How to Handle Your Investors’ Money

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 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.

“How little you know about the age you live in if you think that honey is sweeter than cash in hand.”


[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. ]