A regular recurring mistake that I see from my real estate investing clients and students is that they figure they’ll go to the bank, apply for a loan, then rehab and sell a house for a nice profit.
When I meet new investors, they focus their attention on buying and selling, because they don’t realize that the real profit starts with getting favorable funding lined up first. They’re off-track from the start.
It can be very difficult to qualify for a bank loan or institutional loan for these kinds of real estate transactions. Banks don’t like this kind of opportunity. There are a multitude of reasons they want nothing to do with flipping, but it all boils down to their perception that with retail loans, the property is occupied by the owner and the owner will pay the loan back and keep the property updated because they personally live in it.
Private Money Partners
The funding alternative I want to tell you about is private money partners and private investors.
What is a private money partner or private lender? A private money partner or private lender is simply a passive investor who wants to fund your deal and get a good rate of return. It could be anyone with some extra cash sitting on the sidelines in a money market account or someone with an old 401K or IRA or Pension. It could be someone who just received an inheritance. It could be someone who has active real estate investments and is looking to diversify. It could be any one of your family, friends or business colleagues. It is anyone with money who’s looking for alternatives.If you were a private investor, would you want to do Option A and invest in a market with significant volatility, no control or real understanding of investments OR would you want to go with Option B and invest in something physical with fixed, predictable returns and control over investments that you can see, feel and touch?
No brainer… right?? Option B all day, every day, and twice on Sunday.
So how do you create the perfect pitch to get these private lenders to trust and work with you?
Seven Traits of the Perfect Private Lender Pitch
1. Know your offer
In most cases, you’ll only get about 20 minutes to pitch to someone. You can’t dare to fumble. Rather, know what you’re offering. Educate your potential lender on what you do. To succeed, you need credibility. That is:
There are two kinds of investors in real estate financing:
- Active investors (you) are those investors who are actively finding deals, making offers, wholesaling properties, rehabbing houses, buying and managing rentals, building their buyers list, running property launches either part-time or full-time.
- Passive investors are investors who simply want a great return on their capital but don’t have the time or the motivation to actively seek out deals. They simply understand they can get a great return by lending to an active investor or being a partner in the deal by simply writing the check and funding the transaction.
2. Know your competition
According to Wikipedia, over ten times as much is added to IRAs from rollovers than new contributions. Investors with 401Ks and IRAs are often the most targeted for private lending but from the Wikipedia statistics, they have a number of rollover options which means competition for you.
Convince them that real estate investing is the closest investment vehicle (others are stock markets, mutual funds, etc.) they have with predictable and quick returns.
Private lenders look for two things:
- Higher returns-less security
- More security-less returns
Luckily for you, investors are afraid of the stock market and are looking for better alternatives. Show them that real estate is the best investment vehicle.
3. Educate without pressure
Don’t make it look like you are pressuring someone to lend you. Rather, let them “salivate” and offer you the money themselves. Make it more of an educational conversation, but arm yourself with all the necessary information to pitch them over.
4. Indirectly ask for referrals
As you spike the interest of your lender, once you have educated him on real estate investing, ask him, “Do you know someone else who needs to know/hear about this?” Most likely they will have a person in mind that they think might be interested, but also…
5. Wait for it…
“What about me?”
Once you ask them for referrals, they’ll sit back and think, “wait a minute, what about me? Why don’t you want my money?” The exclusion mentality kicks in and you almost never have to come right out and ask them for their investment.
6. Never look desperate
Real estate investing is not for the desperate. Make it look to the private lender like you really do not need the money immediately. That way, you build trust by not appearing “greedy.” It’s a case of “I could use your money on a future project, but not now.”
7. Follow up
Continue to do what you showed them you are doing. Add them to your newsletter mailing list so they can see the deals you’re currently working on, friend them on social media so you can see posts about your upcoming projects, etc.
Don’t Be Intimidated
Finding private lenders and asking for private money can be intimidating, but it is KEY in growing your business and being able to have multiple projects going at once. Plus, once a private lender gets their 12% fixed interest OR 15% of your profits, whichever is greater, they will almost always re-invest with you to make more.
If you want to hear more about how we find private lenders, killer off-market deals and keep our renovations on time and on budget, join me for my latest masterclass where I will reveal the exact process I use in my business.