Many banks and other lenders have overreacted to the sub-prime mortgage scare. As a result, it’s tougher than ever for people to get conventional loans. Even investors with spotless credit have to face new roadblocks that can ruin a great real estate opportunity.

Over the years, I’ve learned that it pays to become your own bank by tapping into the potentially unlimited funds offered by private lenders. Not only can you bypass credit checks and other delays that prevent you from getting the cash you need, you can also make bigger profits by getting the fastest jump on the best deals. At the same time, your private lenders get a better return for their investing dollar in less time than they could with, for example, bank CDs. It’s a winning situation for everyone – except the bankers who get cut out of the middle.

In my last article for ETR, I revealed how you can get private money lenders to trust you. Put those techniques into practice, and you should have potential lenders lining up to give you their cash. But once the money hits your hands, how do you handle it? Here are three basic guidelines.

Touching the Money

When people hear the kind of interest I pay, they sometimes get so excited about loaning me money that they want to hand me a big check right on the spot. This is not the way to do it. For your protection, and the protection of your private lender, that check should be sent to your attorney.

This is the procedure: Go over your disclosure document with the private lender. The disclosure statement spells out the full facts of the investment and your business. Once you have a meeting of the minds, have the private lender send the check to your attorney… to be used for the closing on a specific property. This way, you’ll have a nice, neat paper trail and a well-informed lender.

Co-Mingling Funds

Sometimes you will have two lenders who each have a small amount to loan. With the combined amount, you have enough for a particular property. But you cannot simply put the money together and let them share the first mortgage.

In this type of situation, give one lender the first mortgage. If you need additional funds, give another lender a second mortgage – after explaining that the first mortgage holds a stronger position.

However, if you’re willing to form a new business entity – such as an S-Corporation or LLC – it’s possible to put funds together from two or more private lenders. Laws and regulations vary from state to state, but all states have similar paperwork that needs to be filed.

When Do the Payments Start and End?

Proper handling of private funds doesn’t end when you buy a property. You also need to pay your lenders back in a professional way that encourages them to invest with you again.

The best way to structure payments is to start paying your lenders interest at the time of closing. So if, for example, you’re rehabbing a property, this means you have to make repairs and get the place lease-optioned as quickly as possible so it is producing income to cover the interest payments you’ll be making.

I continue paying interest to my lenders as long as their money is in a property. When the property sells, they get a check at closing for their principal and interest.

I ask them if they want to loan their money on another property. Nearly all will say yes, and their interest payments start again at the next closing table. So they earn interest while the money is loaned – from purchase to sale.

I pay a minimum of 90 days’ interest on all private money real estate loans – even if I wholesale the property and have the lender’s money for less than 90 days. I just want to be fair.

The lesson here is to avoid the temptation to grab those checks and cash them. Run a professional operation, have your business rules in place, and follow them. You’ll be much better off in the long run.

[Ed Note: Alan Cowgill has bought or sold more than 200 investment properties using funds from private investors rather than banks or hard-money lenders. His Private Lending Made Easy training program is the only one on the market dedicated to private money. To learn more about how you can grow your wealth with private funds, click here.

This April at ETR's Profits in Paradise Wealth Building Summit, Alan will reveal how he created his own "private bank" of over $2,000,000 in ready capital. Get the details here.]

In my last article for Early to Rise, I revealed 14 ways that private lenders can help you take your real estate business to an incredible level of success.

Today, I’ll show you how to take the next step: building trust between you and the people who can fund your deals.

When I decided to work with private lenders, I knew the individuals I wanted to reach were financially savvy and could appreciate the generous interest rate I offer. But people with ample finances get tons of requests for their money. So my biggest challenge – and a challenge you’re sure to face when finding private lenders – was finding private money lenders that would trust me enough to do business with me.

I named my company "Integrity Home Buyers" because the word integrity has meaning for me. It is the way I run my business and my life. The people around me know this, but when I decided to seek out private lenders outside my own circle of friends, they simply didn’t know me. And I was asking those people to give me large sums of money and trust me to do what I said I’d do. So I had to convey my philosophy to them.

You can build trust in dozens of ways. But there are four trust-builders that have helped me find more than enough private lenders to fund all the real estate deals I want to do.

