{"id":7898,"date":"2021-11-23T14:28:16","date_gmt":"2021-11-23T14:28:16","guid":{"rendered":"https:\/\/realestatewealthnetwork.com\/blog\/?p=7898"},"modified":"2021-11-23T14:29:59","modified_gmt":"2021-11-23T14:29:59","slug":"power-with-private-lenders","status":"publish","type":"post","link":"https:\/\/realestatewealthnetwork.com\/blog\/power-with-private-lenders\/","title":{"rendered":"Your Power with Private Lenders\u2014OWN IT"},"content":{"rendered":"

When I was answering a question about private lenders recently from a newer investor that I\u2019m mentoring, I was reminded of something\u2026<\/p>\n

Of how easy it can be for those early in the game to misunderstand the value of what they bring to the table in the investor-private lender relationship. <\/p>\n

Many investors overlook or mistakenly downplay that value in their own mind and end up being way too generous or give up the farm when borrowing money from private lenders.<\/p>\n

But, the moment you realize the big value proposition that you\u2019re inviting private lenders to participate in, is the moment you\u2019ll stop giving away the farm and level up your game for each and every deal.<\/p>\n

Let\u2019s Begin...<\/h2>\n

So, here\u2019s the question I was asked from my mentoring student, who I\u2019ll call Peter. <\/p>\n

\u201cI'm buying pre-foreclosures subject-to the mortgage and the arrearage amounts vary widely from deal to deal. I'm trying to expand my business, and I have an investor who may put $100,000\u2013$200,000 into my business. I want to pay the investor 12% interest for the time we need the money, usually 30 to 45 days, plus a percentage of the profit per deal. Does this make sense?\u201d<\/em><\/p>\n

Well\u2026 not so much.<\/p>\n

First, Peter is being overwhelmingly generous! <\/p>\n

Look, 12% is more than you need to pay in this market for the use of the money, and then to also tack on a percentage of the profit per deal \u2014 no, sir.<\/p>\n

So, with short-term lending, yes, you generally will have to pay a little bit more \u2014 but not 12%. It does require the type of private lender who doesn't mind their money going out, coming back, going out, coming back \u2013 which can be more expensive \u2014 but assuming that they're insisting that their money be collateralized at all times, meaning there will be a note and mortgage on the property on every deal, 12% is more than I think you need to pay..<\/p>\n

Now, the lender could provide you with a personal line of credit. Or, you could collateralize it with another piece of property that you are holding, keep the money and just roll it into the next deal and the next deal. This would be ideal if you\u2019re dealing with the type of lender who prefers the money not to come back over and over again.<\/p>\n

And for that, in this market, I would expect to pay about 3.5%\u20134%. <\/p>\n

Money In, Money Out...<\/h2>\n

Again, some private lenders don\u2019t want the active involvement of having to put money out, then getting it back, then putting it out again. So when that\u2019s what\u2019s happening you may find yourself pushed toward more of a \u201cprofessional\u201d private lender, and they are more costly than your friend, family member, or acquaintance.<\/p>\n

And even with hard money lenders right now, if you've got decent credit and some of your money in the deal, you're looking at 1 point and 9%\u201310%. But that's going to take a 720 FICO and probably 20%\u201330% of the total project value of your money in it.<\/p>\n

So, that\u2019s some context for what's out there. <\/p>\n

Now, Peter also mentioned giving the lender a piece of the profit on the deal\u2026 <\/p>\n

That\u2019s fine\u2026 but(!) the way I see it, there is no need to pay interest AND a piece of the profit from the deal. For me, it's one or the other, not both. <\/p>\n

\"\"\/<\/a><\/figure>\n

Why This Doesn\u2019t Surprise Me\u2026<\/h2>\n

It\u2019s simple. Peter is newer to REI and doesn't fully understand the value that he\u2019s bringing to the table...<\/p>\n

I\u2019ve seen it time and time again \u2014 when people are new to the business, they often think that they need to make the deal super sweet or the lender won't take the deal. <\/p>\n

And, in general, that thinking is sound\u2026 <\/p>\n

However, I know that Peter has at least a deal (or more by this point) under his belt and we have an environment where people are chasing \u201cyield\u201d, A.K.A.  a decent return on their investments. Because interest rates are so low, and there\u2019s so much cash competing for some kind, heck any kind of yield, people who are otherwise highly risk adverse are \u201cwilling\u201d to get into extremely risky investments when they otherwise would never be.<\/p>\n

For example, if they could make any sort of yield on bonds, in a savings account or CD \u2014 anything worthwhile \u2014 that's where they'd be. <\/p>\n

But because they can't, the otherwise risk adverse are chasing yield down rabbit holes where, by comparison, they\u2019re in very risky investments. For example, the stock market, junk bonds or a fund they don\u2019t have control over and  where there's massive counterparty risk, or even crypto assets \u2014 places they\u2019d normally never be.<\/p>\n

They just want to earn 3% or 4% on their savings account or yield-on bonds \u2014 but that's just not available and hasn\u2019t been for many years now.<\/p>\n

Remember THIS About Private Lenders...<\/h2>\n

I bring this up because I want you to know this and remember this\u2026<\/p>\n

I want you to understand that you're really the one in control here<\/em>.<\/p>\n

Why? <\/p>\n

Because you're the one who has what they need. A safe investment that offers higher than normal yield.<\/p>\n

So\u2026 don't give up too much. <\/p>\n

Again, if you can get it collateralized on something you're going to hang on to, so the money isn\u2019t going in and out, in and out \u2014 3.5%\u20134%, maybe a teeny bit more \u2014 ought to blow their minds.<\/p>\n

Because it's<\/strong> safe<\/strong>. <\/p>\n

They've got a note and a mortgage or a deed of trust, and they're making an interest rate that they couldn't get otherwise, without being in the stock market or any of those other risky<\/em> investments.<\/p>\n

You have the power with private lenders \u2014 so own it.<\/p>\n

And if you need extra guidance on dealing with private lenders, I suggest you check out my Using Private Lenders To Grow Your Real Estate Business training. This training will walk you step-by-step through the process of working with private lenders for any type of deal (plus some added bonuses). You can learn more here.<\/a><\/p>\n

Your Take<\/h2>\n

What\u2019s your experience when working with private lenders? Let me know in the comments!<\/p>\n

Regards,<\/p>\n

Cameron Dunlap<\/p>","protected":false},"excerpt":{"rendered":"

When I was answering a question about private lenders recently from a newer investor that I\u2019m mentoring, I was reminded of something\u2026 Of how easy it can be for those early in the game to misunderstand the value of what they bring to the table in the investor-private lender relationship.  Many investors overlook or mistakenly […]<\/p>\n