Investing private money into real estate is a great way to get high returns on your money with more security than the stock market. Private money can provide 8 to 12 percent interest on your money backed by a mortgage. A private money lender acts like a bank, and lends money to real estate investors who are flipping or buying rental properties. I don’t invest private money into real estate, because I invest most of my money into my rental properties and flips. If I did invest private money with investors I would want experienced investors who won’t lose my money! Many great investors have money sources already, but in my experience most of them are always looking for more money and cheaper money. If you want to make 15 percent investing in private real estate projects you are going to have a hard time finding an experienced investor. If you are willing to take 10 percent or less on your returns, you should be able to find experienced investors who will use your money wisely.
How does investing private money into real estate work?
Most private money is exchanged between people who know each other. If you are giving money to an investor you want to know they are professionals and won’t lose the money. The better you know someone the more comfortable you can be lending then money. There are deals done with investors who have no personal relationship with each other, but a lot of due diligence must be done to ensure everyone gets what they want.
Why would investors risk their money by lending on real estate?
If you have invested in the stock market for a significant amount of time, you know the stock market can go up, but it can also go down. In 2007 to 2009 the stock market lost 50 percent of its value. The stock market is going up now, but it does not always go up. Many investors want a safer investment and in some cases better returns than the stock market.
The stock market offers shares of companies to investors, but no collateral if a company goes bankrupt. When investors lend private money into real estate, they get real estate as collateral. If the investor goes bankrupt the lender could still recoup some or all of their investment, because the lender could gain possession of the property that was used as collateral.
Not only can you have a safer investment lending private money, but you can also get higher returns with private money than the stock market.
How much money can you make investing private money into real estate
The rates private money lenders charge vary greatly depending on the relationship between the investors and the risk. The better the real estate investor is, the lower rate they can get on loans. I get private money from my sister and she is happy with a six percent interest rate. She knows I am good for the money, in fact she invests her son’s college money so I better be good for the money!
I know another investor who is able to get private money loans at four percent. I think four percent and even six percent is a pretty low rate for private money. I have also seen investors willing to pay ten percent, eleven percent or even more for private money. If you are sure the investor you are lending to will pay you back, four percent may be a good return for investors used to half a percent on a CD. If you are an aggressive investor you may be willing to take more risk by investing with investors who will pay higher rates, but you do not know them personally.
How do you know if the investor you are lending to is a good investor?
If I were to give money to an investor I would want to see their past deals and current deals they are working on. I would want to know what they bought them for, what the costs are and what the projected sales price will be. I would also want to see past deals done and how much money was made. I would like to see as many financial statements as possible to see what kind of cash the investor has on hand and what their income is. Now, not every investor will provide this information, but it does hurt to ask! The better financial position an investor is in, the better chance they will pay you back.
If you are looking to invest private money into real estate I would be happy to talk to you more about investing with myself or other credible investors. To get more information on private money lending fill out the form below. The investor I know pays 8 to 12 percent on private money he receives and has done over 3,000 real estate deals over the last ten years. You can also invest money with your IRA or 401k. The only catch is you have to be an accredited investor in most cases due to SEC rules. An accredited investor has an income of $200,000 a year or a net worth of one million dollars or more.
If you are interested in being put in touch with experienced investors who may be willing to borrow private money, send me an email. [email protected]. I have from 10 to 20 flips going at a time and I am always looking for new sources of money. I have been investing for over 15 years and never defaulted on a debt.
How do you find a great investor to lend private money to?
Finding a great investor who you can trust with your money is not always easy. There are many investors looking to buy properties without using their own money. Most people who want to invest in real estate are hit with a harsh reality when they find out banks require 20 percent down on investment loans. How to buy an investment pretty with little money down is one of my most popular articles. Many investors looking you buy with no money do not have any experience.
Some investors who are short on cash are experienced with flips or rentals but for some reason need more money. The reality is if they are not using their own money to invest they have no vested interest in the property if things go bad. They can let the house go without losing any cash; just credit.
