Learning how to raise private money is something that every investor should know how to do. It’s one of the most effective ways to fund your real estate investment deals. You are basically in charge of your money. Join your host Jeff Rutkowski as he goes through the face-to-face or Zoom-to-Zoom process of raising private money. Learn how to build rapport, know your buying criteria, your intent statement, promissory notes, and more. Listen in so that you can learn the value of private money! Start getting those deals locked today!
—
Listen to the podcast here:
All You Need To Know About Raising Private Money For Real Estate Deals
I am excited about this episode as always because I’m going to be sharing a personal script that I’ve used that a coach and mentor taught me years ago on how to raise private money for real estate deals. We’ve had a lot of people come on the show talk about what private money is, what funding is, how much they’ve raised, but I’ve got a lot of requests just from you asking, “How do you do it?” If you’re in the position to take notes, this will be an incredible episode to take some notes because I’m going to give you a formula that works. Let’s get ready, but let’s start with the word of the week.
Word Of The Week
The word of the week is promissory notes. That’s because we’re going to be talking about raising private money. A promissory note is one of the four documents that you are going to use to secure private money. It is a promise to pay the money that you are borrowing. As a real estate investor, you want that promissory note coming from your business, not from you personally. In fact, we’re not going to offer a personal guarantee unless it’s a deal-breaker, something the lender brings up.
A promissory note is simply how much you’re borrowing, your business promising to pay it back and it’s going to outline the terms. Typically, an interest rate is based on a simple APR, Annual Percentage Rate. It’s a very simple document, easy to use, promise from your business to pay back the money that you’re borrowing. It’s 1 of the 4 documents that you’re going to use to secure private money.
What Is Private Money?
How do we raise private money? That’s what we’re going to get into. What I want to focus on is the actual face-to-face or Zoom-to-Zoom presentation that you are going to be giving a potential private money lender. Before we get into that, a couple of simple thoughts about private money. It is one of the most effective ways to fund your real estate investment deals.
Your double close wholesale deals, fix and flips, buy and holds that you need to renovate before you place a tenant before you hold. What I love about private money versus any other forms of capital transactional lending, when you compare to alongside hard money lending, is typically you are controlling the narrative. You are basically calling the shots in terms of the money that you’re going to accept in your business.
Private money is great because they can fund 100% of the money needed to do the deal, the acquisition, 100% of the rehab, 100% of the closing costs. This is how you get into deals and set yourself up for infinite returns. If you have no money personally in the deal, your return is infinite. It’s something that I love for that reason. For other reasons alone, it requires no credit check. There is no financial application that you’re applying for.
Another way of looking at private money lending is relationship lending. These are people in your sphere of influence, friends, family, coworkers, people in the real estate community that you’re going to build relationships with, that you are going to educate them on the concept or maybe come across people that are already familiar with this, and you’re going to present them with the opportunity.
What we’re going to get into is maybe you have an initial meeting at a REIA group. Let’s use that as an example. You get somebody’s business card. You follow up with that person and schedule a time to present the opportunity to lend to your business. What I want to focus on this episode is what does that conversation looks like? What are the boxes you are checking? What are the things that you are saying, and how are you selling them on that opportunity?
Raising Private Money: A promissory note is one of the four documents that you are going to use to secure private money. It is a promise to pay the money that you are borrowing.
The one thing that I realized very quickly, and it was a pleasant surprise as a real estate investor, is you will learn very quickly. There is a lot of people out there with money that don’t know what to do with it and where to put it. I get approached on a weekly basis by people. The real estate market is hot. You have a lot of people that have equity in their homes that are doing cash-out refinances, things like that. “I got a $100,000. Can I lend it to you? I have $1 million. What should I do with this? I got this. Can you help me place it over or whatever it is?” Literally, constantly to the point where I have more money being offered to me than deals to put it on, which is a good problem.
Starting A Relationship
It’s a problem that you want to be in as a real estate investor. In fact, if you are doing your job right as a real estate investor, you have the education, tools, resources and you understand how that works. That’s really the position that you should be in. Let’s get into it. You are face-to-face. You ask somebody, “I want to talk to you about an exciting opportunity to lend money on real estate. In my business, I want to sit down with you. I want to show you how it works.”
It’s always good to be having these conversations before you have a deal to place the money on. If you have a deal with a place the money on right there and then, you’re going to bring it up to them. You first want to focus on the idea of starting a relationship with this person where they’re going to lend money over and over again on your deals. That’s the goal.
