The use of private money is not new. Many investors have used it in the past and have called it very different things. Hard Money, Private Loans, Family Loans, Partner Money, Investor Pools, Money Partners, Private Equity, heck even Loan Sharks (jokingly)- are all names and sources of private money that can be used for real estate investments. But in the end, any money that is not a direct loan from a bank or regulated finance company is basically private money.
Private Money opens up a whole host of options for investors. Here are some 5 benefits of using Private Money:
- REO and Foreclosure deals are discounted heavily for cash buyers
- As a Cash Buyer, you can close faster putting you at a competitive advantage
- Private Money Loan Terms can be negotiated majority of the time and structured for your specific deal
- Loan is based & secured by Real Property and not solely based on your credit history
- Unlimited pool of potential Private Money Lenders (friends, other investors, professionals, athletes, etc..)
I thought I would blog about this after watching some of our great quick tip videos that teach real estate investors about private money and how to attract private money investors.
Many individuals, and they don't have to be wealthy, are willing to loan real estate investors “private money” for primarily two reasons:
- They expect to earn an above average return compared to traditional bank and stock market options
- Funds are secured by real estate
Simple as that.
These investors could be individuals with funds to invest or groups of individuals who pool their money to fund private loans and are generally secured by real estate.
Private loans can be a great win-win-win scenario. The borrower wins because he or she gets the loan they desire, and the private money lender and the investor wins because they can create an opportunity to earn an above average return.
Here is an example:
The other day my Mother gave me $5000. No specific reason or property in mind. Why did she do that? Because she invests in T-Bills and if you are following the markets that rate of return on T-Bills nowadays stinks.
I usually use her money to do basic rehabs. So you think $5K is no biggie, well it is a big deal for me, as I often lack it because I use 95% of my cash on hand for purchases and closing.
I've parked her money in my business money market account and plan on using it to fund a new duplex deal or wholesale deals that I am looking at in the Tampa, Florida area. I've promised her a 15% return when the deal closes and a flat $150 or 3% per month for every month that that funds are in use. Because it's my Mom and the money is parked, I do not have to pay her a dime until then. I make payments only when the money is in use.
So when I make a cash offer for a $46,000 SFH in Tampa and take 2- 3 months to rehab, flip to end FHA buyer or refinance & rent out, she makes a cool $1100.00 or so. That's a whopping nearly 20% return. Much better than a six month T-Bill hands down.