Finding great investors is tougher, but it is much easier now thanks to technology. Real estate forums have allowed many investors to meet up with other investors. Blogs and websites like mine have provided a new outlet for investors. It’s easier than ever to find investors online and you can usually tell right away if they are legitimate investors or not.
Real estate bloggers also meet a lot of great people and investors in the business. I know a very large investor who does hundreds of deals a year and he is always looking for private money. I know many other investors using private money, but they have more private money than they can use. If the deal was right I would even be interested in more private money!
What kind of investor is the best to lend money too?
There are many successful investors out there, but many more investors who are just starting. I am not saying the investors just starting out are bad investors, but the longer they have been in business and the more deals they have done, the safer your money is. I believe a good investor to lend money to would be someone who does many deals a year, uses their own cash to invest, might use bank financing as well, but also needs private money to complete more deals.
One my fix and flips I use bank financing from a portfolio lender at 5.25 percent, but the bank only lends on 75 percent of the purchase price. After I pay for the down payment, repairs and carrying costs I will have $50,000 of my cash into a property. I have eight flips right now and that adds up to a lot of cash invested! If I can use private money as well as bank money that allows me to flip more houses or buy more rental properties with the cash I free up.
If I were looking for an investor to lend money too I would consider these factors. (My answers are provided in parentheses)
- How much experience do they have? (13 years)
- How many deals do they do at once? (five to ten)
- How much of their own money is invested? ($200,000 to $300,000)
- Do banks trust them enough to loan them money as well or is at all private money? (yes)
- What kind of deals are they getting? (my flips meet the 70 percent rule and rentals are always bought 20% below market)
Why should investors have a plan B?
Things do not always go exactly as planned in life or real estate. If an investor is planning to flip a house, could they rent the house and still make money if the sale market turns? If an investor is planning to rent a house, but instead needs to sell the house quickly, could they flip it and still make money? If the investor gets a great deal on a home they should be able to rent the house or flip it depending on the market they are in. In some areas it may be tough to cash flow on a flip because prices are so high. In my opinion those areas would be riskier to invest in.
Why is your money safer with a private money investor than the stock market?
If you pick the right private money investor to lend too, hopefully there will be no risk to your money. Bad things happen to everyone and sometimes even great investors get into trouble. With most private money investors your money will be secured with protected trust deeds. With the investor I have talked to and refer people to, he secures private money loans with either first or second Deed of trusts. A first Deed of Trust is much more secure because it is in first position, senior to any other loans. A second Deed of Trust has less security, because there is a first loan that must be paid off before the second gets paid off if something goes wrong.
When lending private money you want to see that the investor is getting a great deal on the home. If I bought a home that is worth $150,000 for $100,000 then it doesn’t matter too much if you have a first loan or second loan if the loans total $100,000. In almost any scenario if something went wrong I could sell the house and pay off those loans. If you lend on a home that is worth $150,000 and the investor buys it for $150,000 and finances then entire amount you are in a much riskier position. If the first loan is $110,000 and the second loan is $40,000 the first loan is well protected, but the second is not.
The more money you are willing to invest, the better chance you will get a first position loan. If you want to invest $25,000 that probably won’t go very far to covering all the costs on a house, but if you are willing to invest $100,000 you might get a first position, because it would cover all the costs on a deal. It is also common for private money lenders to lend on more than the purchase price. They may lend $100,000 when the purchase price is $80,000. The extra $20,000 pays for repairs and carrying costs.
It can cost as much as 10 percent of the value of the home to sell a property. That means the investor could only net $135,000 if they had to sell the house for $150,000 and that would leave the second loan short of what they are owed. If you invest your money with investors who buy homes well below market value it is tough to lose your money. If something goes wrong there are avenues to get some or all of your money back, unlike the stock market.
Investing private money into real estate can provide great returns for those who don’t want to buy real estate. It takes less work than buying and rehabbing properties. If you pick the right investor it can be a very easy process and in the worst case you have some protection for your money. If you decide to pursue a private money transaction always make sure you consult an attorney about legal questions and everything is in writing. if you want more information on how to invest money with real estate investors shoot me an email: [email protected]