This article is the 1st of a 3 part series on Private Money Lending.
I have a few rules that I follow with regard to financing my real estate purchases; I don’t use my own money and I don’t borrow money from banks. The secret to securing enough capital to fund your cash deals is simple, and you can find it living in your neighborhood, at the grocery store, or sitting next to you at a restaurant.
The answer? Private Money Lenders.
Private Money Lenders and Hard Money Lenders are a different breed – so don’t confuse the two.
Private Lending became a very popular investment vehicle after interest rates declined below 5% on traditional Money Markets and CD’s. People with extra cash started looking for a more lucrative way to invest, and obtain a higher ROI.
That started the revolution that you see today regarding Private Money Lenders. This trend toward private money will keep going strong as long as traditional interest rates remain low and traditional mortgage and hard money remains hard to get.
Although securing Private Lending seems so simple, our government decided to throw a monkey wrench into the mix. When borrowing money from another person with the promise to repay them, that “promise to pay them back” is what’s called a Promissory Note. This Note is considered a Security, and is therefore governed by the Securities and Exchange Commission.
“Why does this matter to me?” you may ask…. well, the SEC has strict rules and regulations that govern exactly how an investor can “use” a Private Lender. One being, you MUST be a licensed Security Broker to approach and proposition a Private Lender for the use of his or her capital to fund your real estate investments.
But fear not, there are exceptions!
The SEC DOES permit the average investor (someone who is not a licensed securities broker) to approach friends, family members and/or acquaintances. Here is where the loophole can be found.
What is an acquaintance? Well, loosely defined- an acquaintance is “a person known to one, but not a close friend”. In other words, perhaps someone living in your neighborhood, someone you meet at the grocery store, or someone who is sitting next to you at a restaurant.
Now, you may not solicit a private lender for his or her money, but there is no rule against a private lender OFFERING his or her money to you. I’m sure you’re saying “yea, if it were only that easy…” Well folks, it is. The biggest obstacle standing in between you and that private money is your fear of being rejected. All you have to do is adopt what I call, the “6 foot rule”. Any person that gets within 6 feet of me, I say this:
Tim: “Hi, my name is Tim. What’s your name?… So what do you do for a living?”
Private Lender: “My name is John and I’m a doctor”
Tim: “Oh yea, what kind of doctor?”
Private Lender: “I’m a Neurosurgeon…”
Tim: “Neurosurgeon huh, that’s interesting…” At this point, inevitable they will ask you what you do for a living…
Private Lender: “So Tim, what is it that you do?”
They have approached YOU. Now you are free and able discuss business without fear of repercussions, because they are now an acquaintance.
Tim: “I am a real estate investor who buys and rehabs houses, and at times borrow money from private people, who are looking for better than average rates of return. I typically pay between 10-15% interest for the use of this money, which will fund my acquisition and rehab costs. Do you know anyone who would be interested in something like this?”
This is an indirect approach of talking to prospective private lenders that will eliminate the fear of asking people to lend you their money.
The financially savvy people will say something like this…
Private Lender: “Well Tim, I would actually be interested in an opportunity like that! Please tell me more!”
When they take interest in your offer, set up a meeting for a later date. Get all your material together, and show them your business model. Once you build a relationship with these people, they will become one of your biggest assets to your real estate investing business.
Look for part 2 of this 3 part series on Private Money Lending in a few days!
In the meantime, visit my Blog!