What we’re after is a business relationship, not just a one-time transaction. Some private lenders will come and go. Some will lend on one and maybe wanting to go do something themselves or find something they think is a better opportunity, but many will be blown away by the returns that you are providing and the security of it and be disappointed when you pay them back because now their money stops growing. They need you to go find another deal or they need to find another investor or investment to get that money working.
You’re face to face with a potential private money lender. For the first 2 to 5 minutes of this conversation, you want to focus on rapport-building, basically talking about friends and family, and common connections that you guys have had. This is the small talk that goes along with any conversation that you have, but you want to make sure it’s small talk with purpose. If you’re sitting face to face with somebody, you have a prior experience with them, a mutual friend or business person that has introduced you.
You want to spend a couple of times talking about the common connections and looking to establish commonality. The commonality is when people feel like you are like them, they naturally feel more comfortable and it sets them at ease. A good little formula to use if you don’t have any common connections or any extensive history together, follow the FORD system, ask them a quick question about their Family, Occupation and Recreation. What do they do for fun? What are their hobbies?
A quick question around their Dreams, what are their goals for the future? I promise you, if you ask those four questions, you will find things that you have in common. Maybe you ask them about their family. They have a 13- and 11-year-old daughter, and you happened to have kids in the same age. You talk a little bit about school, sports or whatever it is. You want to take a minute to let them know, “I’m interested in who you are as a person. I’m not just here to try to get your money.” You’re establishing these common connections in 2 to 5 minutes. You don’t want to spend a lot of time here.
What you want to transition is one of the things that we love to do here and the systems that we teach at FortuneBuilders is prior to this meeting, we want to have provided the potential lender some material to read up on our company and opportunity. We like to call this, internally, the private lending credibility packet. To a perspective private lender, it’s going to be an informational packet about your business and lending opportunities.
Private money lending is really like relationship lending.
A good transition is basically asking them if they had a few minutes to read the packet that you had sent over. What this does is it gives you a gauge, so you know how in detail that you’re going to have to go into a specific topic. I like to use that as a nice little transition question. If you’re taking notes, the big first bucket is rapport building, very simple, 2 to 5 minutes. When you’re bringing that to a close, you transition out by asking if they had the information and ask if they had a minute to read through the information that you had said over.
Intent Statement & Agenda
The second category that you’re going to get into is what I like to call an intent statement and agenda, where you are letting them know what’s in it for them. Maybe it sounds something like this, “I appreciate your time. I appreciate you setting us out a little time in meeting me here. I want you to know up front that I’m only going to take about 30 to 45 minutes of your time. I’ll stay around and answer whatever questions you have. By the end of this meeting, I’m going to ask you a simple question, ‘Are you interested or not?’ Fair enough?”
They’re going to say, “Yes.” Why do we ask this question? Number one is we’re telling them what to expect, so they understand what’s coming and what are we going to go through. We’re letting them know at the beginning that at the end of this conversation, we are asking you, “Is it a yes or no?” This is a powerful question because when you ask or tell somebody up front that, “At the end, you’re going to give me a yes or no,” people want to be congruent with what they said they’re going to do.
What this does is it will eliminate the maybes. We are in sales as real estate investors. We’re trying to close deals, relationships to bring more money into our business, close deals with contractors. All the time, we’re looking to sell and close deals. We’re after getting to the yes or the no quicker. We don’t want to waste our time in the maybes. Follow-up is important. I’m not saying, you can ever eliminate all follow-up. When you tell people up-front, “I want a yes or no,” you’re more likely to get is, “What it comes down to?”
Let them know what the outline of the meeting is going to be. I have my notes in front of me and this is something that you shouldn’t have to wing it when you’re face-to-face. You should have a computer with you or an iPad with you. I like to put together a little keynote presentation for the investor and have it there on the desk and I’m going through it on my iPad. Those slides are my notes. I know what I’m talking about on this slide, what I’m asking and covering, but in the intent statement, I let them know the time of the meeting and that I’m going to be doing a quick discovery of their current investments and goals, so I can understand how you’re currently investing right now to know if I’m the best fit for you.
I certainly wouldn’t want to try to persuade you on investment that’s better than what I’m offering into mine. I’ll let them know I’m going to do a quick company overview so they understand what my company is, what it’s about, who I am, what I’m about. I let them know about my buying criteria, how I buy real estate, what are the margins I’m after. This is meant to show them that when they lend money to me that it’s a safe investment because I buy property right. We know in real estate that you make your money when you buy. As long as we buy right, then we’re going to keep people safe.
