Within this section, we’re going to discuss raising private money for yourself. One of the huge things that we’re always running across with brand new folks is the number one excuse is, and it’s I don’t have a track record, I haven’t done deals before. Well, I can tell you this right now, it doesn’t matter if you have never done a deal or if you’ve done hundreds of property flips, there are different ways that you can structure your deals.
Now the two that I’m going to discuss with you right here right now is debt equity position and rate and term. Those are the two that are more than likely going to be the ones that you’re going to come across and structure with your private money lenders. When you’re just starting out you’re more than likely going to structure in some debt-equity position where you’re giving up a percentage of your profits for somebody else to give you their money to do the deal. Yeah, you found it, it’s a great deal, you’re probably going to be able to sell it quickly if you want to rehab it, that’s great, but you need the money.
So, instead of getting zero percent, you’d instead reach 50 percent. Most debt equity deals will be structured to where it’s going to be 50, 60 percent to you depending on how you structure it and 40 percent to the individual that’s lending you the capital just because they have a little bit more at risk. Now here’s the deal that also puts them in favor. If something happens to where you are not able to perform, and you’re not able to proceed forward, the best thing for your private money lender to be protected is that they have a lien positioned on the property. That’s what I always did when I was just starting out, and I was doing debt equity position transactions is I would give my private money lender a position in the property. So, they would have the first lien, they’d have the first right if anything went sour.
So, if something happened and I went way past the timeline of what I told that person, because generally for me, I don’t want to get into a rehab if it’s going to take three or four months just because I don’t like having capital tied up for that extended period. Even though it’s not my capital, I care about my private money lenders because I don’t want them having their capital tied up for that long period unless we’ve discussed that. So, having transparency is fully exposed and having everything put forth by expectations is also going to be key. Because when we talk to private money lenders, it’s crucial that you let people know what your intentions are.
So, if you plan on fixing the property, getting a tenant in it and then refinancing your private money lender off, then you need to have that conversation with them upfront because they may not want to get involved. The debt-equity position is you’re going to have a partnership agreement in place, and then you’re also going to have them on the title to where they’re in first lien position. You’re going to be on the title by yourself, but they’re going to be in first lien position, and it’s going to be written in a format where they can foreclose on the property immediately and get the owner of record transferred over to them. It just works in a favorable position for them from that standpoint. A, they didn’t have to find the property, B, you’re going to be doing all the legwork. C, they get paid handsomely when the deal is done and closes and D, if something does happen they get the property back.
So, once you do a few of those, and you have built a track record up doing deals using none of your capital, that’s going to be a great thing for future private money lending transactions.
Some folks are probably wondering like well when I close on the deal will I also get rehab money when I close on the transaction because I don’t have that money either. And trust me I was in that boat too. I didn’t have the money. So typically, how it works is you can get all of it upfront or you can work in draw periods.
So, the best way to do that is you pay out your contractors every Friday. You don’t pay out in full, so if somebody gives you a $25,000 quote and they say hey, I want half, no. You work in installments with the individual as they complete work. So, the best thing that you can do is pay them out every Friday and as you do that you give information to your private money lender wanting additional funding for draw periods. So, what I mean by that is, you’re going to provide them with receipts, you’re going to give them the individual work that was completed by your contractors, and then they go ahead and give you the draw for next week.
Some of them want to work that way as well because they want to see like actual work completed on the property. If it’s going to be your first or second time with this individual, they’re probably not 100 percent confident and comfortable with you get to where you can proceed forward in a manner that allows you to receive full rehab costs at closing.
I’ve been able to structure deals to where I wanted to borrow 100, and I needed 25,000 for rehab, and I received all of it at closing. That happens. It’s all about structuring and getting creative so that everybody feels confident and comfortable.
So, when you work rate and term a lot of folks, they hear points. Now after you’ve developed relationships, and you’ve done three, four, five deals with them, now you could start going out, with a track record, and start negotiating terms in a much favorable manner to where you’re not giving 50 percent of an equity position on the net profits that are made. Now you’re in a place where you can structure the deal from a rate and term standpoint.
Most of the time we’re going to be … Anywhere between eight to 11 percent on our private money terms and I say the double digits part because that did happen a few times when I was starting out. Don’t want to feel like I’m going to over-promise and under-deliver here by painting some picture to let you think that every single deal is going to be eight or nine percent interest. In fact, it’s probably going to be slightly higher with brand new private money lenders, and then you could always renegotiate. And the key to getting terms is making sure that you do not paint the picture of how much they’re going to get as far as their return. You always want to find out from them what they are looking to receive.
