Let me first explain my definition of "Private Money". Private money is funding that comes from private individuals, friends, family, IRA’s or any source other than institutional or conventional means. It is some-times referred to as "Hard Money" or "Flash Cash." Finding private money is not near as difficult as people think. I know that is hard to believe if you are sitting there with bad credit, and no cash to do deals. I use private money in all my cash transactions. I never use my own capital. I make a phone call, and the money shows up at the close a few days later.

Since I have developed a good relationship with my money sources, I am able to borrow 100% of the purchase price, and all of my fix up, closing costs, etc. Oftentimes, I am able to walk out of my purchase closings with a check. I don’t pay near the points and fees others pay, because I have taken the time to find a good source, and have never compromised that relationship.

The first point I would like to get across is that, it is easy to find the money if you have the right deal. If you are new to the investing game, you may think that you need to find the money first. Not so. What you do need to do first is find a good deal, and put it under contract. Then approach a capital partner. It is much easier to shop for cash when you have a deal in hand. It gives you something to talk about, and you will be able to shop lenders, and compare apples to apples. If it’s your first deal, you don’t want to go tying up a $250,000 fixer upper. You want to start in the lower-end range. Lenders are not looking to take risks. If you are new to the business, you will find it easier to get smaller amounts.

You will want to go armed with the details of the deal, and you want to know what you are looking for. You would be well-served to back up “You may think that you need to find the money first. Not so. What you need to do first is find a good deal.” Develop Good Relationships Bring Contracts to Lenders

your after repaired value assumptions with some recent comparable sales. You could get these from an agent, after you have tied up the property. Next, you will want to determine your repair costs, if any. Also deter-mine holding costs, selling costs, profit-margin etc. so your lender can get a good idea of the risk associated with the transaction.

EXAMPLE:

Here is a sample of what most private lenders want to see.

Most want to Anticipated Sale Price $100,000
Purchase Price (40,000)
Remodel cost (15,000)
Holding (6mo interest) (4,000)
Selling Costs (6,000)
Lender Points (10pts) (7,500)
Total Loan $72,500
Loan to Value 72.5%
PROFIT POTENTIAL (27.5%) $27,500

How Much Should You Pay for Your Money? This is a good question. I believe its not as critical to be concerned about "how much’’ you pay, as it is to be concerned with "how avail-able" the cash is. There is nothing worse then getting down to a close, and your lender doesn’t have the funds available right then. Money costs range from 0-10 points at the time of origination, with monthly interest from 6-20%. I personally have a hard time paying more then 6 points and 12% interest. A standard in the industry is 10 points and 15%. Money is readily available at that cost, with loan to values around 65-75%. Knowing that, I encourage you to start asking around. I have a friend who has borrowed $8 million, and he only pays 8% quarterly with no points. You will find that there are
a lot of people in "the money business".

“It’s not as critical to be concerned about “how much” you, as it is to be concerned about “how available” the cash is.” What are You Willing to Pay?

Secure it against the real estate, however, I have often borrowed money unsecured. I just offered to pay a little more in interest. As far as a term goes, I have borrowed private money from a 2-day term for "flash cash" to take out loans 30 due in 30. It really depends on your investor. I have found that older individuals, who are lending out their own money, typically want to offer it to you for a longer term. They are more interested in the interest generated, and monthly cash flow. If it is sitting in a bank, it would only be earning 2-3% today, and many money lenders are skittish on the stock market. We know what’s happened the last 2 years. Secured against property, they can earn a relatively safe interest rate, making several times a money market rate. Avoid Pre-Payment Penalties My personal pet peeve is making any kind of prepayment penalty. I once borrowed money from an individual for a care center. The note had a 4 year pre-payment penalty of 6 months interest. Since I was paying 14% interest, that added up to quite a penny. I sold the property at 3 1/2 years, and he would not waive the prepayment penalty like he had said he would. I was furious, but since I had tripled my money, I got over it. Actually, it was a return of infinity since I never had any of my own money in it to begin with.


This is one of the nice things about private money. You can get into deals that many traditional lenders wouldn’t touch. And, you can get into them without qualifying financially, so credit doesn’t matter. The lender looks at the asset, or the cash flow of the asset to repay the debt.


A great way to find private money is to advertise for it. That is how I got the deal above. I ran an ad in the paper stating what I wanted, and an agent called me who said he knew of a friend that had some money he wanted to invest, and that was that. We drew up a note, and I borrowed enough to cover all my costs. The whole thing took just a couple of days.

Run an ad like this:

Private Money Needed
Earn 14% plus 5 points
Rental, 70% Loan to value
$65,000 call 234-455-6543


It only takes one call. Another great thing about private money loans is that they don’t show up on a credit report, unless you want them to. Look in your local newspaper and oftentimes, you will see lenders that advertise private money available. Another good thing to do is, call a half dozen of the real estate agents that work with investors or rental property owners. Ask title or escrow officers who the players are that loan money privately. Every community around the country has people that offer money for a fee. I myself have never used a broker for private capital. I have always just gone strait to the source. I know it has  saved me a considerable amount in fees. Realize that when people have money to loan, if it is not in an investment, they are not earning interest. They love clients like you that will repeatedly borrow funds over and over again.


Having private capital resources is critical to the success of the serious creative real estate entrepreneur. Even if you desire to use your own money, it never hurts to have another source or two available. If your funds are tied up, and a great deal comes along, you can immediately jump on it.


Some investors like to use a bank or a credit line for these kinds of deals, but why would you want to risk your home or credit rating, if the deal goes bad? I submit to you that it is easier, and less risky on your part to use private money. Especially when the deal goes bad! It is much easier to talk to an individual than an institution if you owe them money. Have you ever dealt with Wells Fargo? I believe you should never be in debt to your enemies, and that is one company I loathe to do business with. You may pay a little more for private money than institutional financing, but if the numbers are that tight - you should not be in the deal to begin with. Believe me, getting private money to use is worth a few
phone calls. I have developed a track record over the years where I get 100% of the money I need, plus all the repair money etc. Most of the time, they “Realize
that when people have money to loan, if it’s not in an investment, they aren’t  earning interest. They love clients that will borrow funds over and over.”


I have several lenders that never even look at the property. They know that I know what I am doing. That level of trust is awesome. It’s like banking used to be. Start Thinking Out of the Box It’s funny, but so many people are conditioned that the only way to do business is the traditional way: with banks and real estate agents. Nothing could be further from the truth in creative real estate. While using banks and agents may work, it is not the only way. I, regretfully, have to admit that I have a traditional mortgage or two on personal residences, but I would never be able to do the volume of deals that I do if I used traditional lenders on my purchases. My credit report would be a book, and I never would get anything done except filling out applications. I don’t think I have ever filled out a loan application for a private lender. Be Creative