I let them know that I’ll answer questions, I’ll be covering the terms of the loans that I will accept, then I cover the documents that they’re going to need the sign to execute it and we ask if are they in or out. We go ahead and get the commitment. Also, let them know that I’m going to share with them many different ways that they can lend money to me as an investor, things from as cash sitting in their bank, home equity lines and retirement accounts.
A lot of the time, people don’t think of these things. They think, “I love to loan money out of a real estate, I just don’t have any cash,” but they neglect to think about the big retirement account that they have, the equity line of credit they have on their home or whatever it may be. These are ways that we can leverage or teach them how to leverage those funds to be an investor in our company.
Raising Private Money: Private money is one of the most effective ways to fund your real estate investment deals. You call the shots in terms of the money that you’re going to accept in your business.
Let’s get after it here. That would be the intent statement and agenda. You are giving them an overview of what’s going to happen with you. Let me recap here for those of you that are taking notes because I’m a note-taker myself, so I like when people communicate a certain way. Rapport building, 2 to 5 minutes you’re spending on there. On the intent statement agenda that I just covered, I would also put that at about 2- to 5-minute period where you’re letting them know, “This is the length of the meeting. These are the main things that I’m going to be covering. I’m going to communicate the opportunity.”
You also want to let them know that you’re not just here to try to get money on one deal, even though you may have a deal ready for them, but you’re looking to establish a relationship with a handful of private lenders that you could go on and do a lot of business together in the future and then you let them know at the end, “I’m going to be asking you for a yes or a no.” You’ll be shocked how well that simple question works when you say it in the right way.
Casual, “I appreciate your time today. This is what we’re going to go through. I want you to know at the end of our meeting, I’m going to ask you a simple question, ‘Are you in or out?’ Just so we don’t waste each other’s time moving forward and I can respect you in that way. Does that sound good?” They’re going to say yes 99.9% of the time. You’ll be more likely to get that yes or no at the end of the meeting.
Discovery Of Current Investment Goals
Our third bucket would be your discovery of current investment goals. This is where you are basically asking people what experience do they have around private lending, how are they currently investing their money, how much do they have available to fund the deal. Things along those lines. This would be maybe a 5- to 7-minute category where we’re spending time here. I like to kick off this category by first asking them a question and this question is gold.
This is a question that is literally Than invested. It was $50,000 in a sales trainer to come out, to look at our deals and processes. He said, “In the beginning, you need to ask this question. You’re focusing too much on telling the people how good you are as an investor to where we want the potential investor telling you instead how good you are.” We kicked this off by saying, “Before I understand how you’re investing money, I’m just curious, Mr. or Mrs. Potential Investor, what interests you most about potentially loaning your money to me or investing in real estate?”
What they’re going to give you here is what is motivating them, what is important to them and they may even start selling how good you are. What do I mean? Maybe you asked that question, “What interests you most?” Maybe you hear this answer, “I got a lot of equity in my home. I did a cash-out refinance in my current job that I’m working out and not going to get me to my retirement goals as soon as possible, so I’m just looking to make some extra money. I have two kids to send to college. I’m not prepared to do that. I hate my job. I just want to get the heck out of there,” or maybe they’re in a solid position and, “We have some good position and good investments going on, but I want to diversify,” or whatever it may be.
It’s going to give you an indication on what their why is. Why they’re sitting down with you? If somebody’s meeting you face to face, they have interest on some level and are motivated on some level to grow their wealth. I want to understand, “What is motivating that?” Throughout the conversation, I can come back to that and show them how this can help them with that or maybe I get some objections along the way I could tie back to basically that why that they gave me and talk about how this is a solution to that, so why wouldn’t you want to do that type of thing? Obviously, that’s not how you communicate it, but that is the essence of it.
I want to know, have they had any past experience as a private lender? If they have, that’s great. Did they understand the process? They’re going to be a little bit easier to communicate with or less time that you have to spend explaining the basics. I also ask, have they ever lent money before in any capacity? It’s funny because when I’m teaching in a room of hundreds of people, I’ll ask a question, “Raise your hand if you’ve ever loaned money to anybody and not gotten paid back?” Probably, 80% of the room raises their hand.
These are just relations. These are regular folks that work in different careers. They’re not experienced in this realm. A lot of times, they’re coming in thinking, “I’m interested in real estate. I loaned Uncle Joe $50,000 on his hotdog stand idea and I never saw any of it back.” They may have had bad experience in loaning money. I want to let them know that, “This is nothing like your uncle’s hotdog stand. You’re going to be secured by real estate. You are going to get paid out on this deal before I do. You are going to be insured on this property like you own this property.”
