your Real Estate Deals
Private money or OPM (Other People’s Money) is one of the first concepts that you learn as a real estate investor.
It’s important not to confuse private money with hard money. Private money is when you deal with individual people or companies, who have money to invest. Hard money lenders are more like what I call “institutional private lenders.”
Having “go-to” private lenders is like having a blank checkbook. You don’t have to jump through the hoops in qualifying for a loan, paying upfront fees and establishing credit. It’s more based on building a relationship with the private lenders and answering 3 main questions before they even ask:
- What is the return on my investment (ROI)?
- How is my money protected?
- What is the turnaround time?
My Story – How I Started Raising Private Money
Back in the ‘90s I was involved heavily with wholesaling. Most of my end buyers were cash buyers. So in 1997 I started asking some of my cash buyers if they wanted to partner with me and invest in properties that I was going to fix and flip.
At that point, they knew me. We had established mutual trust and they were confident that I could find properties and I had construction and maintenance teams in place (building a relationship.)
In 2001 I wanted to see if I could raise more private money. I talked to title companies and mortgage brokers I was working with, and I asked them to extend an invitation to anyone of their contacts who they knew had liquid funds.
So in July 2001 I hosted a meeting, which I called “Meeting of the Minds,” and I shared with them closing statements and scenarios of the deals I had done in the last few years, using just a few private lenders that I had rounded up in 1997.
By the end of the meeting, I had 6 private lenders on board. Within 2 months I had 10 and a waiting list (I wanted to make sure I could invest the money and provide the ROI that I had promised to my existing private lenders first.)
By the end of 2002, we were doing over 20 fix and flips at a time, and wholesaling 10 to 15 properties a month.
How to Find Private Lenders
It’s not hard to find private lenders to work with, but it takes 2 important ingredients:
- Your experience level as an investor;
- Building relationships and trust.
When I have a new investor coming to me and saying that he/she wants to start raising private money, but do not have any experience in the business, my advice is to start building that experience by wholesaling first.
Wholesaling at least 5 deals will build that experience and know-how as an investor that will be crucial to establish relationships and trust with private lenders.
Then you can move to phase 2 of finding private lenders.
- Start with your cash buyers (end buyers) of your wholesaling deals.
- Connect with real estate agents who work with investors. Mortgage brokers. Title companies. They all know investors who have liquid funds to invest.
Then talk to these investors either one on one or through a meeting like I did.
- Colleagues. People you know. I would keep these for last, because you want to establish a track record and make sure that you know what you are doing You definitely don’t want to burn bridges with family and friends.
Of course over time, you are going to connect with other real estate investors, people who have IRAs and life insurance policies to invest, etc. But I would start with the 3 ways mentioned above.
You also have to be careful about the rules in place from the Security Exchange Commission (SEC) and State laws. The SEC really focuses on full transparency and building relationships with the possible lenders before any money is invested (i.e. rule of 3/45 and intrastate transactions.)