THIS IS THE STRUCTURE OF A PRIVATE MONEY DEAL
Real estate investors spend days, hours, weeks and months finding the next deal. Some get lucky and find their deal within the first few prospects but for others it make months viewing prospect after prospect to finally find The Deal. Now comes the second part of the real estate investment equation:
Deal + Money = Investment
Without money the real estate investment equation is incomplete. Real Estate Investors need to actively work on bringing in private money lenders to both tie up their deal and fund their real estate investment opportunities.
https://www.biggerpockets.com/renewsblog/wp-content/uploads/2014/12/Left-Quote-Real-Estate-Investing.jpg" width="171"/>(Before we get too deep in this post, we want to invite you to download our book “The Ultimate Beginner’s Guide to Real Estate Investing” which will help you build a solid foundation for your financial future. In other words – you are going to learn exactly how to get started building wealth with real estate! To get the book, just click here and join BiggerPockets, the free real estate investing social network!)
How I Bought, Rehabbed, Rented, Refinanced, and Repeated for 14 Rental Properties
This is the dream right? Going from zero to 10+ rental properties, providing stable cash flow and long-term wealth for you and your family, and building a scalable business model to boot! Learn how this investor did just that, in this exclusive story featured on BiggerPockets!
Definition: A private money lender is a non-institutional (non-bank) individual or company that loans money, generally secured by a note and deed of trust, for the purpose of funding a real estate transaction. Private money lenders are generally considered more relationship-based than hard money lenders.
Check out the Web’s Largest Directory of Hard Money Lenders Right Now, For Free! Visit The BiggerPockets Hard Money Lender Directory!
One of the biggest mistakes that new real estate investors make is that they spend an inordinate amount of time learning about finding and typing up deals but a small amount of time on how to raise equity capital from private money lenders. It’s just as important, if not more important, for real estate investors to understand the ins and outs of raising money as finding the deal. Finding a deal is great but if you do not have earnest money to tie up a deal or funds to purchase it, then all that time and effort is for nothing. (Ankit Investing Life Rules: Work Smarter Not Harder). When you make an offer on a piece of property, it is expected, and usually required, that you place a earnest money deposit down with your offer. If you are currently living paycheck-to-paycheck, coming up with even a few hundred dollars can be a big hurdle in launching your real estate investment business, let alone thousands needed for a purchase. Hence if you work on raising capital from private money lenders while locking up deals then you will have a greater chance for investment success.
The goal of this post to help you learn how to raise capital from private money lenders so that you can successfully tie up and invest into real estate projects. The first question that most investors come up against is who should I approach to raise the equity capital? Let’s try to answer that question
The primary investor circle is composed of Friends & Family. Many real estate entrepreneurs/investors (okay lets face it we are all investors whenever we raise capital for a new investment) turn to friends and family for their first funding needs. Friends and family financing is popular because it is easy to get in front of these people who know you best and they are positively inclined to say yes. But there are negative parts of raising money from friends & family as they may not be sophisticated enough to know what is a good deal and what is a bad deal and this can lead to problems when a deal goes sour. Hence when you take funding from friends and family by very clear about the risks and downside.
I would also suggest only taking capital from friends and family members who can afford to lose the investment. That way, if the investment does turn out to be bad, at least you won’t lose valuable relationships. In addition, friends and family often cannot come up with a lot of capital so friends and family can get you into business by providing you initial earnest deposit money so consider this source your angel investment source of funds. The money from friends and family will give you time to create value by locating and locking up deals so that you can either raise additional money from this circle of investors or raise money from secondary and third party circle of investors.
A really good BiggerPockets article that talks about how to raise money from your friends and family is Raising Private Capital: How I Raised $50,000 over Dinner by Arthur Garcia
The secondary circle of investors consists of the Friends and Colleagues of your current primary circle (Hint: the bigger your primary circle then the bigger your secondary circle of investors; get out there and make more friends and contacts through the BiggerPockets Forums and other social networking groups). This is the second best source for raising capital compared to the third party circle as this group will be more receptive to listening to you given that you have been provided a nod of approval from your primary circle mutual contact.
In addition, this circle is a bigger capital pool as there are more people in this group than in your primary circle which will allow you raise equity for your investment projects once you have locked up your deal using the primary circle’s capital. There are negative parts of working with this group as it is likely to take more time to raise money from this group as they are less positively inclined to say yes as they do not know you personally. To raise money from this group, you will need prepare to an investment presentation and spend time meeting these investors at luncheons, happy hours, and dinners.
Learn how to raise money from your secondary circle through this great Biggerpocket Blog Post: How to Raise Money Anytime, Anywhere. Even over Chicken Wings by Clay Huber
Use this article as a guidepost as you work on raising equity dollars. Balance your experience with your capital timeline needs as you consider who you should approach for your equity capital.
I would love to hear your thoughts on how else you can approach private money lenders. Leave a comment, thought or suggestion below.
Private money lenders are all around. In fact, a recent study showed that 22% of American workers have at least $100,000 in their retirement funds.
Wondering what strategy you should take to obtain your first investment property? Learn why a duplex financed with an FHA loan is a great place to start!
Somehow, real estate investing has acquired the perception that it is easy, cheap, and will make…
Do you wanna hear something not a lot of folks know about me? I used…
The Real Estate Marketplace is the place IN THE GROUP where you can promote or advertise your real estate business, your deals & opportunities, your financing, and your website. If you have residential or commercial real estate for sale, the marketplace is the perfect place to find buyers. It is also the only place where soliciting partners, financing, deals, leads, or referrals, is acceptable