I want to understand, is there any past trauma around lending money on real estate or lending money in general? If there is, I’m going to spend a little more time on the security side of things, a little more time making them feel safe and having them understand how this is a safe opportunity for them. I want to get into how are they currently investing their money and asking them specific questions around that like how much money do they have to invest. I’ll ask how their current investments have performed over the last year, 2 or 5 years.
When I started asking this question, it surprised me how many people out there don’t even understand how their money is growing or what kind of returns they’re making. I did 10% of the stock market where some have no clue or they’d just been working this job for years and cranking money into a 401(k), but don’t understand year over year what they’re earning, which surprises me.
Even when I was breaking, I knew where all my pennies were and what they were growing at, but a lot of people didn’t. Some people will be dialed in, but I want to understand, “How are you currently investing your money now? What are the types of returns you’re getting?” This is my opportunity best for them because we’re trying to sell them on an opportunity, but sales, in my opinion, is helping other people understand what they want and, if you can, helping them get it.
Sales is helping people understand what they want and how they can get it.
If you’re going to be offering 10% on your private lending program in your business and they’re currently growing their money at 15%, I’m not going to try to talk them out of that deal. That’s not what is best for them. Another way of asking them, “How much money do you have?” I don’t feel awkward, but some people will feel awkward asking or answering that question. If you know in your marketplace that on average, you need about $250,000 to acquire a property, renovate a property and handle all the closing costs, then you could frame it like this, “Typically, it’s about $250,000 to fund an entire deal in our program. Assuming you add interest, would you have the ability to fund an entire deal for us or we need to look at a different opportunity?”
They may say yes or no. If they say yes, you know at least, they got $250,000 or above. If they say no, they’re not at that benchmark, which is fine. We could still put people in second positions and things like that that we’ve talked a lot about on this show. We’re going to move into the company overview next, but before we do, a reminder, as always, if you are looking for a coach, mentor and formal training on how to become a real estate investor. FortuneBuilders offers a free class every single week by one of our top trainers, Than Merrill and Nate Harris. They usually are the two of the trainers that you’re going to hear from.
Company Overview: Personal Story
You get your free ticket by FortuneBuildersShow.com. It’s a one-day training on how to go from zero to making money in real estate. That’s what it’s about. They get a lot into raising money for your deals as well. Let’s come back. What we looked at is we kicked it off with rapport building. We spent a couple of minutes there. We went through our intent statement, agenda and what we’re going to cover. We asked some questions around how are they currently investing their money. Now, we’re getting into a company overview about you and your company.
If you are brand new in real estate or looking to start a company, I’m going to give you some tips that helped me when I was brand new as well. If you have experience in it, obviously, you have past experience, closed deals and have a track record to point to. I’m going to focus this a little bit more on those of you reading that maybe don’t have that track record. You want to start off by giving your personal story of real estate, how you got involved in it, why it’s always interests you, why you believe in the asset class of real estate so much, any past education or work experience that can translate into running a successful business.
Maybe you’ve been a manager at a hospital for a number of years and you’ve managed a team of 40 people. You’ve had tasks and projects every quarter that you’ve successfully completed. You have a track record of running, not necessarily your own business, but managing a team and hitting goals. Whatever it is from your past experience, we want to leverage that. You wanted this communicate your real estate education and how you’ve studied. You didn’t just wake up one morning, watch a YouTube video, go out there and pretend you know everything about becoming a real estate investor.
You want to get educated, get a coach, a mentor and communicate to people that you have done these things. You want to communicate how you’ve studied your local market, how you’re a conservative investor, and then any past experience like I said earlier that you have. Let me role-play here. I’ll wing something, pretending I’ve never done a deal before.
The name of my company is ABC LLC. For the past years, I’ve always had a strong interest in becoming a real estate investor. I love TV shows. I’ve read a lot of books on how people create wealth, and it always seems to lead back to real estate. When I look at people that are where I want to be, 75% of the people in our country have become wealthy through the asset class in real estate. I believe in the asset class. There’s no greater well way to create wealth than investing in real estate.
About a year ago, I started a coaching program. I got some mentors and education from current real estate investors that have done over about 1,000 deals themselves. They’re doing about 100 deals a year. I’ve begun to study their programs, systems, resources and have that coach there to guide me. I’ve also spent an equal amount of time studying the local market, understanding what is happening here and plugging in your market wherever that may be.
