How to Invest in Real Estate With Private Money
I am by no means a real estate investor. In fact, I only have 3 rental properties. The first one I bought without money. I used hard money to make the purchase and then traditional loans to refinance and repay the lender for hard money. The fees were very high so I would not recommend using hard cash unless you repair and sell in a short time. I bought the second and third properties together with only 10% less than the traditional 20% or more needed for investment property.
I was determined not to use any banks on my next property. I wanted to find a deal, either with self-financing or with private funding. Private financing is when an individual lends the investor the money to buy the property. The investor / borrower then makes payments to the private lender as to a bank in a traditional situation. Normally, you do not get the 15 or 30 year maturities you get from a bank, but you can get 1 to 5 years and then refinance. You also have to pay higher interest rates; like 8-12% for first mortgage positions. If you want private money in a junior or second mortgage position, you will probably need to raise up to 15% as the lender risk is greater.
Below are my recommendations for buying a property with private money.
1. Find a wholesaler. These are the men and women who have advertisements, signs and sometimes advertisements for “I Buy Homes”. These investors specialize in picking up real estate at a discount. They do not usually want to be landlords. They like to get in and out and make a quick buck. You buy these properties for less than 70% of the fair value (FMV). They then turn around and sell to an investor for a small spread.
2. Get a property from the wholesaler that needs little work. Make sure you are at 70% of FMV or less. Make sure in the contract that you use a “weasel” clause stating that the deal is dependent on your financing or depends on your partner’s approval. The partner in this case is your private lender. That way you can opt out of the contract if you can not find financing.
3. Once you have a property under contract, start by putting together your “Property Information Package”. This package consists of a cover sheet with a photo of the property and your contact information. On the next page, you’ll find a one-page summary of your goals, the types of real estate you’re interested in, and, ideally, some examples of deals or experiences that will help you complete these deals. There are a lot of templates on the internet. Just search for “Executive Summary Template”. The 3rd page contains photos and properties of the property. List the bedrooms, bathrooms and other sales arguments. The 4th page should be the side of the County Assessor. Just go to your district’s website and enter the address. You can then print the Assessor’s page with the square footage yr. built, bedroom, bathroom, etc … All the information you need when you take out insurance … but keep it for later. The fifth page contains the tax balance sheet with the estimated taxes you will pay. Page 6 will be a printout of RealEstateABC.com. Simply enter the address of the property and you will receive a report on the estimated value of the accommodation and a map of the location. Page 7 will come from Zillow.com. Enter the address and you will get another estimate along with comparable sales data. If possible, highlight compositions that flatter your property and add photos. If you want to take pictures of the property, make sure you take pictures of similar houses on the street. You can insert these photos along with the Zillow page and get some basic rating information.
4. Talk to everyone you know: friends, family, co-workers. Go to real estate investment groups and talk to other investors. Someone should know someone who wants to earn 8-12% of his money instead of the 2% he gets from the bank.
5. If you find someone who is interested, take him to lunch and show him your package. If it’s a good deal, the numbers should speak for themselves, but you may have to “sell” it a bit. If you find a co-investor, they should not need much persuasion.
6. Arrange the loan amount, the interest rate, the term of the loan and whether you make capital and interest payments or pure interest payments.
7. Contact a title insurance company and give them the information. The seller / wholesaler most likely has already sent a copy of the contract once you have told him where to send it. The attorney-general (usually the title insurance company works with one) can draw up the promissory note and the mortgage papers. While you do not have to, it’s a good idea to request a “lenders policy” on property insurance in addition to your policy. In the event that the lender must take over the property, he or she then has the property insurance. Banks are demanding this and it really calms the lenders.
8. Contact an insurance company for information about your fire / danger policy. The loss recipient is the information of your lender. In this way, the lender gets paid first when the place burns down or when the earth swallows it. Again, this makes it easier and more convenient for the lender to complete the deal. If you mention the status of the payee and the property lender’s policy, you will appear very knowledgeable and professional.
9. The lender approves all documents and the closing date is set.
10. Go to the conclusion and sign the documents. The lender does not have to close, but make sure the money is there in advance.
Congratulations! You are real estate investor and have used private funds!
Of course there are whole books and seminars on this topic. Make sure you do your own due diligence. If you are not sure, ask a specialist. Lawyers, other real estate investors, etc …
Have fun investing!
John Noce is a real estate investor in Asheville, NC. As a member of the Carolina Real Estate Investors Association, John was a librarian, club secretary and most recently webmaster and internet marketer for club activities. John is a frequent guest speaker at the club’s focus groups and general meetings and has given a half-day seminar on Internet marketing to real estate investors. John Noce has written several e-books and created the “Hotjohnnie Property Analyzer”. As an Excel format, investors can enter real estate data and see if the numbers work. If not, the analyzer calculates which offer to make.