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Hard Money Vs. Private Money (and Nailing Your "Elevator Pitch")

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Hello to all our Mogul investors out there. It’s JD Esajian here weighing in on this attention-getting discussion about money. One of our favorite subjects, right? This one’s about raising money.

I’ve received an interesting challenge from one of our Moguls. I’ve been challenged to give a presentation on how I would approach a potential private-money investor asking them to fund one of my deals.

That sounds pretty simple, but there was one stipulation...aAnd it’s a tough one. The catch was I couldn't mention the fact that I'd been on the TV show, Flip This House, nor the fact that I've been investing for almost 11 years.

I'm not one to back down from a challenge, so I’m going to take it on.

Two Kinds of Funding

But before I do, I want to step back for a second and talk about the two main kinds of funding that we have available to us as real estate investors. This clarification may help you to get a better picture of what raising money is all about.

The two kinds of funding are:

  1. Hard Money Lenders
  2. Private Investors

Both of these will provide cash – someone else's cash – for your deals. Here’s the difference between the two.

Hard Money Lenders

A hard money lender is typically an organized company that does lending as a business. Typically speaking, their interest rates will be much higher than private investors. The rates can range anywhere between 12% and 15% and sometimes higher.

Then there're points to factor in. One point is 1% of the amount borrowed and that's paid up front. It's not a derivative of time. The interest is a derivative of time and how long you borrow the money.

Private Investors

On the other hand we have private investors. This is yet another avenue for investors to have ready cash to buy distressed real estate. Who are these private investors? It can be anyone who has a cash reserve and who's looking for a better return on their money than they're currently getting, perhaps from the stock market.

This is a better form of borrowing than with hard money lenders. These are high-income earners who aren’t aware of, or don’t have time to investigate alternative investments (such as real estate).

Private investor funds are all negotiable and rates vary. Typically they will range from between 10% and 12% interest. This is based on time and usually there are no points. If a private investor wants or asks for a point, then you can decide if that's something you want to do, and whether or not it makes sense with the deal.

Banks Are out of the Equation

Bank funding for us as real estate investors is pretty much out of the equation. Not only is it cumbersome, but when you're buying distressed real estate – houses that don't have working kitchens or working bathrooms or they're run-down and dilapidated – banks will turn up their noses.

borrowBanks simply are not going to lend money on those types of transactions. If by chance a property were financeable from a bank (meaning the bank would lend money on that property), you're going to be competing with retail buyers – people who are going to live in the home.

When you're competing with people who live in a home, and you're the investor who wants to resell it, you’re up against a brick wall. Why? Because the person who's going to live in the home will always be willing to pay more money than the investor. When that's the case, then your competition is magnified and your chances of getting those types of deals are significantly reduced.

When we're talking about buying distressed real estate, which is where we get our deepest discounts, the only two choices for funding would be hard money lenders or private investors.

Back to the Challenge

Now let me handle that challenge that was put before me. How would I make a presentation, and how would I ask them for money?

First thing is, we're not asking someone for money.

You’re probably wondering, ‘But JD, what are you talking about? Isn’t that exactly what we’re doing?’

So, I’ll say that again. We are not asking someone for money…

We're presenting an opportunity for them to make a good return on their money.

They can decide if they want to accept that opportunity, if they want to get more information about that opportunity, or if they just want to say no. But we're not asking for anything.

When you ask for something, typically speaking, your posture changes. You look down, you don't make eye contact, your voice is weak, you're less confident.

When you're presenting an opportunity for someone to do something good with their money, your posture changes for the better. You stand taller, you can look the person right in the eye, and you present an air of confidence. You're confident about what you're presenting.

umThat's a fundamental, but very important, shift. It’s time to get it out of your head that you're asking for something. You’re presenting an opportunity. It’s an opportunity to make money in real estate with fixed returns. Not guaranteed returns, because we can't guarantee rates, but fixed returns attached to real estate (a tangible asset) is a valid opportunity.

A Typical Presentation

I'll run through a typical presentation and won’t use any of the information that’s in my current arsenal that might prove my credibility. Here we go!

Hey, how are you? My name is JD Esajian with CT Homes. My goal this year is to do three real estate transactions, and I'm looking for one potential private investor who’s willing to make a return on their money; a fixed rate of return. I have an opportunity for you to get more information. I've got an FAQ section that I'd like to give to you that will explain all the benefits and also address some of the concerns of lending in real estate. I'd like to leave that with you.

I also have my credibility kit about my company, which has more information. It tells my mission statement, what we do in our communities, my goals for this year, the team members I work with, what really matters to me in this business, and all the systems that I use to find properties and analyze deals. I want to leave that with you as well to provide you with more information about my business.

Again, I'm looking for just one investor who's willing to have a long-term relationship with me and get a better return on their money than where they are currently investing. If you'd like to get more information about that, please get in touch with me. I have a little bit of time now if you'd like to talk.

Elements of the Presentation

Pretty good, right?

Go back now and see exactly what I did here…

  • I introduced myself.
  • I said the name of my company.
  • I didn't say that I've done hundreds of deals. Because if you’re just starting out, that’s not a claim you can make.
  • I gave my goal. What did I say? I said three properties. That’s better than saying, "Hello, my name is JD Esajian with CT Homes, and I've never done any properties." That doesn't build any rapport or credibility.

credibleYou can build credibility with someone by the way you communicate. If you don't have a goal for your real estate business, that's the first thing. You need to establish your goals and have them firmly set in your mind. If it’s two deals, then share that. If something is really powerful about your mission statement in your company, share that. Say, you're looking at improving properties in blighted areas and plan to bring in first-time home buyers. Or, you want to help distressed homeowners get their credit back and buy homes for the first time.

Whatever is unique about your business that you're passionate about, share that. Then say what you expect your business will look like as it grows. Those points will have a bigger impact and create more credibility, than just saying you’re new to this business.

Credibility Kit

Then I offered them a credibility kit. Have you created yours? Our mastery students have the ability on the website to download a very detailed credibility kit. It’s the same one that we use – one that we created. All you have to do is plug in all your information.

As an investor in your marketplace, you’re going to need to create your credibility kit to present this information about your company:

  • Mission Statement
  • Your Goals
  • What systems you use to analyze properties
  • FAQ section

The FAQ section will answer questions and concerns that your potential lender might have. What are the things you would want to know if someone stood in front of you? What kind of returns can I expect? What are the risks? When do I get my money back? Those types of questions. You can create a list of questions that you might have and just answer all those.

I wanted to share on this subject of raising money because many beginning investors use “I don’t have any money,” as an excuse that stops them from moving forward with their goals.

Now that excuse has been obliterated! So get out there and go for it.

Want more awesome info from me? Make sure you check out my previous lessons.

Holla at us

Do you include any other details in your credibility kit? Do you have a solid private lender pitch? I wanna hear about all that good stuff in the comments section below.


Do It To It! Immediate Action Steps

Know the difference between hard money lenders and private money investors.

Understand that you’re not asking for anything when approaching a private money investor.

Keep your business goals well in mind – even if you’re a newbie.

Prepare your credibility kit, which will create a professional approach.

Practice your presentation until you have it down pat.

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