It really is possible to raise money from private individuals to fund the purchase of an investment property, or to buy a home to live in. The key is to make the right presentation, and that presentation should be constructed with your potential lender in mind.
Potential lenders come in all shapes and sizes. They may include anyone from your parents, friends, or an extended family member, to a professional hard money lender or a capital company. Pitching the idea of getting them to lend you the money you need revolves around a few key points.
If the lender is a family member, friend or other “non-professional” person who does not lend money on a regular basis, they will most likely be concerned about issues such as your personal ability to pay them back, protection of their principal, and their anticipated rate of return. Your job is to answer those questions with a presentation that they can easily understand.
No matter who the lender may be, they will want to know how much money they will make if they lend to you. But family members and friends are probably not carrying a financial calculator around with them. Chances are they are not all that familiar with how the process would work and they may not be able to determine how much money they would make. When “pitching” your loan request to them, it is important to give them something in a written form that shows how the transaction will work, how and when they get paid, and how much they will benefit financially. And you want to keep it simple.
For best results you should have a specific property in mind, preferably already under contract, subject-to getting the required financing. Then you can structure your loan proposal around the specifics of that property.
For example, let’s say you found a nice three bedroom, two bath home in a good part of town and you want your uncle Bill to lend you the money to purchase this property. I’d take uncle Bill to view the property in person if possible. If that is not possible, I’d video or photograph the property and have photos or video ready for uncle Bill to look at.
I’d make sure that my negotiated buy price is below the appraised value, so that the Loan-To-Value ratio looks good to uncle Bill. If you find a property worth $100,000, but you only need $80,000 from uncle Bill, that would be an 80% LTV. This is a commonly held benchmark for a “safe” LTV. Uncle Bill might be willing to lend you more than 80% of the value, but as a general rule, the lower the LTV, the easier it will be for you to find a willing private lender.
I’ll plan to prepare a simple financial statement for uncle Bill, showing what rate of interest I am willing to pay, and how much the monthly payments would be. I’ll use a mortgage amortization calculator to work up the payment amount along with the interest and principal break down. This way uncle Bill can see how much money he will make on this loan, as the years go by.
I want to make sure I cover all of the important details, including the loan amount, the interest rate, the total number of payments to be made, and the total interest that will be earned by uncle Bill. Even conservative family members are more willing to consider lending money to finance a home when they can clearly see how much they may earn. Chances are your loan will pay much better than what they are currently earning on bank CD’s and other savings vehicles. You can tell uncle Bill that this loan is like creating an annuity for himself, secured by real property.
On the flip side, getting your loan from a private lender such as uncle Bill will likely be much cheaper than typical FHA or other types of government insured loans. Unlike FHA loans, which are costly, uncle Bill may be less likely to saddle you with loan origination fees and private mortgage insurance. This alone may save you tens of thousands of dollars over the life of your loan.
When dealing with more experienced private lenders that loan money on a regular basis, your own experience and track record may play an important role. No matter how much or how little experience you have, the key to success will be your ability to present an investment opportunity that makes sense for the experienced private lender.
I was once approached by a custom home builder who had a dream of creating a development in the mountains, in which he would develop and build out the entire property. He was seeking a million dollar loan to help him finance the project.
I arranged a meeting with a private investment group that was looking for such an investment opportunity. I told the builder to have a detailed presentation ready for the meeting that included such things as blueprints, surveys, maps, photos, cash flow projections, and so forth. After all, if you are seeking a million dollar loan, you need to look and sound like you know what you are doing, and you must be able to demonstrate how the loan will be paid back and what the time frame will be.
The builder showed up with the details “in his head”, and had not taken the time to put together a detailed presentation that would answer even the most basic questions that the lenders asked. The meeting was over the minute it became obvious that the builder had not prepared an adequate presentation.
Whether you are trying to raise private funds for your first house or a 50-story office building, the key is to have a clear presentation that provides all of the essential details about the property and shows the potential lender how the deal will benefit them. They are considering making the loan because they want to make money. It’s up to you to show them how much they will make and when they can expect to make it. When you properly address lender expectations, it’s not that difficult to find private money to finance a home or investment property.
Donna S. Robinson is a real estate investor and residential investment consultant located in Atlanta, GA. Follow her on twitter at donnaconsults, Facebook.com/RealtyBizConsulting and watch her videos on youtube. Her latest book, Basics of Real Estate Investing, is now available for Kindle on Amazon.com