“Money is plentiful for those who understand the simple laws which govern its acquisition.” – George Clason
When I started my real estate career, I heard about the necessity of finding private lenders. I even found two of them. But then I stopped because I didn’t get it. For four years, I continued to go to banks and jump through their hoops.
It wasn’t until I quit my job and found that banks would no longer loan me money that I realized I needed to bring private lenders into my life. Not only did everything change for the better when I took that step, I was kicking myself for not doing it from the beginning.
Whether you’re on the fence about private money or have never even considered it, you owe it to yourself to be aware of all the advantages.
The 2 Biggest Reasons to Use Private Lenders
I’ve always been unhappy with how long banks take to get the job done. I once waited more than four months for a bank to finance a house without a furnace. They weren’t sure they wanted to make a loan on that kind of house, even though that’s what my rehab business is all about. I buy ’em ugly and cheap. Then I fix ’em.
Just think. If I had used a private lender for the same deal, I could have bought the house, fixed it, sold it, and pocketed $20,000 in less time than it took to get to the closing table with the bank.
With private lenders, you have the funds available all the time. When a good deal comes your way, you can grab it because you know the money is waiting for you. While your competitors are scrambling around applying at the bank, you can make an offer and close the deal.
In short, the first major advantage of private money is that you can close a deal fast. (My rehab crew is all over a property like ants before the competition knows what happened.)
Another advantage of private money is that you don’t have to worry about monthly mortgage payments if you structure the deal correctly.
For example, my first private lender was my mother. When my dad passed away, Mom had insurance money. She proudly invested it in bank certificates of deposit (CDs). When I learned about private lending, I offered her an alternative. She loaned me $5,000 and received 10 percent interest in return. I paid her monthly, just like her bank did with her CDs. She was delighted… and so was I.
As my use of private lenders increased, I learned that some of them didn’t need monthly payments. I discovered that I could structure my loans so there was no payment until the property was sold.
Now my mom will always get monthly payments from me because she’s retired and depends on that income. But for anyone who can wait on their money, I’ll let the interest accrue. I may pay a little more interest to them, but it’s a small price to pay for the improved cash flow I enjoy.
But that’s not all…
12 More Advantages of Private Money
- The ability to get money fast often allows you to snap up good deals at a discount.
- There are no credit checks, and the loan doesn’t show up on your credit report.
- You have access to a potentially unlimited source of funds.
- Since you set the rules, you’re in control – not the bank.
- You can help your friends and family make extra money, and meet a great network of people.
- You can get some of your profit when you buy by borrowing more than the cost of the property.
- You’ll have the flexibility to do deals that banks might question (like my no-furnace bargain).
- You can make offers with confidence. No worries about bank delays or being denied financing.
- You can structure quick and more profitable exit strategies.
- You’ll save money on the deal in the short run and long run.
- Private money loans are cheaper than investing with a partner.
- You can build the foundation for a very profitable brokerage business.
Best of all, if you treat your private lenders right, they’ll be there for you again and again when you find hot opportunities in the future.
What to Do When You Get the Money
Once you’ve won over a private lender, you’ve taken on a responsibility to make the deal profitable for everyone. Here are three key rules I rely on in my own business:
- Make your interest payment when the property sells.
When I started using private lenders, I thought everyone would expect regular payments. So I paid all my lenders monthly. Later, I realized that everyone could benefit if I delayed payment until the property was sold.
By eliminating those monthly mortgage payments, I was able to supercharge my cash flow and dramatically cut down on office paperwork. Plus, there was a practical benefit that my investors really appreciated. When their money is applied to a property at closing, the interest rate clock starts ticking – even though it may take a couple of months to renovate the house and find a buyer or rent-to-own tenant and get the cash flowing. Adding interest helps make the seller willing to wait for that payoff. That way, you can do your work faster and give your lender a bigger chunk of money to lend back to you for your next project. Everybody wins.
- Only one private lender per mortgage.
I’m often asked if it’s possible to “pool” funds from more than one private lender. The best way I’ve found to do this is to give the first lender (the one with the most money) the first mortgage on the property.
If you need more money to do your rehab work, bring in a second lender and give them a second mortgage. In essence, they are your “bank” and get a mortgage (lien) on your property. Still need cash? Add a third lender and a third mortgage.
You can have as many mortgages as you like, as long as you don’t over-leverage the property.
- Keep your word.
I follow my agreement with each lender to the letter. As I said, I now make interest payments only when the property sells. But there are a few lenders I worked with early in my career (like my mother) who I agreed to pay monthly. I’ll stick to my agreement with them regardless of how long they invest with me. And since they love those monthly checks, they’ll probably be with me for a long time.
Many investors have watched a deal slip through their hands while they waited for a bank to approve their loan. Once you have private money available, that won’t happen to you. You can make an offer knowing you can go ahead and set a closing date… and leave your competition wondering how you did it so quickly.[Ed. Note: Alan Cowgill’s Private Lending Made Easy program is the only one on the market that specifically explains how to find and manage private funds. A great way to get more information on this topic is to attend the free teleseminar Alan will be giving exclusively to ETR readers this week. It’s a no-cost way to build your knowledge base and find out if private money could help you increase your income.]