When it comes to real estate investing, access to funds is huge. Most of us leverage OPM or other people’s money so that we have the power to buy more houses and we aren’t limited to our own funds. Hard money loans and private lending are two common ways for investors to finance a deal. Today, we’re going to focus on the private lending stream of financing.
To start off with, private money is money provided to us by friends, family, or acquaintances. This money is sometimes in their retirement accounts or in accounts with money that isn’t being put to use. Private money is a bit more lax on the terms because the terms are decided by you and your lender.
We see investors paying 6-14% interest typically with private money and sometimes it involves 1 or 2 points as well. This varies because it’s determined by what the investor and lender are both comfortable with and at times, the relationship between the two parties also is a deciding factor.
Why is this?
Consider that your uncle has $2 million sitting in accounts making measly 1-3% returns. If he sees that you’re successfully buying properties and your lenders are making 6-8% interest, it’s likely he’d want to jump on board. Add to it that the loan is secured by a property, it’s an easy yes for him.
Now if your private lender is also in the real estate investing space, they understand points and may ask for a higher set of terms, such as 8% and 2 points. This is still a good deal for both parties, if the property is purchased right.
Terms are also decided by the two parties. Some lenders want their money out for at least 3 months. It’s a conversation that ideally allows for a win-win on both sides.
Now let’s get into WHY it makes sense to have multiple streams of private funding.
Let’s continue talking about the rich uncle above. He has been your private lender for deal after deal and you’re really putting his money to work.
He’s making money.
You’re making money.
Except, he’s getting older and he decides he wants to travel around the world with his wife and enjoy their retirement years. He decides to pull back on what he’s wanting to lend you.
What do you do?
Scary right?
Your main source of financing is gone and with deals likely in your pipeline, it might send you scrambling to find a replacement source of funding. If the market has tightened, lending might be more limited.
This is a bad spot to be in.
Now, consider the same situation but instead of just having your uncle’s money, you also have 6 other private lenders that you use regularly and have provided them with excellent and stable returns on their investments. If 1 lender bows out, you have other options to go to that know your business and are more likely to lend out more, as available.
It’s always important to have multiple streams of funding and to put their money to work. If they’re able to see consistent returns and that their money is in good hands, they’re likely to continue the business relationship and might even refer you to new private lenders that they know.
Build the relationships now so your growth isn’t stunted by financial obstacles down the road.