Trust Builder #1: Reach Out to the Right People.

When I started looking for potential lenders, I first determined common denominators among my target group that would help me reach them effectively.

I found that I could get an extremely targeted list of names of potential lenders from a list broker. (You can find a list broker in the phone book or on the Internet.) The list can be tailored almost any way you want, so I requested the names, addresses, and phone numbers of people who met the following criteria:

1. They owned their own home.
2. They bought items through the mail.
3. They owned bank Certificates of Deposit (CDs).
4. They were located in our county.

Here’s the logic behind my choices:

1. They owned their own home.

People who own their own home are probably already aware of what a great investment real estate can be.

2. They bought items through the mail.

If they buy things through the mail, I figure they will take time to read things that I send to them through the mail. (One of my primary marketing tools at the time was a postcard.)

3. They owned bank Certificates of Deposit (CDs).

These people obviously have available money. With the banks paying a pathetically low rate on CDs, my program is that much more attractive. (That was true when I got into the business – and CD rates are even lower today.)

4. They were located in our county.

This criterion is crucial to building trust and credibility. I focus on my local market, because it is likely that they already know about me from my other marketing efforts. They’ve seen my "I Buy Houses" signs for years. I sponsor Little League teams, so they may have seen the T-shirts with "I Buy Houses" and my phone number. And they may have read newspaper articles the local paper has done about my company.

In short, I believed from the start that lenders would be comfortable loaning to one of their neighbors. Plus, since they’d already seen my ads and heard about me in the community, they’d believe I was the real deal. And I figured they’d enjoy being able to drive by the house on which they held the mortgage while my crew was doing the work. (This turned out to be another huge trust builder. It made them feel safe, seeing exactly where their money was.)

Trust Builder #2: Crush Your Prospects with Credibility.

Once I received my list of targeted names, I mailed postcards inviting them to a luncheon. I didn’t have a tremendous crowd, but I didn’t need one. The number of guests didn’t matter as much as the number of guests in my targeted market who could take advantage of my program.

One of the best ways to establish your integrity is to create a "credibility kit" that you can hand out to potential lenders. Mine is a 30-page, spiral-bound book. On the cover are color pictures of more than a dozen houses I’ve bought and rehabbed. Before they even open the book, they see before-and-after pictures that show I have a seasoned real estate business… evidence of my work that they can drive by to see in person.

Inside the book, you want to include information that sends a strong message that you are a trustworthy person who knows his or her business. My book includes a brief history of my investing career, my company philosophy, pages of testimonials, certificates from training I have completed, and information-packed special reports.

Trust Builder #3: Become a Household Name.

The credibility kit is a great start, but you can’t stop there. To grow your business, you want your name out there. You want the prospective lender to say, "Hey, I’ve heard of you." Or "I’ve seen the T-shirts on the Little League team you sponsor." Or "You’re the ‘I Buy Houses’ guy." Familiarity makes an impact, and recognition conveys credibility.

For example, about a year ago I was able to add something new to my credibility kit: a copy of an interview with my local newspaper. They did a long article with lots of great information about my company and my lender program. Then, recently, the reporter came back and did an article focusing on the lender program – which, of course, I am now adding to my packet.

Talk about credibility! That’s the kind of publicity money can’t buy.

Trust Builder #4: Join the BBB.

Another credibility-building tool is to join the Better Business Bureau. It’s a great way to let people know that you consider yourself a serious, responsible businessperson. It also authorizes you to use their logo on your materials, which further conveys credibility.

People frequently check with the BBB before making a major financial decision. With good reason. To be a member of the BBB, you have to agree to "follow the highest principles of business ethics and voluntary self-regulation" and "have a proven record of marketplace honesty and integrity."

Early in my career, all of the above strategies combined to take my real estate investing to new heights. I had targeted my market correctly, won the trust of several private lenders, and had awesome results. After just two luncheons, I had $1 million to buy houses with… without having to hassle with a bank.

[Ed note: Alan Cowgill has bought or sold more than 200 investment properties using funds from private investors rather than banks or hard-money lenders. His Private Lending Made Easy is the only training program on the market dedicated to private money. To learn more about how you can grow your wealth with private funds, click here.]