Raising Private Money: Take two to five minutes on rapport building, then another two to five on the intent statement. Let them know that you’re not just here to try to get money on one deal. Then at the end, you ask for a yes or a no.
One thing I want you to know is I’m going to be taking a very conservative approach. We are out there every single week making offers on properties, typically about 30% to 50% below market value. In fact, I usually have to write about twenty offers to get one accepted. That’s how conservative I am being with my offers. I know when my offers are accepted that I’m going to be safe as a real estate investor and anybody that invests money into my company is going to be safe as well.
Those are some points. Obviously, these are the things that you want to practice and script out. You shouldn’t be sitting in front of a potential private money lender for the very first time and saying these things for the first time. When I started as a student years ago, I scripted out this entire thing. I wrote it out and recorded myself on camera saying it. I modified my script on paper to match the way I said it when I recorded it because a lot of times you speak a little different than you and then I practice it again.
I had family members, “Will you pretend you’re a private lender and listen to this presentation?” When you go into game time because you could be sitting across the table from a lender that sitting on millions can literally give your business the jumpstart that you’re looking for. If we’re not prepared for that opportunity, then we’re not going to maximize it. One of the definitions to success that I love is, “Success is when preparation meets opportunity.” You want to be prepared.
Your Investment Buying Criteria
In the company over you, there may be some questions that are sprinkled in there by the potential lender. I would put that also at about 5 to 7 minutes. My next major category of this presentation is going to be your investment buying criteria. This is going to be different for all investors. Maybe you’re a wholesaler, rehabber, you do a little bit of both, you buy and hold or whatever it may be. Let’s use the example of you’re a rehabber, you’re fixing and flipping properties.
Typically, you want to let them know and communicate to them as a real estate investor. The most important thing as a real estate investor to be successful is that you understand how to buy properties right. As a real estate investor, the two most important numbers that you need to be confident in anytime you’re making an offer on a piece of real estate is the after repair value also known as the ARV, and the repair cost.
The after repair value is after you fix this thing up, what are you going to sell it for? What is it going to be worth? That number needs to be dialed in, and then how much is it going to cost you to fix it up? That’s why that one-day training I talked about earlier is so powerful because they get into those to spend a lot of time on building your confidence around establishing ARV and repair costs.
Assuming you have the education and you know how to do that stuff, you are communicating that to people. You are communicating some of the tools, resources and systems that you’re using to dial in that ARV and repair cost. You’re letting them know that you’re out there making offers about 30% to 50% below market value. Let’s use simple numbers. Maybe sellers are asking $200,000 and you established that after that thing is fixed up, it’s worth $300,000. You need $60,000 to fix it up.
Maybe use an example on a $2,000 property. Give or take, I’m going to be offering around $140,000 or $150,000 on that deal. If my rehab is $60,000 to $75,000 on that deal, I’m going to be into that deal for about $215,000 to $220,000, plus the cost of the deal. I built in a healthy spread, amount of equity and profit that is a cushion. If a private lender lend the whole amount, $150,000 to buy the deal, $75,000 to renovate the deal, $225,000. They understand that, “I’m in X amount, but the after repair value is much greater than I’m lending,” which people understand very quickly that that is safety and security for them.
Success is when preparation meets opportunity.
It’s good to have an example property, even if you’ve never done a deal before, map out a deal, get pictures of a deal, use one of a coach or a mentor, use one of somebody that’s done a deal before. Obviously, give credit to them, but show them an actual example of before, “This is what the property looked before. This is what it looked after. We determined it was X amount of money. After it is done, this is the repair. This is what the private money lender loans on this deal and this is what they made.”
One thing I used to do years ago in Connecticut, I would do these free Saturday sessions on how to loan from retirement accounts. I’d get maybe 20 or 30 people in a room and I would give a presentation on how to convert their retirement account and how to set the retirement account up in a way that they could be a private lender on real estate deals. I would show them at the end a deal I recently did, “This is what the lender loan made. This is how long the project took. This is what the lender made at the end of the day.” I would never ask a single person in the audience to loan money to me.
What do you think the number one question after this seminar was over that they would ask me? “Could I potentially loan money to you and your deals?” You say, “I don’t know. Let me think about it.” You take the posture back there. That is a powerful strategy. Your investment buying criteria, I would hang out here about 5 to 7 minutes as well. If you have pictures and images, it’s very easy to demonstrate the power of private lending and how much money there is in real estate for them as a private lender.
