“The Techniques of Private Lending”
Here are a few simple questions?
1) Are you willing to share the wealth?
2) Would you like another source of income?
3) How would you invest unlimited funds from Private Lenders?
The objective in this lesson is to begin teaching you to think about your ability to become a master fund raiser in real estate. Just think if you could provide high yield returns to investors all throughout the country? What if you were the go to person for a secured real estate investment? This is why I want to teach you how I’ve succeeded raising unlimited funds.
Once you have established your deal criteria it will dictate the range of percentage of return you can market to your investors. Your ability to offer opportunities to investors, giving them a share of the wealth, will bring you many prosperous real estate investments. It will also enable you to earn fees for managing the funds and the business.
Typical fees to raise the money are 2-5%, 2-3% to manage the business and 5-10% additional fees to manage the investment, development and/or construction. IT will add up quickly and this does not include your net profits. IT is a very lucrative business when you break it down in this fashion.
Types of Private Lending
There are a few private lending methods, we will discuss in our funding lessons, which will include:
- One-on-one private lending
- Group Investments in LLC
- Private Placement Memorandums
This week I want to give you some of the basics to private lending focused on one-on-one relationships so we can begin to build your foundation of your fund raising techniques which will apply for each method described above. Remember it only takes one investor to set you free.
What is Private Lending?
Private lending refers to a transaction wherein the party that invests the money is an individual or company and is not your typical institutional lender such as a bank or insurance company. It is basically a loan secured by the real estate. Just like a car loan or a home mortgage only PRIVATE.
For the purpose of this lesson we will refer to the term Private Lending to mean lending between an individual and entity for the purpose of buying, refinancing and/or repairing real estate. In all instances we will always assume the investment is a loan secured by the real estate.
For simplicity, the Private Lender is basically your bank. Like a bank, the private lenders is prepared to invest with you as soon after you have found a property, negotiated the price and have put the property under contract. Identical to a bank, the lender must agree to the terms of the money which include loan amount, term, interest and payment terms. Once agreed upon, the private lender will typically place the investment funds in an escrow account in preparation for the closing. At the closing, the private lender will receive a mortgage security and note that outlines the terms of the loan which is secured by the real estate.
Why would a Private Lender want to invest with you?
Private lenders have many benefits when they lend money as a private investor.
1) Flexibility – They get to negotiate their own rules and loan terms, giving them the flexibility they want in the investment.
2) Higher Return – They can demand higher interest rates and return on investment due to the demand and timing requirements which they can meet different than large institutional lenders.
3) Fixed Income – Most transaction of this nature result in fixed mortgages, which are attractive when stocks are volatile.
4) Security – Loan and/or mortgage is secured by real estate.
5) Tangibility – Investment is tangible, limited liability and requires minimal effort.
When you consider the benefits that private investors have compared to, rigidly structured investments naturally become the solution to many of the concerns investors have, before they choose an investment in real estate. Your services provide them with a hands-off investment with flexibility, higher rate of return and secured by real estate. With these factors you are easily recognized as a legitimate vehicle to earn money.
What are the sources of private lending?
1) Personal Savings – people have long term savings tucked away and not working for them.
2) Home Equity Lines – money borrowed at 5% and earning 15% gives investors a unique opportunity to use credit to gain return. Remember the 50% of all real estate is free and clear.
3) Self-directed retirement accounts – this is a huge source most retirees are losing money on their IRA’s. There are companies that will facilitate this process for you.
4) Groups of partners – many professionals form groups such as Doctors and Lawyers to invest in real estate.
What is the market for Private Lenders?
There is a great demand for private money especially in today’s market and surprisingly enough, there are numerous private lenders looking for safe secured investments collateralized by real estate. It has become so popular you are now seeing private lending where groups of people have partnered to lend money or in some events, wealthy families provide full-time private funding services. In these cases, it is a full time business, lending money, similar to the bank, with the benefits outlined herein.
