Conventional financing is by far the most popular method of financing in the real estate industry, but unfortunately, it doesn’t apply to everyone.
Some people may have exceeded their loan limit, their debt-to-income ratio may not be good enough, they may not be able to afford a 20% down payments, the issues are endless.
But if you can’t get a conventional loan, how else do you buy properties?
Many ways, but one of the more popular alternatives is to use private money lenders. These are people that you may talk to on a day-to-day basis, or they may be professionals that are lending on the side!
There are many great benefits to using private lenders, such as:
- Converse with an Actual Person
- Receive More Leniency
- Get Better Deals
- No Cap on Your Loans
Converse with an Actual Person
You won’t be talking with a faceless corporation when you approach a private lender. These guys see what goes on in the real estate market on a day-to-day basis, and will know a good deal when they see one. If they don’t, then you need to get them to trust that you do.
A person can see logic and reason outside of the book. Conventional lenders can oftentimes miss great opportunities because they don’t leave the book and they have to operate on strict government regulation.
Receive More Leniency
Walk into a bank and ask for a loan without having AT LEAST 20% of the purchase price of the property. No chance of getting a loan. Try to get a conventional loan without doing the extra stuff that the bank wants done to the property. No chance.
Private money lenders can see firsthand how the deal will play out, and then will evaluate if a lower down payment could still be a great deal for them in the end.
Get Better Deals
When you try and get a conventional loan from the bank, they normally won’t approve the loan if there is anything wrong with the property. Whether it is just bad paint, bad flooring, needs a new ceiling, or whatever, they probably won’t approve.
But the best deals are the ones that need work! Private lenders are where most flippers and investors that invest in distressed properties get their loans, because the banks normally won’t approve them.
No Cap on the Loan
Freddie Mac and Fannie Mae each have maximum loan limits, meaning you can only get a certain number of conventional loans before they deep you too risky.
Private money lenders have no cap. Get as many loans as you want, as long as the math makes sense to the them and they like what they see.
Which Form of Financing Is Better?
The honest answer, is neither. They are both great forms of financing and apply to different situations with different people. Conventional loans offer better interest rates, longer terms (normally), and more stability, while private money lending offers more flexibility, better chance for approval, better maximization, and a chance to build a relationship.
8 Ways to Get Approved with Private Money Lenders
I’ve given you a brief overview about some of the pros for private money lenders, so if you’ve decided that you want to roll with them, let’s go and get a loan!
Have a Good Deal
You can’t just walk up to private money lenders without a good deal and expect to get financing. A lot of people are looking for a lender and wondering why they aren’t getting one!
Yes, it may be your credit score.
Yes, it may be your income.
Yes, it may be your small brand. (More on that later)
But there is also a good chance that it could just be your deal! If the lender doesn’t think that there is enough reward for the risk, they will simply say no! They are people too. They aren’t there to serve you, the deal needs to look enticing for them as well.
Make sure you provide them with a killer deal that will cause both of you to win big.
Build Your Personal Brand
Let’s face it: If they don’t trust you, they won’t work with you.
You need to focus on building your reputation in the community. If you are hanging out with your buddies every day and drinking it up, do you think that would reflect very well? Or if you are working on real estate deals with people, reading, learning, doing, will that reflect well?
If someone had an insight to your life and could see what you were doing with your time, would they approve you or not? If they would approve you, then make sure your voice is getting heard.
Find people who are more successful than you, who already have connections. Reach out to them and offer value to their team, and see if they will take you on and show you the ropes, and help you build your reputation. (Don’t tell them you want to build your reputation, it’ll be built naturally)
Piggybacking off of the above point, you need to build relationships with these lenders. Ask them questions, show them you’re motivated. Continuously bring them different deals that have potential. Give them some of your own knowledge! Private money lenders, along with most lenders, will take your deal into more consideration if you know what you’re talking about.
These lenders aren’t your enemy. They aren’t like “The Tax Man”, trying to take every last dime you’ve earned. They’re your friend, and sometimes your greatest ally in tough times. You need to focus on building a relationship with them that builds trust.
Understand the Math
If the numbers don’t make sense on a deal, you won’t get the financing. The numbers have to look great! You need to make sure your math is correct, and use worst-case scenario in your hypotheticals before approaching the private money lenders.
Private money lenders plan for worst-case scenario, but they also see the opportunity in deals as well. Make sure you plan accordingly, and come prepared with the correct numbers, and attractive numbers.
Keep Their Risk Low
The more risk you add to a lender, the more likely they are to refuse the deal. Make sure you aren’t asking them to take on most of the risk, you need to show that you are taking on just as much, if not more risk than they are.
There are many ways to decrease the amount of risk the lender will take, such as:
- Lower the Loan Amount (Increase Your Down Payment)
- Request the Money in Draws After the Repairs
- Find Ways to Boost the Rent
Present the Deal Correctly
You might be able to find a killer deal, but without a good presentation, it may pass through deaf ears. You need a good, clean presentation. If you can’t even perform a presentation correctly, why should private money lenders trust you in a real estate deal?
There are 5 C’s that real estate investors use the present a worthwhile presentation to private money lenders:
If you aren’t confident in the deal, why should your lender be? You need to know the numbers well, and present them confidently in your presentation. If they are good numbers, they should speak for themselves, you just have to deliver them in a clean format.
Make sure the lender hears the message, loud and clear. Make sure they know your goals with the property, how you will approach it, how you will make money, and how much money they will get.
They need to clearly know their ROI, and any other metric revealing what their investment can do for them. Any misunderstanding can get the loan disapproved.
You presentation should deliver as much information as possible, but a 100-page document is an easy way to get kicked out of the office without much of a look.
The more concise your presentation, (with the necessary information of course) the more likely you are to get approved.
Going along along with the conciseness point, you need to make things as convenient as possible for the lender. Don’t make them sift through 30 pages to find what they’re looking for.
Make the information easy-to-read and accessible. Try to make things easy on the lender, because they can be your moneymaker.
Finally, you need to stand out. If your presentation is laid out with colorful charts, graphs, and statistics, it will appeal to the lender much more than chicken scratch on a sheet of paper.
If you can present your offer to the loan officer in a nice, clean, and concise manner, you will be far more likely to get a loan.
Ask For a Loan
You may get rejected. Actually, you probably will get rejected. A lot of people do.
You need to go to several different loan officers from different companies, and see what they can do for you. It’s a lot like investing. You can do all of the research you want, but if you never invest, you never make anything!
A lot of people look into financing for real estate, but they back off because of the intimidation. Everyone feels this intimidation in the beginning, you have to get used to it! It comes naturally, just go ask! They want to help you!
The more money they can make for you, that’s more money you can make for them. It’s a two-way street, just go ask!
8 Ways to Get Approved With Private Money Lenders
The information in this article was provided by Brandon Turner in his book, The Book on Rental Property Investing.
The Book on Rental Property Investing is an Amazon bestseller, and is widely regarded as the best overall guide to investing in real estate. It covers a broad range of topics, from finding a deal, to analyzing it, to obtaining different kinds of financing, to taxes, and more.
The Book on Rental Property Investing is rated the #1 Book on Real Estate in a multitude of sources, including:
- The Balance
- Real Wealth Network
- The Motley Fool
- Investor Junkie
Brandon Turner is the VP of Growth for BiggerPockets, the largest real estate community in the country, and is the author of many bestselling books on real estate investing. Turner has amassed around 300 rental units since he began in 2007, and has been making an effort to help others achieve what he has through podcasts, Youtube, books, and BiggerPockets.