Question: Do you know of any local private money lenders?
Keith H. - Navarre, Florida
That’s a great question, Keith…and you probably won’t like my answer. Yes, I do know of some, but I won’t give you their names. And to understand my answer, and why I would be so protective of my personal lenders, you have to understand the nature of private money and the difference between it and what is often referred to as “hard money”.
Traditional financin
g (FHA, VA, conventional) is both “borrower-driven” and “property-driven”, in the fact that both the borrower and the property have to qualify for the loan. The borrower has to have a good credit score, a sufficient down payment, and a low enough debt-to-income ratio, while the property has to appraise for the contract price, and not have any major repairs or renovations needed.
In contrast to traditional financing, hard money is almost exclusively “property-driven”, which means that the borrowers finances or credit history don’t play as large of a role in the approval process. The lender uses the value of the property, and the loan-to-value, as the main criteria for approving the loan. The lender wants to make sure that in the case of default, there would be sufficient equity to foreclose on the property and re-sell it for a profit (or at least get their money back).
In the crash years of 2007-2009, hard money became either non-existent or had more stringent “borrower” qualification rules, however good ol’ fashioned hard money is coming back into the marketplace as the economy improves. The down side to hard money is that it is very expensive, many times costing 5-10 points (5-10% of the loan amount in fees), as well as 12-15% interest during the life of the loan. The positive side to hard money is that it is readily available, and can be obtained by those with less-than-stellar credit histories.
Private money, on the other hand, is the absolute holy grail of creative real estate financing because it is neither “property-driven” nor “borrower-driven”, but rather “relationship-driven”. Private money lenders loan money because they believe in the individu
al person, and the presentation that they have made in regards to the returns that they can provide based on a track record of successful investing. That is why I wouldn’t share my private money contacts with another investor, because that particular private money lender is investing in ME, more than he is in a property or credit score, and that trust is not easily transferred to another individual.
If you want private money, you have to go out there and hustle it up. Yes, there is in fact W-O-R-K involved in becoming successful, and you will have to convince people to buy into your vision. The quickest and easiest way is to put together a business plan, and present it to those closest to you who have money to invest. They already know, like, and trust you…and know your character and integrity, so it’s one less barrier you have to overcome.
However, if you are a brand new investor, you may find that it’s a lot easier to just stick with wholesaling, joint venturing with experienced investors, and/or use hard money until you get your proverbial "feet wet". You will find that it’s a lot easier to get private money, when you have a story to tell. Just the other day, I was having lunch with a high net worth individual, and he was asking me questions about my investment business. By the end of our chat, he had offered me $100,000 to invest in my business, based primarily off my recent successes and "my story"...which you must take the time to build for yourself.
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