Private money had been a huge reason for my success when flipping homes and it is a key to many other flippers success as well. On my podcast I have interviewed many real estate investors and many of the investors who flip houses, use a lot of private money. It has been a recurring theme with almost every successful real estate flipper I talk to. Private money is an awesome tool for flipping houses, because it gives the investor flexibility to close quickly, pay cash and use less of their own money. The problem with private money is it is not easy to find! How can you find a private money lender?
What is a private money lender?
If you search for private money lenders online, you will find many companies pop up that claim to provide private money. The chances of finding a true private money lender by searching on Google is pretty slim. Most companies claiming to be private money lenders are actually hard money lenders. Hard money lenders are companies that borrow money from investors and then lend the money back to flippers at a higher rate. The rates on hard money are usually at least 12 percent and sometimes much higher.
True private money comes from people who have a lot of cash and are willing to lend it to individual investors. Private money can come from friends, family, business partners, other real estate investors or anyone with cash. It is not easy to ask for private money and it is not easy to find people with money who are willing to lend it to individuals. Private money rates can vary from 0 percent (most likely a parent wanting to help their children) to 12 percent or higher like hard money. The rates all depend on what return the lender wants, what the investor is willing to pay and the risk involved.
Why is private money so important to flipping homes?
I use a mix of financing when I flip houses. I have 9 flips going at the moment and in order to do that many flips at once I must have a lot of financing in place. I use:
- Portfolio loans: A local bank will sometimes lend to flippers. My bank charges 5.25 percent and will lend on 75 percent of the purchase price. This financing is very cheap for flipping, but I still have to come up with a 25 percent down payment and all the money for repairs and carrying costs.
- Private money: My sister lends me money that is secured against a couple of my rental properties and I also have another investor who will lend me private money for purchasing new flips. He will finance up to 100 percent of the purchase price, but charges much higher rates than my bank.
- Lines of credit: I have one rental property paid off and equity in my personal residence. I was able to get lines of credit on both properties that can be used for flipping houses.
- Cash: Not only do I use other people’s money to finance my flipping business, but I also have a lot of my own cash tied up in the business. I don’t like to max out my financing options or borrow so much money that I do not have a cushion if something changes in our market.
When I flip houses I usually pay from $50,000 to $150,000 for a house. After I pay for the down payment and repairs I usually have at least $50,000 in cash I need after using the bank financing. If I have 9 flips that would mean I would have to have $450,000 minimum of my own cash invested to complete the flips. The truth is many of my flips need $50,000 in just repairs alone. By using private money and lines of credit I can flip more houses and make more money, even though the financing costs are higher.
Some flippers will use only private money to fund their flipping business. When buying at a foreclosure auction you may need cash within a couple of hours of winning the bid. Most banks or hard money lenders cannot fund that quickly. Private money lenders can fund deals right away and private money lenders will have more flexible terms than most banks and hard money lenders. Banks and hard money lenders will have certain guidelines they will lend on for flips. They will not want to lend over a certain amount of the purchase price or the after repaired value. Some private money lenders will lend on the entire purchase price and all the repairs.
How can you find a private money lender?
Private money is very important to growing a flipping business, but it is not easy to find. Here are the most common roadblocks to finding private money.
- Investors do not want to ask their friends or family, because they are afraid of rejection or losing their money.
- Investors do not know anyone with a lot of cash who could be a private money lender.
- Investors do not have any experience flipping houses and private money lenders do not want to lend to them.
Overcoming any of these obstacles can be tough, but they are not impossible to overcome. Here are some tips.
- If you are afraid of rejection you are in the wrong business. It happens all the time in real estate, so don’t worry about people saying no. It is not the end of the world. As for being afraid of losing people’s money who you know, you should also be worried about losing people’s money who you don’t know! If you don’t have confidence you can make money, maybe you need more education and experience.
- If you don’t know anyone with a lot of cash, there are ways to find those people. First off, you may know people with cash you just have not thought about them or are afraid to ask them. Make a list of everyone you know and anyone they know or may have connections with who might have money.
- If you have never flipped a house, it is tough to get started. The best way to get attention from lenders is find awesome deals. Find a deal that is so good that it is a no brainer for the lender. Even if you screw up and can’t pay back the loan, the lender could take the house back and still be in a good position.
I still don’t know anyone with money, how do I find a private money lender?
If you went through all your contacts and still cannot find someone with money, you have more options. There are investors lending flippers money all the time and most likely doing it in your market. How do you find those lenders?
When someone is lent private money, a Deed of Trust is used to record the loan against the property. When a Deed of Trust is recorded against a property it becomes public record and anyone can see who the lender was. Look for properties that have been flipped (either sold recently or on the market) and check public records for private money loans. As a real estate agent I can look up pubic records on properties very easily and see what loans are against a property. If I want to see the actual Deed of Trust I can use the counties website or call the title company and ask for a copy. You can also use List Source to find properties with private money loans against them.
With this technique you can find investors who are lending to flippers in your market. Finding the investors who will lend money is just the first part of the process.
How do you convince someone to lend you private money on a flip?
Once you find someone who has money, you have to convince them to lend it to you. There are advantages to lending money on real estate flips and disadvantages as well. You need to make sure you limit the disadvantages and make the advantages as big as possible. Make sure you think about the perspective of the investor who will lend you money, not just yours.
Advantages for the investor looking to lend money on a flip:
- Higher rate of return than most investments like CD’s, money markets, bonds and possibly the stock market.
- When you invest in stocks and bonds you can lose your entire investment and have no collateral. When lending against real estate your loan is secured against the property. If the borrower can’t pay back the loan, the lender can foreclose on the property and take possession (assuming it is a first Deed of Trust).
- You know your exact return and when you will be paid back. With other investments you are guessing what the returns may be and when.
- If the flipper knows what they are doing they will buy houses very cheap. If the flipper does default the lender may actually make more money by taking possession of the house.
Disadvantages for the investor looking to lend money on a flip:
- The flipper may not be experienced and know what they are doing. This could result in more costs than expected, the property being worth less than expected, the flip taking longer than expected or other problems.
- The value of the property could decrease. This is usually only a problem when a flip takes a very long time to complete or the home is over priced when the flipper tries to sell.
- It takes some work to foreclose on a property if the flipper defaults. The time frames vary by state, but it could take a couple of months or a couple of years in some extreme cases.
- If something goes wrong and the lender and flipper know each other, it could result in a lost friendship or family problems.
When trying to convince someone to lend you money, you have to prove to them that their money is safe. You need to show them with documentation what the property is worth, what it will sell for, what repairs will be needed, what all the costs will be and what the time frame will be. Most new flippers underestimate most of these costs and experienced investors will know if you are being unrealistic.
My book Fix and Flip Your Way To Financial Freedom is a great resource to learn the ins and outs of flipping.
Don’t be afraid to pay someone 10 percent interest or even more if needed. An investor will require high returns to take on the risk of private investing. The less experienced the flipper is, the more interest they will most likely have to pay. If there is not enough room in the flip to pay a higher interest rate and still make money, it is not a good deal.
Finding private money is not easy. The more experience you have the easier it will be and you may find private money lenders coming to you to lend you money. If you want to find and convince someone to lend you money you need to have a great deal, prove you know what you are doing and be willing to pay high rates that most lenders require.