Private Lending: 6 Steps to Develop Your Own Private Lending Program for Real Estate Investors
If you are a real estate investor, or if you want to get started in real estate investing, having a steady source of mortgage money is absolutely essential to your real estate investing business. The answer is private lending and borrowing money from private individuals, not banks or hard money lenders.
If you are a real estate investor, or if you want to get started in real estate investing, having a steady source of mortgage money is absolutely essential to your real estate investing business. In fact, having a good source of mortgage money will give you such an advantage in the post-credit bubble market that you can get better deals than your competitors can get by making better offers. Imagine getting a 5% to 10% lower price simple because you can offer an “all cash” offer versus your competitors having to ask for a “financing contingency” in their offer.
But the $1,000,000 question is how you get a good and consistent source of money when traditional mortgage money and hard money loans are all things of the past. The answer is private lending and borrowing money from private individuals, not banks or hard money lenders.
Borrowing money from private lenders is not nearly as difficult as some would make it seem. There are six major elements to starting and developing a private lending program a real estate investor needs to do as follows.
1) Business Plan: You must have a solid and believable business plan that fits your experience level and skill set. If you have only bought one or two properties you can NOT tell a private investor you plan to buy 12 properties this year. This is not believable and the private lender will not lend you money. Your business plan must be well thought out and when you sit in front of a prospective investor it must be believable and achievable without being a stretch.
2) Credibility Kit: Building your personal Credibility Kit is going to be one of the most important tools in your real estate investing business. Nothing speaks louder, or more clearly, about you or your integrity than letters from your sellers, personal reference letters, letters from your lenders, copies of ads you have run, photos of properties you have bought and sold, and the professionalism that a good Credibility Kit presents to private lenders. You absolutely must have good Credibility Kit and be able to email or provided a hard copy to prospective lenders.
3) Marketing Plan: You must have a good marketing plan including several different types of lead generating marketing to get potential private lenders to call you and request more information. These methods can include post cards, flyers, networking within professional organizations, and group or one-on-one educational presentations. We do NOT recommend any big or public advertising such as newspapers, internet or email marketing.
4) Follow-up and Presenting Deals: Once your marketing has generated some leads it is time to present deals. You may want to meet with the potential lender in a one-on-one meeting and lay out why your deal makes sense and how the investor’s money is well protected and what return they can expect earn. You also may want to send out a short summary to a number of potential lenders and see if they are interested by having them call for more information and details. If one of the lenders calls from your emails it is important to follow up and send both your credibility kit and deal summary for their review.
5) Legal Forms: One of the great advantages of private lending is how simple the forms are for a typical private lending transaction. In fact, most private lending transactions only involve four documents including a Mortgage or Trust Deed, Promissory Note, Insurance and Disclosure Statement. The most important document is the Promissory Note and this is where you add certain clauses that allow to control the deal and give you the investor flexibility down the road.
6) Closing: Once you have a private lender ready to go and your forms prepared for the deal it is time to close. I strongly recommend to my coaching students that they always close with a title clerk or attorney and let them prepare the closing documents and handle the money for you at closing. For the small fee they charge, it takes a lot of headaches away and adds a level of professionalism to your investing business. I also strongly recommend that the title clerk or attorney record the private lenders mortgage with the local county land records office.
Private lending may well be the only way to get money for real estate investing in the post-credit bubble market. If you follow these simple six steps you will be well on your to having a consistent source of money for your real estate investing business.