What are the advantages of using a Private Lender?
1) Private lenders can move more quickly – most private loans can close much quicker than a bank or institutional investor.
2) Private lenders have no hidden frees – private loans are typically clear cut fixed interest rate, no application fees or points.
3) Private lenders like fixed rate loans – when other investment vehicles are challenged such as the stock market, private investor enjoy the fixed income.
4) Private lenders can fund 100% of purchase price – no banks are going to lend you 100% in today’s market. Loan-to-value is as high as 50%.
5) Private lenders will not run credit checks – there is no board approval, credit scores or nerve racking nights awaiting the response.
6) Private lenders are much more flexible – once you have established a relationship, private investors are flexible to meet your needs because they see the profit potential.
7) Private lenders don’t require massive paperwork – they are only interested in recorded mortgage and payments on time.
Should I establish term of the money?
As we discussed in Lesson 5, when you establish your investment criteria you will also establish the rate of return estimated for your investor. Along with these criteria, the investor wants to know the term of loan, payment terms and marketing information to support the investment. There will also be first and second mortgage, loans for repairs and possibly other needs for funding. Therefore you should establish a basis of return for each of these scenarios because in some case savvy private lenders will play with the rates. Typically a 2nd mortgage pays a higher return on investment due to less security. Short term loans may have a higher rate of return due to length of the period. If the property is fully leveraged at 100% they may require a higher interest rate. When you have a basis for these types of lending, the private lender will see that you have attempted to organize and streamline the returns and would prefer not to negotiate, however you must always be open to negotiations. Your goal is to get the money.
What do private investors look for?
1) Experience – the private investor would like to see a seasoned support “Dream Team”.
2) References – have a reference list of people like me help you bridge the gap if it’s your first deal.
3) Adequate Information to Make a Decision – provide an executive summary of the key elements of the investment. Required investment, term, interest rate and ownership interest.
4) Profitable Investments – be sure that your investment presentation is attractive, meets your criteria and profits, for the investors.
This is where you put on your game face and make it happen. Investors like to see organization and structure. Your executive summary must outline the investment and nature of the project. You should include a brief market and demographic paragraph, duration of investment and financial summary that indicates cash-on-cash return, equity required and total investment. This will most like answer 90% of all major questions which will allow the investor the ability to focus on confirming information and performing due diligence on market concerns.
Understanding the documentation
It is typically an open-end mortgage where you pay profits based on each investment for this individual while you keep their equity at work. The concept is to roll-over the equity after the conclusion of each investment term after satisfaction to your investor with fixed income and profits. Once this cycle is accomplished you repeat it over and over again. It’s that easy!
Here are two documents that will save you over $5,000 dollars in time and money. These two simple documents allow you to borrow money secured by real estate. The last piece is the operating agreement for the Limited Liability Company which was given to you in the bonuses. You will form an LLC for each investment to minimize liability. It also protects other investments, when you structure each deal separately. IF you have any questions, send them to me by email.
The first document is the mortgage agreement which outline all the specifics.
A) Commercial Mortgage Agreement
This document reinforces the mortgage with a promissory note.
B) Commercial Note
Private lending is easy. You simply have to ask for the order. The principles outlined herein apply to all of the methods of private lending which will break down for you in future lessons. If you want to accelerate please give us a call. Whether you are seeking individuals, forming a partnership or leaning towards securitized investment in the form of private placement memorandums, all of the principles apply across the board. Take the time to implement this process into your daily life, because having private lenders in real estate investing, is the key to success.
Wisdom and wealth are what you truly want in your life and the ability to contribute to others with either money or knowledge. The ability to invest in real estate and to earn a boat load of money gives you this opportunity to help the big picture. Consider yourself a leader who can provide the vehicle to wisdom and wealth. This is your chance to make a difference in the world.
“Your Financial Future is Based on The Decisions You Make Today!”
Ken Van Liew