Bagging That First Private Lender

Ahhh, private lenders. The Holy Grail of REI deal-funding. We all want them, right?

Of course we do. We want them like Elmer Fudd wants Bugs Bunny. Because leveraging private lenders is - hands down - one of the fastest and most effective ways to start landing deals and catapult your business right where you want it to be.

The problem is… just like the actual Holy Grail, private lenders can be tough to find, especially when you’re just starting out as an investor. No matter how many tips, tactics and strategies you use, we know connecting with that first private lender is a huge hurdle. For many people, it seems too huge. Insurmountable, even.

But we’ve got some good news for you: it is possible.

And today, I’m going to outline a couple of key factors in getting over that first private lender hump: experience and creativity.

Experience: Build Your Portfolio

One of the biggest scare-offs for potential lenders is a blank résumé. Rather than seek funding first, get some experience under your belt and develop a track record through wholesaling.

To get your confidence up, you can even wholesale real estate without using a penny of your own money or touching your own credit. It doesn’t matter what financial situation you’re in right now… You can start making money, and get experience closing deals at the same time.

I recommend creating a portfolio of deals you’ve closed: photos, detailed descriptions and a breakdown of your profit. This portfolio provides concrete evidence of your real estate chops to show potential lenders.

Creativity: Think Outside the Funding Box

So many people never pass go with private lenders because they’re not thinking creatively about their approach. Here are 2 off-the-beaten-path ways to structure your private lending opportunity:

Ask your lender if you can pay a specific rate of return over a longer time period, like you might pay a bank loan. For example, if you borrow $100,000 from your private lender, you could pay them an 8%-10% return on their investment. Pretty standard, right? Actually, in this situation, you could make monthly interest payments… or, if you’re a good negotiator and savvy enough to think to ask – you can defer your interest payments til the end of the loan, after you've closed the deal.
Structure the loan like a joint venture partnership opportunity, where your lender will share a percentage of the equity or profits in the deal. This way, the lender shares more of the risk of the investment with you as well. They may make more money when you sell the property, but the fact is, people who aren’t willing to simply loan money often are willing to be funding partners. And if it helps you get the deal off the ground and build that portfolio, parting with a smidge more of your profits might just be worth it.

Bonus Creative Funding Idea

Here’s one more creative strategy I wanted to share…

borrow If you have willing friends or family who have some equity in their home, ask them to take out a home equity line of credit (HELOC). Then, borrow that money from them and offer to pay them 2-6 points up front and make the interest payments for them during the loan. (1 point = 1% of the borrowed amount.)

Now HELOCS have notoriously low interest rates – we’re talking 4%-5%. So, say you borrow $100,000 in equity from your cousin Alfredo. Then, as soon as you cash that check, you immediately write him one for six points ($6,000). Yes, it may seem like you’re paying Alfredo back with his own money, but you still do actually owe him $100 grand. The six points aren’t payback; they serve as Alfredo’s fee for being your private lender.

Then six months later, when you sell the property for $200,000, you pay Alfredo back in full and, after your lowball interest payments, still pocket a pretty juicy profit.

This approach may not be as tantalizing to an experienced lender, but if you have friends and family with untapped capital, they’ll probably be thrilled to get a few thousand dollars free of interest. And again, you’ll get your foot in the door of a profitable deal that might otherwise have been closed to you.

The Bottom Line

More often than not, getting over that first private lender hump has less to do with where or how to find lenders, and more to do with your confidence and get-‘er-done attitude.

Any of the strategies above can be great stepping stones toward gaining that confidence and experience you need to bag private lenders any day of the week.

So get out there, and don’t be afraid to color outside the lines!