Definition: A private money lender is a non-institutional (non-bank) individual or company that loans money, generally secured by a note and deed of trust, for the purpose of funding a real estate transaction. Private money lenders are generally considered more relationship-based than hard money lenders.
Hard money lending is the process of borrowing money from a professional private lender, with the bulk of the lending decision based on the hard asset being bought.
Private money lending is borrowing money from non-professional lender, where the bulk of lending decision is based on the relationship between the lender and borrower, but enhanced by the hard asset being bought.
Private lenders lend money out not as a living, but usually as an investment. The rate, fees and terms are usually less and much more negotiable than hard money lending.
Why Borrow from Private Money Lenders?
One of the biggest mistakes that new real estate investors make is that they spend an inordinate amount of time learning about finding and typing up deals but a small amount of time on how to raise equity capital from private money lenders. It’s just as important, if not more important, for real estate investors to understand the ins and outs of raising money as finding the deal.
Finding a deal is great but if you do not have earnest money to tie up a deal or funds to purchase it, then all that time and effort is for nothing. (Ankit Investing Life Rules: Work Smarter Not Harder). When you make an offer on a piece of property, it is expected, and usually required, that you place an earnest money deposit down with your offer. If you are currently living paycheck-to-paycheck, coming up with even a few hundred dollars can be a big hurdle in launching your real estate investment business, let alone thousands needed for a purchase. Hence if you work on raising capital from private money lenders while locking up deals then you will have a greater chance for investment success.
The first question that most investors come up is who should I approach to raise the equity capital? Lets try to answer that question
Why Would Someone do Private Lending?
1. Higher return than stock market, index fund;
2. Security – private lender holds first position liens on the property;
3. Passive investment.
How to Find Private Money Lending?
1. RealtyShares is a crowd funding platform for raising capitals for real estate from accredited investors .
2. Local real estate investors, especially older ones, as they don’t want to do much work anymore and just prefer more passive income.
3. Family and friends. This is how most people begin. I don’t advise asking all your families and friends. You need to approach this very carefully.
How to Get Your Private Lenders to say YES?
1. Find a deal
2. Connect with private lender
3. Build your brand
4. Build relationships
6. Do the math
7. Reduce risk
8. Present it right
Related article: Investor's Guide to Private Money Lending.