Capitalism at its best finds new and innovative solutions that the market needs. Entrepreneurs are all about new and innovative solutions. Typically, it takes some time before the market recognizes and embraces these new and needed solutions. What we have seen evolve from the ashes of the exceedingly tight bank mortgage market is exactly that.
Two of these innovative financing solutions are crowdfunding and private money entering the mortgage market. Crowdfunding is primarily about financing commercial real estate deals. This article is about private money entering the residential mortgage market.
Brokering Private Money
There are two main residential lending markets. One is short term financing for investors. The other is for long term financing in the form of 30-year mortgages and similar traditional products. The successful private money entrepreneur will be active in both markets. That doesn’t mean using your own money. It means brokering deals to bring together individuals with money to invest with people needing money to achieve their real estate dreams.
In fact, the savvy private money broker will create round trips by first finding money to finance rehabs and then putting in place long term financing for the end buyer. The money may or may not come from the same source for both deals but the broker will earn a commission for both deals.
The Basic Private Mortgage Model
It should be clear that finding people needing mortgage money won’t be difficult. Spread the word to a few real estate agents and/or place a few advertisements alongside ads offering houses for sale and you’ll have an ample number of people wanting access to your money sources.
You may think it’s much more difficult finding the money sources but it’s not. It’s a matter of being prepared and getting your word out in the right places to the right crowd. Begin by being prepared. This is a new and still mostly virgin field. First, you need to determine what you can offer these money people that will make them want to do business with you. Is it a 9 percent interest rate? Is it a fast return on the money? Is it a much higher degree of security than Wall Street offers?
In reality, it is probably some of each of these. Private money does and probably always will cost more than traditional loans. Depending on the risk the investor takes, it might be 6 percent or 15 percent. You should be able to offer investors a lower rate of interest for people putting up a large down payment and a higher rate of return for investors with less skin in the game. And where is the security that investors are sure to want? Probably in the form of a first mortgage on the deed. Even better if the deal offers a high value to loan ratio and a first mortgage. Or maybe it’s cross-collateralizing with another piece of real estate. An entrepreneur knows how to be creative.
Of course, the business model needs to include your brokerage fee. It could be a one-time commission or it could be splitting out a small percentage of the interest rate for an ongoing passive income. It could even be arranging a loan that slightly exceeds the purchase cost. You take a small portion of the loan proceeds that the buyer must repay to the lender. Be creative but also know the laws and abide by them.
Finding the Money
The money is everywhere when you know where to look. How about the always-popular one-minute elevator speech you can share with doctors in a hospital or lawyers in an upscale office building? That elevator speech can lead to a business lunch delivering your full and well thought out presentation.
Of course, there are estate attorneys with clients that just came into an inheritance and need a secure investment with a decent rate of return. Or truly independent financial advisors that look beyond Wall Street. Much of this private money is in the form of retirement saving accounts such as an IRA or 401k. This money can be funneled into private mortgages when it is placed in a self-directed IRA or 401k.
I certainly don’t have all of the answers to this new innovative real estate career. It’s going to take real entrepreneurs to fill in all of the details.
Please leave a comment if this article was helpful or if you have a question.
Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.