How do I find and get funding from a private lender?

Getting money from a private lender for real estate investments can be a viable alternative to traditional bank loans, but it does require careful planning and preparation. Here are some steps to follow:

1. Build Relationships: You should start building relationships with potential private lenders well in advance of your actual purchase. Attend local real estate investor meetings, join online investor forums, and network with other investors to get an idea of who the leading private lenders are in your area. Local REI groups and Facebook communities are a good place to start. Groups like Lend to Live: Private Lending Lessons are focused specifically on private lending. There are FAR more private lenders than most people realize, they just don’t usually need or want to advertise their activities. Building relationships, establishing trust, and asking folks if they have ever lent or considered lending is the best way to start building your network.
   

2. Do Your Due Diligence on Your Deal: You need to identify the property you want to purchase, determine its value, and create a plan to show your potential lender. This is typically done by using a variety of online tools and real estate experience. Once you have assessed the value of the property, you can calculate the amount of money you need to borrow from the private lender. Be realistic in your assessment, consider at least three ways to exit the deal, consider market conditions, and have a plan for when the rehab or construction goes wrong and build that buffer into your numbers. Do not present pie-in-the-sky perfect circumstances numbers, work off the assumption that everything will go wrong and show that you will STILL be able to pay off the loan in a timely fashion.
   

3. Prepare Your Presentation: Once you have identified potential private lenders, you need to prepare a professional presentation to pitch your deal. This presentation should include information about the property, the purchase price, the amount of money you need to borrow, pictures and videos of the property, a schedule of work, and the terms of the loan that are optimal for your project. If you are an experienced investor, consider having a Schedule of Real Estate Owned (SREO) prepped for the past two years. If you are new, seriously consider how ready you and your team of trusted professionals are to tackle this project. If you are experienced, do you have a history of experience and finished projects that you can highlight? Private lending is relationship based, the more prepared, confident, and accurate the borrower is, the more a private lender will look upon their request with serious consideration. This is often your first chance to make a good impression. Make your pitch brief, high level, and professional. Be ready to answer questions but don’t try to kill the lender with details. If they are interested, they will ask for more info or have you fill out an application. This is your chance to make a great first impression.
   

4. Have Documents Ready: Private lenders will require various documents to evaluate your deal, these may include a loan application, business entity documents, a property appraisal, a title report, and financial statements. Gather all typically requested loan documents in advance to present to potential lenders as soon as your application is in. Make sure you understand what the lender requires and gather these documents as quickly as possible. Your preparation and timeliness could be the limiting factor in getting a loan approved and closed quickly. Again, private lending is relationship based, if you appear disorganized and unprepared in the application phase of the loan, your lender will assume that you are disorganized and unprofessional in all aspects of your business. This is your chance to validate that first impression you gave was correct.
   

5. LLC: Having an LLC can help protect your personal assets in case of default or legal action, but it is not always necessary. Some lenders may require you to have an LLC, while others may be comfortable with you borrowing as an individual. Many private lenders will only lend to business entities on investment properties (non-owner-occupied) as that helps keep them clear of running afoul of Federal banking regulations. Individual state regulations on lending may also impact this requirement.
   

6. Negotiate Terms: Once a private lender is interested in your deal, you will need apply and possibly negotiate the terms of the loan. This may include the interest rate, the repayment period, construction draws, and any fees or charges associated with the loan. Be upfront about what is optimal for your business but flexible in what you are willing to consider.
   

7. Tip - Don’t overly focus on rates: This is a not seeing the forest for the trees kind of issue. Most borrowers focus heavily on rates and fail to see other important aspects of a private loan. Do not start an initial conversation with a private lender asking what their rates are or overly beat them up on this aspect of the loan. This is the fastest way to shut down their interest in engaging with you. Think of private lending as if you were buying a bespoke suit. It can be tailored specifically to meet your needs, but it isn’t the same as buying off the rack. Private lenders are rarely of a discount mentality. They are not interested in trying to compete with conventional lenders on rates. If you can get better rates at a national or regional bank, by all means, do that! Private lenders are individuals who are putting their limited personal capital at risk with you and your project and are providing you personalized customer service. They will often charge a premium to compensate them for their risk, their effort, and the time their capital is tied up. The rate is, of course, important but instead of jumping right into a hardcore rate negotiation ask if they can be flexible on the terms that are optimal for your project. Could they perhaps wave a paid appraisal, could they evaluate your deal flow instead of your DTI, can they close quickly enough to save your deal, could they charge the points at the end of the loan, could they collect all interest on the balloon date? They have more control over how and when payments occur, or fees are charged than a traditional lender. Paying a bit more on your rate may be completely worth it if they can solve critical business problems for you that conventional lenders cannot. Calculate out the total amount you’ll be paying in interest, especially for shorter term loans, you may be surprised to find how little money is actually the difference between two rates. If your project has razor thin margins, private lending may not be your best option.

Overall, the key to getting money from a private lender in real estate is to be well-prepared and professional in your approach. Building relationships with potential lenders and presenting a solid deal with all the necessary documents will increase your chances of success.