Private Money for Real Estate Investors

Last Updated on March 14, 2024 by Mark Ferguson

Getting money to start in real estate investing is the biggest hurdle for people. Traditional lenders have stringent requirements, making it hard for people just getting started and hard for people looking to take their real estate investing to the next level.

This is where private money, an alternative to traditional financing, comes in. In this article, I’ll cover what you need to know.

Private money has been a key piece of my strategy. I would not have built my real estate business without it.

Understanding Private Money

Private money refers to loans sourced from individuals or non-traditional institutions rather than conventional banks. These people invest their own capital directly in your project, secured by the property itself.

Said another way, private money usually means borrowing from a person who is looking to earn interest on their cash. For taking a risk on you and your project, they get some form of recourse, which may include getting the title to your property if you don’t pay the loan back according to the terms of the agreement.

Here’s what real estate investors get with private money:

• Faster closing times: No red tape, which expedites deal execution.
• Flexible criteria: Less rigid evaluation and underwriting, catering to scenarios banks might reject.
• Custom terms: Negotiate interest rates, loan amounts, and repayment structures directly.

Private money loans are different than hard money loans. You can read about Hard Money here.

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Key Points to Remember

• Higher interest rates: Compared to traditional loans, expect rates ranging from 8% to 15% or higher.
• Shorter loan terms: Private money is typically short-term financing, lasting 6-24 months.
• Due diligence is crucial: Verify the lender’s credentials, experience, and track record thoroughly.
• Legal agreements are everything: It’s best to have a lawyer draft a comprehensive loan agreement outlining terms, rights, and responsibilities. If there is a dispute, it’ll come down to the terms of the agreement. A lot can be on the line in these deals, so ensure you understand the agreement in full.

Just starting out? See my post The Best Way To Invest In Real Estate.

Pros of Private Money

Private money is one of the best options to start your real estate investing and to scale it.

It can also help kickstart the BRRRR method to rapidly expand your real estate holding. Here’s my article on How to Use the BRRRR Method, including using private money.

• Access to capital: Secure funding even with imperfect credit or unconventional projects.
• Speed and agility: Move quickly on time-sensitive deals and capitalize on fleeting opportunities.
• Direct relationship: Build rapport with the lender, potentially fostering future collaborations.

Cons of Private Money

• High costs: Interest rates and origination fees can significantly impact your profit margins.
• Short timelines: Pressure to exit the investment quickly for repayment can limit options.
• Risk of default: Non-compliance with loan terms could lead to property foreclosure.

Additional Tips

• Start small with your first private money loan to build trust and experience.
• Network with real estate professionals and advisors for recommendations on reputable lenders.
• Have a solid business plan and financial projections to demonstrate your investment’s viability.

How to Find Private Money

Private money can be a great option for real estate investors. And it’s been a great way for me to scale my real estate.

If you want to find private money, you can read my article How To Find Private Money For Real Estate Investments.

Conclusion

Private money can be an incredible way to get started and also scale up. It’s been critical in my journey.

However, know what you’re getting into. Carefully understand the terms, exit strategy, and your risk tolerance.