What is a Private Money Lender?
These days many real estate investors are looking for private money lenders. These are not loan sharks. They are not the people that will come break your legs if you don’t make your payments. These are people that will lend their own money to real estate investors when they can’t get money from banks. You would be surprised how many sources you could get money from these days. The first place I would start would be family. You probably have parents, grandparents, aunts, uncles, cousins, or even siblings that have money in the bank these days and are getting less than 1% on their money.
Your probably asking, well how do you convince them to lend it to you, and what would be their security? Their security would be in the property you are buying. When they become your loan lender, they will receive a first position lien on the title to the property. What does this mean? It means if you don’t pay them, and they have to foreclose on your property, then they will get the property, become the owner, and usually have about 40-50% equity (the difference from the value less what they lent you). They would then be able to sell this property, recoup their initial investment on their hard money loan, and then benefit from the gain in the profit on the sale.
One useful tool to show the private money lender, would be what is called a 30 day quick sale value on the property. The reason for this, is that this will let your hard money lender know, that in worst case scenario, if they had to foreclose on the property because you didn’t make your payments, they can reasonably sell this property for ‘x’ amount of dollars, called a fire sale, to get their initial investment back, plus some profit.
Speak with people you know that have self -directed IRA’s. They will be able to lend hard money to you from these IRA’s for your deals with the same protection, but their profit will go to their IRA, which in turn will not be taxed on their yearly tax return. There are many hard money lenders that have these loan lenders at their fingertips, whom are ready to make the right loan within days. This is the most common way these days to obtain a private money lender right in your own backyard.