Private money lenders have their benefits, as Tony Javier explains in this lesson. Learn the difference between private money and hard lending and how it can help you with lots of deals.
Tony emphasizes how talking with everyone you can about what you do in real estate investing can help you secure private money lenders who will provide you with the money you need while giving them great interest.
Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Tony: Hi this is Tony Javier with RealEstateProdigy.com bringing you your next REI classroom, and we’re going to talk about raising private money.
Mike: This REI Classroom real estate lesson is sponsored by VirtualStaffNow.com.
Tony: Private money is something that has really helped explode my business over the last few years. You hear things about buying properties with no money down. Private money is one of the ways that you can buy lots of properties with no money down. First I’d like to talk a little about what private money is, and compare that to hard money.
Private money is a less expensive version of hard money. Hard money is basically when a company will lend you money to do the transaction for a [inaudible 00:01:06]. Typically, a hard money lender will charge you two to three points up front, and they’ll charge you around 15% interest. Whereas a private lender is someone who is typically an individual that will lend you money between 8 and 12%. The great thing about private money is, typically you can get the private lender, if you’ve got the relationship with them and they trust you, to fund the whole transaction.
So a typical transaction for us, if we’ve got a house that we know is going to be $100,000 when it’s fixed up, we’ll buy a house like that for say 50 grand, and we’ll put $20,000 in renovations. So we’ll need $70,000 to buy the house and to flip the house. What we’ll do is we’ll go to our private lenders and say, “We need $70,000 for this house that is secured by a note mortgage on this $100,000 house,” and we’re able to basically buy that property with no money down.
So how do you raise money? First of all, I can tell you right now, there’s money in so many different places. There are a lot of people that I’ve met throughout the years that have money sitting in savings accounts, that are sitting in money market accounts that are earning less than 1% interest. And when I tell them that I’m able to get them 12% fixed interest, and it’s not something that if they put into a stock market and tomorrow it could be worth nothing, or could dip 50% tomorrow, they’re really amazed that I could give them those returns.
Let me tell you the three principles that I use to raise private money that will help you to either raise your first bit of private money or take private money where it is now and take it to the next level.
The first thing I do is I try to talk to as many people as I can about private money. So talk to everybody you can about private money. Now if you’re doing it right, you’re talking to everybody you know and everybody that you meet about what you do when you buy houses. One of the things I’m going to throw in there also, is I also help real estate investors invest their money. Once you say that it’s, “Oh. Well that sounds interesting. Tell me more about that.”
I’ll tell you a quick story. I was in Switzerland about three months ago, the same conversation, telling a guy what I did for a living. He owned an insurance company. Honestly, I didn’t know if this guy had a dime to his name. I told him about the investment program, and his ears perked up.
He said, “Tell me more about that.” I started getting into it. He said, “Wow. I’d really like to know more about that. I’ve got some people that I’d like to introduce you to, because they’re in this industry.” I thought that was a way of blowing me off of, “Hey, you need to go meet some other guy that will do this.”
He got me on a conference call. He’s in Cleveland. I’m in Tampa, Florida. He introduced me to this investor that’s a third generation commercial real estate guy. I know he’s got properties probably paid off, cash flowing pretty well, probably has quite a bit of money.
Long story short, we’re here two months later after that call. He’s got $500,000 invested with us, and he says to keep bringing him deals. That just spurred from one conversation of, “Oh, by the way, I deal with real estate investors as well.” So talk to everybody you can about what you’re doing. Not only will you find houses that you can buy, but you can also find people that want to invest in real estate.
The second thing is you’ve go to build credibility. If you’re new in the business you’re probably saying, “I don’t have any credibility. I’m just starting.” One way to build credibility is to know what you’re talking about. You’ve got to have confidence. When they ask questions about your program, you’ve got to be very specific on what you can offer them. Act like you’ve been in the business a long time.
The other thing you could do is if you’re associated with FlipNerd and some other places, say, “I’m affiliated with a company or companies that do a lot of real estate,” which isn’t misleading, because you really are associated with them. Of course, if they ask you how many deals you’ve done, you’ve got to disclose that. “I’ve never done any personally myself, but I’ve got a system that I’m using that people that I know use.” You can formulate a script to really build that credibility.
The third thing is that once you get those investors in place, you have to treat them right and do what you say you’re going to do. This is one principle that I can tell you that we’ve raised a little bit of money from some people, and once we’ve raised that money and did what we said we were going to do, we’ve sent them checks on time. We didn’t ask for any more repair money like we said we wouldn’t do. Everything else that we promised them we delivered on. They would bring their friends.
We got so many referrals from other people where I could probably attribute a few million dollars of deals we’ve done just from referrals of people that have come from other investors we’ve dealt with. Treat them right and things will just start coming to you.
Again to recap, tell everyone what you do. Tell everyone about your private money program, and I guarantee you’ll start meeting people that have money. You’ve got to build that credibility. You’ve got to know what your program is.
Be very specific on what your program is and don’t veer from it. If you want your program to be 8% interest, offer them 8% interest. If you want it to be 1 point and 8% interest, make that your program. Because in the beginning I used to tell people, “What would you like the return to be?” I’d get into trying to formulate a program for them and it was confusing for them, because I didn’t have anything to offer them.
So have a set program for them, and when you find them, treat them like gold. You never know if that $200,000 investment is going to be just their original investment, and they’ve got a million dollars sitting on the side that you didn’t know about.
I hope this works for you. I hope this helps. We’ve got millions of dollars in private money that we raise and we do deals with. I can tell you right now that we could not do the deals that we do without private money. Even if you don’t have your first deal right now, start talking. Start talking about private money and raising private money. Once you have your deals coming through, you’ve got a way to fund them. Hopefully this helps and we’ll see you next time on the next REI Classroom.
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