Raising private money has always been a popular way to grow your real estate portfolio in slow markets, normal markets and even in hot markets. However, it has become increasingly more important as bank loans have become more competitive. Financing was so hard to get over the last 5 years that banks are inundated with loan applications. Investors who possess less than perfect credit or buyers who are seeking to purchase distressed facilities with low cap rates are having a hard time getting banks to partner with them.
So, what do you do? Do you give up? Do you sit on the sidelines and watch everyone else grow their portfolio? If you are wondering how your competitors are buying, it is the title of this article. They are tapping into the billions of dollars that are available in the private sector to increase their holdings, often, without having to even visit a bank.
The benefits of lining up dozens of investors and developing a private lender program are substantial. For starters, you can begin buying smaller facilities for cash. This gives you the ability to purchase distressed properties at a significant discount. You can either purchase them from distressed sellers or from lending institutions that have foreclosed on their non-performing loans. I have purchased many of these for as little as 30 cents on the dollar. Second, you can structure seller financing offers on properties. Finally, you can purchase properties that have no equity by paying off the existing debt at a discount.
You need to understand that many of the people that you meet have retirement funds or savings that are experiencing little to no growth. Sometimes they are experiencing negative growth. When you offer double-digit returns that are secured by commercial real estate, they are very excited by this great opportunity. Your private investors enjoy higher profits, thanks to you, and you can buy more properties, thanks to them.
Create your program so that it can easily be explained to others.
When you begin creating your program, you need to ask yourself several questions about how you are going to structure your partnerships.
- Do you want to pay simple interest or compounded interest?
- Will you pay a higher interest rate if you don’t have to make monthly payments?
- Will the program ever make quarterly or annual payments instead of monthly payments?
- What day of the month will you pay your mortgage note?
- What is your minimum investment requirement?
- How will you handle it if a lender requests that you pay them back early?
- How quickly can you respond to a request to be cashed out early?
- Will you offer a minimum earned interest or a prepayment penalty?
- When you will begin paying interest?
- What will you do if you need two or more lenders for one deal?
Once you have these questions answered, you will be ready to bring other people into your plan. Nothing is worse than trying to make a partnership with someone and answering their questions with “I don’t know” or “I’m not sure”. Worse even would be explaining in a way that only you understand! So, before you have those conversations, make sure you have the answers! Stay tuned for the next steps in raising private money to make more deals.