The Creative Financing in Real Estate 101 series exists because real estate is expensive, very expensive. We need to leverage all of our smarts and connections to afford real estate with as little of our money as possible.
We have covered personal loans (102) and home equity (103) in previous installments of the series. You can perform both of those techniques without the assistance of others. However, at some point, you will hit the ceiling, wall, or limit. You will need to seek out others to pool money together.
Enter private money lending. I talked about becoming a private money lender before. Now, it is time to seek out private money to build your real estate investing career.
Determine the Best Time to Buy a House
Private money lending focuses mainly on the person to who the money is being lent, as opposed to hard money lending, which focuses primarily on the project or asset. This focus on the individual means that you need to have an excellent track record of success with completing your projects and returning investors’ money.
So, how do you get started with private money loans if you don’t have a track record of completed projects? First, read as many books as possible. You need to speak the language of real estate. Terms like net operating expense (NOI), cash-on-cash return, and the 2% rule should come second nature.
Second, ensure your personal life is in order. Your personal credit score and debt levels should all be impressive. People are investing with you at the heart of the investment. If you are carrying debt and creditors are chasing you down, investors will not trust you with their money.
Third, ensure you have a couple of homes of your own. It would be hard for me to loan money to someone who doesn’t at least own one house. As a first-time homebuyer, it is easy to qualify for great loans. Read “Maximum Leverage 1 and 2” for more on how to acquire great loans.
Four, I recommend having some sort of rental income coming in, either from a room rental or basement/attic. You learn a lot by becoming a landlord, and it will help you as an overall real estate investor having these experiences.
Financial Independence through Real Esate
Now, it’s time to start your search for private money to build your real estate career. But, where do you begin the search? With family, of course.
For your first couple of homes, your family will be the best way to get funding and increase your chances of success. Inevitably, you will make some mistakes early on, so the family is in the best position to work with you.
How do you identify family members that are in a position to invest money? Easy, let’s take a look at my past articles and figure this out. Go back and read the other pieces in the Creative Financing in Real Estate 101 series.
Family members who can take out personal loans, home equity, or can cash out retirement accounts are perfect candidates for private money lending. Remember, private money lenders care about themselves first; you second.
Become a Real Estate Agent/Investor
You will need to create a presentation that gives them their WIIFM or “What’s in it For Me.” For example, let’s take your mom. She is 65 years old, has social security income coming, and a little money from her 401K. She worries about running out of her 401K as she continues to age.
You will need to create a presentation with her specifically in mind. Chances are, you are not in a position to become a house-flipper. So, buy-and-hold rentals are your best bet, at least initially. After reading my article “Should, You Buy a Home in a Small City?” you discover hidden treasures in small cities nearby.
You can present to your mom that using her money as a down payment will create a $200/month passive income. You will be doing all the management and maintenance calls. Say she puts in $20,000; in about eight years, she will have all of her money back. With the rental price increases, it will probably be closer to five years.
You can also tell her that if this goes well, there will be more opportunities for investments. You can even propose a scenario where you move into the home, saving on the down payment. Instead, you can use the money to finish a basement or attic. You can guarantee even more income back her way.
It is essential to be creative. The only thing stopping your plan is your creativity or lack thereof. Read, read, read, and then read some more. These ideas come off the backs of others.
Run a Profitable Dog Park, on Your Property
Now, once you have a few projects under your belt, more family members will show interest. You see, everyone wants to diversify into real estate; most people are scared or nervous. They hear the horror stories of tenets gone wild or missing payments.
But if you have been reading books, as I keep suggesting, you will have the confidence to push these stories to the side. Yes, tenets suck. I get it because I am a landlord. But every time I open my accounts and see zero debt and $160,000 in the bank, I don’t mind being a landlord.
If you do not want to become a big-time real estate personality, you can fund most of your project through private money. To be a great investor, you need two things: deal flow and capital. In English, it means available deals and funds. If you are trying to buy one house a year, private money should get you there.
As long as you are giving your family their WIIFMs, they will keep investing. However, what if you want to own more properties? Then you will need to move on to friends and friends of friends. These are your second and third circles.
Mailbox Money: The Power of Dividends, Royalties, and Rents
The process is the same, but now you have successful projects under your belt. When you create your presentations, remember to highlight your successful projects. You can even speak on some of the losers and explain what went wrong and how you can correct these issues in the future.
Being an investor is all about confidence. You will have faith, and successful projects, to continue your journey as a real estate investor. Make sure you explicitly layout the plan, the payments, dates, and the exit strategy.
Even if you are purchasing buy-and-hold rental properties, you still need an exit strategy for each of the private money loans. Structure the deals so that everyone wins; that is the best way to get continual deal flow.
Millennials, Howeownerships, & Kids
For example, your mom may not want to keep her $200/month passive income; she may want to turn her $20,000 into $30,000. You may recommend she invest $20,000 and use the $200/month to invest in cryptocurrencies. Once she has $30,000 in crypto, she will still have the rental income as well.
You can use all of your intelligence as an investor to achieve your goals and the goals of others. Remember, always, I repeat always, be honest and a good steward of other people’s money—this will ensure you keep a squeaky clean reputation.
That is it for private money loans; remember the three circles; family, friends, and friends of friends. Private money focuses on you as an investor—your track record, deals, presentation, and reputation. Keep all of these things looking good, and you will have all the deal flow and capital you need. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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