Every exit strategy may coincide with multiple funding options. It’s worth noting, however, that not all funding is created equal. Let’s take a look at a few of the most popular ways you may want to fund your first real estate investment.
As their name suggests, private money lenders are typically those that aren’t associated with a traditional institution; pretty much anyone you know that may have a slight interest real estate and a little disposable income. That sad, the perfect private money lender can range from your closest friends to a coworker at your current nine-to-five. Just know this: you will never know which private lender funds your next deal unless you ask. Your first real estate investment won’t fund itself; get out there and find out who is in your corner.
Private money lenders aren’t known for their marketing prowess, and are — more or less — dependent on investors seeking their services. In other words, they aren’t going to come to you, nor should you expect them to. While they have been known to seek out opportunity from time to time, I maintain that your best chances of working with a private money lender revolve around proactively seeking their services. As an investor without the privilege of having a deal or two under your belt, you will have to put yourself out there (perhaps even outside of your comfort zone) if you ever hope to gain access to private money.
The simplest and most effective strategy, at least as far a I am aware, is to tap in to the network you have already created. As I mentioned before, anyone with a little extra money is a candidate; it’s your job, however, to convince them that investing it is in their best interest. Don’t hesitate to inquire about potential investment opportunities with those you already have a working rapport with.
I encourage those seeking funding for their first real estate investment to initiate their search with an email. Send a well-devised email to your friends and family, and anyone else you feel could meet the criteria for becoming a private money lender. The content of the email should not entertain specific actions, but rather paint with a broad brush. Instead of barraging your audience with the minutiae of a particular deal, I recommend easing them into the idea that you are in fact a residential redeveloper; one that has an opportunity for anyone willing to take it.
There is no need to beat around the proverbial bush, as many tend to do; get to the point, but in the most tactful way possible. Reiterate that you are in fact a real estate investor, and that you currently have deals in need of additional financing. It’s also worth noting that you should refrain from using a “canned” email. Since you are speaking with those you already know, it helps to have a more personal touch. While it may take longer to draft an email for each recipient, I can assure you everyone that opens it will appreciate the time you put in.
It should go without saying; you aren’t begging for money, but rather awarding someone with the opportunity to make a better rate of return on their money than they currently are. The faster news spreads of your respective opportunity, the more likely a source of private money will come out of the wood works to capitalize on said deal. Trust me when I say you will absolutely be amazed at who comes forward to express their interest.
All things considered, a truly great opportunity will help every party involved. But to understand why you should fund your first real estate deal with private money, perhaps it’s worth knowing why someone would want to give you money in the first place. If for nothing else, you may feel better asking for money once you know the intricacies of a private money exchange.
Essentially, investing private money is your contact’s opportunity to become the bank and reap the rewards of interest. At the very least, a promising deal can put their money to work without them have to do much more than writing a check. Provided the deal goes according to plan, they collect interest on the money they lent you, at a higher rate than it would just sitting in an account. What’s more, they are provided an additional safety measure in the form of a mortgage/trust deed. Your lender can relax, as the mortgage is secured by a real asset, which is the physical property itself. Provided you have done the legwork, and the numbers suggest it, a respective deal should help everyone.
While your first real estate investment may have several funding options, none are more promising than that of the private lender. The right private lender, while typically charging higher interest rates than the average bank, is usually the best rout for new investors to take. What they lack in affordability, they more than make up for in speed of implementation. Despite costing more, a private money lender will offer you the ability to secure a deal with cash faster than almost any other method; that gives you a significant advantage over any using an alternative means. What’s more, higher interest rates are typically offset by shorter loan durations. While the rates may be high, they are typically only spread out over a couple of months — give or take a few months depending on your experience.
It’s worth noting, however, that private money lenders aren’t the only option to fund your first real estate investment. There is at least one more preferred option: hard money lenders. In fact, it’s not out of the question to assume your first real estate investment will come to fruition thanks to the help of hard money.
In today’s fast paced investor environment, hard money has found a comfortable niche. Those investors looking to get around the red tape that has become synonymous with traditional lending institutions have found that hard money is a great alternative. In fact, hard money not only allows investors to bypass lengthy institutional systems, but like private money, allows investors to secure deals faster. If approved, you can have funds to close your first real estate investment in as little as three days. It’s worth noting that you will end up paying to make such a timely transaction, as you should expect to pay a premium on the interest rate and fees associated with the deal.
Most hard money loans are based on the comparison of the property value and the purchase price. Though most hard money lenders will come complete with their own guidelines, it’s safe to assume they’ll lend somewhere in the neighborhood of 60 to 75 percent of the property’s after-repair value. But I digress, not all hard money lenders are created equal. I encourage you to vet any hard money lender you intend to work with. If you are searching for a credible and reliable hard money lender, I encourage you to consider Grand Coast Capital. As the managing director and co-founder of Grand Coast Capital, I am convinced there is no better place to secure a hard money loan for your first real estate investment.