Private money lenders are companies or individuals that are non-institutional. This means that they are not financial institutions like a bank. Instead, they secure their loans with deeds of trust or notes, and this tends to be related to real estate transactions. In general, borrowing from a private lender is more down to having a relationship with hard money lenders. So how do you find the best private money lender?
Search For Private Lenders
Unfortunately, it can be quite difficult to find a private lender, although it is not impossible. You have to work a little harder, not in the least because you will have to build a relationship with the lender. Generally speaking, private money lenders are people or companies with experience in investing their money by offering it to individuals who want to purchase real estate and who can afford higher interest rates.
Naturally, because they are experienced in doing this, they are also well-versed in determining whether or not someone is “worthy” to provided with the loan. Furthermore, because they tend to have limited funds, they aren’t easy to find either. Generally speaking, private money lenders only work in specific niches as well, such as commercial property, multi-family property, or non-owner occupied rehabs. Furthermore, private money lenders do not usually advertise their availability, oftentimes just relying on word of mouth.
That said, there are a few things that you can do to find a private money lender. What you need to do, essentially, is understand the three circles of private money lenders. You start with the central circle and work your way out to the outer circle. In so doing, you will also go from who is most likely to be the cheapest private lender to the most expensive one.
Your Central Circle – Your Friends and Family
The first circle you should consider is that of your friends and family. Asking them can be difficult, but you will generally already have a bit of an idea of whether or not they have the financial means to assist you. This is of key importance because the relationship is already there. The difficulty with the central circle, however, is that borrowing from friends and family can often be a recipe for disaster when it comes to relationships. You must, therefore, ensure that when you borrow, such relationship should a business one in which you are both aware of your rights and responsibilities.
The Second Circle – Associates
The second circle is made up of the associates of the people in your central circle. This can be a little bit harder to access, because it means approaching those who are in your central circle and then asking them for recommendations, which is something that they may not want to do. This is because borrowing money can be a touchy subject. In the event that someone agreed to lend you money but the relationship later soured, this will reflect badly on the individual who recommended you. That said, it is possible to borrow from the second circle, although it usually takes a lot of work, particularly in terms of building that relationship of trust. A second difficulty is that few people know private money lenders. Rather, they may know people who simply have a lot of money. This means that you not only have to convince them to lend to you, you also have to convince them that lending you money is a good investment.
The Outer Circle
The outer and final circle is the circle of third parties. These are investors with whom you have no personal relationship to speak of. This is where most of the money can be found, as well as where most of the expertise lies. However, it is also the most difficult to get into. Finding them is already difficult, and convincing them to lend to you is equally hard. On the other hand, building a relationship, once you have found them, is slightly easier because these investors are looking for ways to invest their money.
Investor contact sites are perhaps the best place to find these types of investors. Consider Lendpost, Go Big Network, Prosper, Lending Club, BiggerPockets Marketplace, and so on. You can post your ideas there, and investors can then contact you with offers. Do make sure, however, that you follow the rules and regulations of the Security and Exchange Commission.
An alternative is to join an investor direct mail list. This is a very aggressive way of doing it, but some people have been successful with it. It does mean that you have to have an excellent pitch ready to send out to your list.
Finding private money lenders takes time, but it is not impossible. Be aware of the different limitations that are in place and how to resolve them. In so doing, you will greatly increase your chances of being accepted.