As investors work towards building their portfolio, they often might run into an issue of finding capital to fund their deals. I have also run into this problem as I was taking down almost 1 deal a month in 2018, and needed to find a private lender (e.g. family, friends, coworkers, and other acquaintances that you have met/talked a couple times) that will help provide me with a short term loan while I execute the Buy, Rehab, Rent, Refinance, Repeat (BRRRR) strategy to force appreciation (build equity) in lieu of a 20-25% downpayment. I will share with you the steps that I took to raise capital and create win-win situations for myself and the lender.
My first private lender was an investor friend of mine, as such, we knew of each other's deals, experience, and goals prior to entering into a financial relationship. I knew that as I engage other potential lenders, I needed to be able to explain clearly what I do, my experience, and the potential returns on their investment.
My informational package included the following items:
Business name/contact information
Business mission and objective
Description of how my business operates (e.g. Market, Team, Investments)
Explanation of Private Money and how to fund a deal
Business track record, including photos and videos
Referrals from previous investors or mentors
Expectations for both parties in the deal
Frequently asked questions
Remember that content, not format of the information is key. Be prepared to fully answer any and all questions that the potential lender may have as most private lenders do not do this on a daily basis and will need some education in the beginning
Once this was put together, I provided this information to the potential lender and walked them through the entire process. Remember that real estate is all about building relationships, so even though this potential investor may not pan out, there may be someone he/she knows that is interested or they may return in the future once they are comfortable with the concept. As much as they are interviewing you, you are interviewing them to make sure that they are not going to be a hindrance and obstacle in operating your business. Is this person a nervous individual who will be calling you every day for an update, or a pushy investor? Or will this investor be in it for the long haul and be with you on multiple deals? These are questions to carefully consider before entering any agreement with your lender.
Next, you want to learn about your potential private lender and their main concerns. During my experience, I learned that lenders mostly care about three things:
Return on Investment
What if the rehab goes over budget
Securing their Investment
What if the appraisal does not come in at ARV
Timing of their Investment
What if the economy changes
What if the borrower goes bankrupt
These are all important questions that you should proactively address during your walkthrough and calls with the lender as follows (Investor Script taken from the BiggerPockets forums):
“As you know, these are ‘investments’ that we’re talking about, so there is no guarantee of success. There is risk involved with any kind of investment, but as our successful track record testifies, the way we invest in real estate seeks to minimize the risk at every turn. We offer a first lien position on any property we lend on, which means if I end up breaking any of the terms in our agreement, you could foreclose on me and take the property."
“Also, because of this lien, you will get all your money back, plus interest, before I ever see a dime. I only make money if you make money. Additionally, we will sign a promissory note that clearly and legally spells out all the terms and conditions of our arrangement. Finally, we only invest in amazing real estate deals that will have significant equity in right off the bat, so we are protected against a drop in the economy. Because we buy only good deals, there is significant monthly cash flow following conservative estimates, and we set aside money each month for future expenses. All these factors help limit risk and ensure that your investment is as solid as possible.”
Below is a sample rehab and FAQ sheet that I also share with my potential lenders as appropriate:
By advising your potential lending partner on these concerns up front, you are able to build a stronger relationship and trust so that you are both on the same page. Show them different versions of a proforma on a sliding scale that show a best to worst case scenario. Although you do not want to scare off the lender, it shows that you have done your homework and will put them at ease when you run into roadblocks and have to make adjustments.
As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.