Ultimate Guide to Private Financing: Using Other People’s Money for Real Estate Investing
When it comes to getting money for properties or even renovations, many of you know that I never – if ever – use my own money.
I always rely on other people’s money (OPM) for many of my properties and renovations.
And a lot of my Subto students will ask how I’m able to find lenders, especially private lenders, who are willing to give me money for real estate purchases.
I’m going to give you guys the low down on:
Finding private lenders
How to pay them back
The interest involved
What terms they’ll allow
Let’s go and get some private money!
What is Private Financing/Private Lending?
So what exactly is a private lender or private financing?
Private financing is typically given by high-net-worth groups or individuals. These aren’t your traditional banks or financial institutions.
Private money lenders – PMLs – then are individuals who are willing to loan out money to a borrower for a purchase.
But Pace – why in the world would someone give a stranger a whole bunch of money?
Well, for many of these PMLs, this is a fantastic way to make passive income without having to do anything.
For example, some of my private lenders came into money – like an inheritance – or they make enough of an income that they want to use that money to invest.
These PMLs give money for either buying a property or to help renovate a property; for one of these investors, the biggest reason they give us this money is for passive income.
Not only do they get passive income on a monthly basis, without doing anything, but it’s one of the greatest return on investment projects and it’s a safe investment.
The great thing about using PMLs, aside from not having to go through a bank, is PMLs can take any form – they can be a friend, they can be a family member, they can be an investor, etc.
How Does Paying Back a Private Lender Work?
Because a private lender can be any type of high net worth individual or company, paying their money back is heavily dependent on what they want.
For example, if you get private financing from a friend or family member, you can easily make some negotiations depending on how close you are.
Sometimes, you might not need to pay the entire amount or only half; other times, they might arrange lenient terms due to your relationship.
What if you’re dealing with someone you don’t know?
As I always tell my students, building up relationships is one of the best things for you to do when you work with a lender for the first time.
The reason is so that you receive better interest and they’re also more open to working with any specific terms you both might have.
So how does that all work?
How Does Interest and Terms Work?
When you start working with a private lender, there’s really no contract between you, however what you do need is a promissory note.
This basically states that you, as the maker, promise to pay the principal of whatever the amount agreed, for however long the time period. This is one of four things that a PML receives when they invest.
The other things you give to a PML:
1. Promissory note
2. Deed of Trust (or mortgage depending on the state)
a. I tend to draft both of these by recording them at the County Recorder’s Office
3. Set of recorded documents (the promissory note and the deed)
4. Lender’s policy from the title company
Not only are these four things that I myself make sure to do and give to all of my private lenders, but I also ensure to teach this same procedure to my students.
All four of these documents are essential when working with private financing because it ensures that you’re both secure in your partnership.
And that’s it!
That’s how private financing works and how we use it when doing creative financing real estate. If you’re ready for your deals on, then let’s go!
Come join us and let’s do some deals together!