Professional real estate investing differs considerably from purchasing a normal house with a mortgage, as a place to live yourself. Most property investors do, at one stage or another, end up searching for different types of financing. Therefore, learning how to secure private lending is an essential skill to master, if you are to realize your investment ambitions.
Many novice investors find financial parlance bewildering, and mistake hard money lending for private money lending. To clarify, private lending is cash that investors borrow from lenders, who do not work for financial organisations. This loan could come from one of your friends, or a private individual who wants to fund your venture. In contrast, a hard money lender typically works for a conventional financial organisation, but uses less stringent rules for lending. Often, these types of loans have higher rates of interest.
It is important to understand the whole process of private real estate investing. You should know what paperwork to give to your investors, like the insurance documents and promissory note. Also, you will need know the timeframe for completion, how to handle more than one investor and when you will return their money to them.
You should assemble the necessary materials to make a good pitch to private lenders. A video or Powerpoint presentation is useful to showcase previous houses you have done, and detail what sort of properties you want to purchase – and how they will appear once you have renovated them (photographs are an effective sales tool). Also, you will need a company summary, which outlines why you are the perfect investor to grow their capital. This should include your ambitions, experience and education.
Ultimately, securing private funds comes down to relationship building. This process begins by forming a solid network of investors. One obvious source of contacts is your immediate circle — relatives, work colleagues and friends – anyone who is not presently an investor, but who may want to expand their financial horizons. Frequently, these are the simplest types private loans to obtain, particularly for novice investors, because you already know the people you are dealing with.
The other way to build your network is to reach out to other industry professionals. Fellow property investors, realtors, lawyers, title companies and private investors are all examples of people you can approach. Lots of private loans can be accessed through the connections you will make from doing this type of real estate networking.
County records websites are a good place to find the names and addresses of lenders, along with the rates of interest they are likely to charge. Even better, for faster results, you can use data broker websites — like DirectMail.com, ListSource.com, Click2Mail.com and MelissaData.com — to discover which lenders were active in your region over the past six months. Websites such as LendPost.com and LendingClub.com allow you to post deals that lenders can see and respond to if they are interested.
Obviously, once you have obtained a list of lender’s names from a broker site, you will need to get in touch with them. This is where direct mailing can prove to be highly effective. It is important to craft your mailshots correctly, to receive a positive response from your prospects. The mailshot should create a good first impression of you and your business, so that people will pick up the phone and you can start developing a rapport with them.
It is best to include a professional looking letter printed out on a business letterhead. You should avoid sending out a handwritten note, because often you will be contacting people who are highly knowledgeable – and who want assurance that you are a serious professional that they can entrust their money to. A business letterhead displaying your contact information presents a credible image to any would be sponsor. If you fail to do this, then you will alienate many potential prospects before you even get the chance to talk to them.
In terms of the contents of your message, you should refer to the house the lender previously invested in, so they realize that you have done your homework (this always goes down well). Then, mention that you are also involved in renovating properties, and want to find a new private money lender. To boost your credibility further, you can include a company presentation, or a list of other properties you have worked on. Alternatively, just keep the message simple and to the point. Always have a clear call to action, where you tell them that you have several properties you are looking at, which you want to get their opinion on. Or, just ask them to get in touch to talk about things further.
Try to send a couple of hundred mailshots out at a time, and follow up with additional mailings every few months. Typically, each mailshot will generate ten to fifteen phone calls – and you can take things from there. Once you find someone you connect with and their conditions are fair, you can proceed with a deal. With all types of direct mail advertising, it is important to keep your lists updated and send them mail regularly. You might not receive a response from someone straightaway, but if you keep marketing to them with varied messages, it demonstrates that you are serious about what you do, and have frequent deals that require financing.
It is vital to make your private cash investor feel comfortable, and ensure that you both know what to expect. To do this, make the theme of your first meeting with them about the investment process itself. Avoid resorting to cheap sales tactics to make a quick buck. Rather, concentrate on responding to queries, particularly those related to timescales and profit division. These things are what the majority of private investors want to know about. Approaching things in this way means that you will lay the groundwork for a prosperous relationship over the long run. Often, this will be worth more to you than the profits from a single deal.