From that standpoint, most of our deals nowadays are going to be anywhere between eight and eight and a half percent as an interest-only monthly payment. Most of the time now, maybe one or two points at the most and we pay those at the end once the project is finished. Like the last few transactions have been no points just because that’s how we’ve been able to negotiate them. We’ve had relationships now for an extended period. The deal can get structured in that way.
Another great thing to do is as you’re doing this, and you’ve got excellent private money lenders, you can keep these properties like I was saying at the beginning, you can do deals to where you’d have them for six months, and then you could refinance them. So, say for instance you want to build up wealth, and you could use other people’s money to do this, is one of the strong ways that I would recommend to execute this is you can have multiple properties with the same private money lender.
Say you have four or five deals and they’re cash flowing for you. You’ve put tenants in them, you’ve got property management in place, and they’re good to go. Or they might be Airbnb properties that you’ve got consistency coming in with bookings, and they’re cash flowing. Well, next thing you know you can go and get what’s called a blanket loan and you can take those four or five properties that you’re paying on so each property you’re paying eight to eight and a half percent interest on and then what you could do is you could take them and put them all together, and now you can have anywhere between a five to five and a half percent interest rate to a high five percent interest rate, and you’re only making one payment instead of five.
This will allow you to get in there and get deals at phenomenal prices and allows you to build up long-term wealth because a lot of us think short term with wholesaling because wholesaling is kind of like a one-off transaction. Once you do it, there’s no recurring revenue from that deal. So, wholesaling is tremendous, but the longevity of real estate is being able to have that from a generational standpoint to where you can pass it down from yourself to your kids to those kids’ kids, and it keeps going down and down and down forever. So that’s the great thing about real estate.
Now a couple of tips that I’m going to give you on finding the private money lenders. We’re talking about people that are going to be willing to provide you with their money to do these transactions, and yes, everything is safe and secure with real estate but you also want to make sure that you’re developing relationships, because as you grow those relationships you’re going to be able to get the longevity out of that relationship too which is better terms on your deals, improved pricing on your deals. So instead of a debt-equity position, you can now do rate and terms.
One of the things that I saw in this group the other day and it was handled exceptionally well. Very professional how the whole group kind of came together and tried to explain to these folks that it’s going to take more than five different conversations. You’re going to have multiple conversations with people. Some of the best ways, believe it or not, you could find individuals on Craigslist, and you’re going to have a conversation with these folks. It’s not just going to be like, hey, would you be interested in lending some money.
What I would say is, “hey, I came across your information on Craigslist. I saw that you’re actively looking for properties. When can we set up a phone call, a quick 15-minute phone call? I just want to talk to you. I’m a real estate investor here in town.” Here’s what I would do after that 15-minute phone call is if you guys are meshing while it sounds like it could be an excellent opportunity, then take that individual out for coffee. If you don’t have the budget to go out for lunch or dinner, then go out for a cup of coffee.
For me, I’m not a coffee drinker, but you can always go and get like a bottle of water or a tea and just have a conversation. It’s not going to be some short, sweet conversation after the 15-minute initial call, but once you go and you’re able to talk to this individual in person, it helps out. Because like when we have live events, and people come, and they’re able to see me like face to face the whole dynamic of the relationship changes now because we get to know each other a little bit differently and it just helps out quite a bit. So, Craigslist can be an excellent source. It’s free.
We’re talking Facebook now, we’re talking LinkedIn, YouTube. You could find folks locally from a geographical standpoint in your backyard. You don’t have to be looking for folks all over the place. These folks can be in your backyard. You can go to Chamber of Commerce meetings, your local real estate investors associations. Find out who the players are and have conversations with them.
Another excellent source that’s overlooked is you’re the recently completed cash transactions. First of all, you want to have a conversation with them, and it’s going to be a little bit different because something like this, “I just saw that you closed on 521 Main Street. I wanted to give you a call because I’ve come across a lot of deeply discounted properties that are similar and I wanted to see if you might be interested in looking at some of the properties that I’ll be having here soon that are similar to the property that you just bought. It might be a little bit cheaper than what you originally bought at which gives you a larger profit spread.”
And that would be a great conversation because we do those calls all the time for our students, for our business. We do them live at our events. So, people know that those calls, they don’t have to be scripted.
Finding the recently sold cash transactions in your area is going to increase your chances of being able to get private money. Find out from them what type of deals they want and then once you’re ready to do maybe one or two deals with them from a whole selling standpoint, take them out. Take them out for lunch and talk to them about being able to do deals on a larger scale.
It’s time for you to receive private money for your next real estate transaction. Go out there and make it HAPPEN!!