You’re not going to sit there and give this presentation from start to finish. There are going to be questions that the investor peppers in now and again. Some of the top questions that probably will come up by this point in the presentation is, “What if something happens to you? I have to take the property back. What if you don’t sell the house for what you think?” That’s an easy one if you told them how you buy, because if the property doesn’t sell for what you think it will, you’re going to make less money as an investor.
If you bought the property right, they’re still going to get paid what they were promised. That’s what they’re concerned about. “What if I have to pull my money out in three months?” That’s not an ideal situation as an investor. We could replace them with another private lender, but that’s the last thing you want to be focused on in the middle of the deal. If somebody has concerns, “I may need my money back in less than six months and I’m looking to renovate a house,” I’m probably not going to do business with that person.
It tells me that maybe they don’t have a whole lot of money available and they’re depending on this for some livelihood issue. That’s not a situation that I want to be involved. I’m looking for people that can put the money out for 6 to 12 months comfortably and there are no issues around that. “Why isn’t everyone investing this way?” That’s a question that in some way, shape or form, I get a lot. I’ll tell you exactly what I say, “In the beginning, I asked myself the same question that as I began educating myself as a real estate investor and learning, I began to realize that we are not taught financial education very well in this country.”
I think back to my experience as a student in grammar school, high school and college, I was taught to work hard in school, get good grades, get good-paying jobs, save my money, hold onto it and hope I have enough to retire. When I began studying the wealthy 10% in this country and learning from people that are out there doing this stuff, I realized it is a small portion of our country, but I want to model myself after people that are where I want to be in the same position I am. I began to realize that the most successful people are investing this way. As a country and as a whole, we’re not being taught this.
I had two choices. Stay on the path that I’ve been taught and work for somebody else for the next 40 years and hope at the end, I have enough to retire or take control of my financial future, learn how the successful people are doing in implementing that. Typically, that’ll resonate with somebody because they’re probably coming to you for this opportunity because they’re looking to grow their money faster and new ways of doing it. This will resonate with them.
Raising Private Money: As a real estate investor, you have to understand how to buy properties right. The two most important numbers that you need to know are the after repair value (ARV) and the repair cost.
You want to get into the terms and the conditions of the loans. Typically, as a private lender and investor, you want to pay out anywhere between maybe 7% to 12% to a private lender. That’s going to be for you to determine. What I and CT Homes do is we offer 10% and no points. That’s our program. Take it or leave it. That’s something for you to establish. You talked to them about, “Are you paying them monthly?” All payments rolled to the end of the deal.
Typically, if you’re in the position to pay monthly, it’s a great thing to do because then people are getting instantaneous results. They’re seeing they lend you this money on a monthly basis. They’re getting an interest check. They’re getting a payment. I didn’t do that for many years in the beginning because I wanted to conserve cashflow. Typically, the interest would accrue and it is simple interest. It’s interest-only loans, simple interest, calculate it on an annual percentage rate.
If somebody loans you $100,000 at 12%, you’re paying out $1,000 a month in interest or whatever it is. You can pay that out monthly or you let that accrue, and then when the loan closes, they are paid from the proceeds of the sale. That’s typically how you want to do it, especially as a newer investor. Obviously, we’re in a hot market right now. Maybe you got a simple cosmetic reno that’s going to take you 2 to 3 weeks through 30 days to get it ready for market, and then I’d probably do a six-month loan.
If it’s a typical renovation, $60,000 to $100,000 in the renovation that’s going to take you 2 to 3 months to do that, then maybe 30 days to conservatively get a buyer, and then 30 days to close, so it’s going to be cutting it close around six months. I would just do a twelve-month note. You don’t have to worry about redoing paperwork in the midst of the deal. If you close at the seven-month mark, they’re paid for 7 or 9 months of interest. You talk about these things.
Private Money Documents
This is your program. You set it up. It’s not necessarily, “I don’t want to get into negotiating with people around this stuff. This is the way we do it. You like the opportunity or you don’t.” I want to take a few minutes to walk them through the documents and how they are protected. Our word of the week is the promissory note. That is one of the documents that is a promise to pay from your company to them that plugs in the interest rate, the terms and conditions that we spoke about.
The second document is the mortgage deed or a deed of trust. It’s the same thing depending on what state you’re doing business in. They call it one or the other. This is like if you bought your own home in US Bank or Wells Fargo funded that loan, they get a deed of trust and that gives them their mortgage position on title of the property that gives them security.
We are providing to them like Wells Fargo and US Bank. They’re getting that data trust that is giving them if they loan the entire amount of the deal, $250,000, they’re getting a first position lien on that property. Meaning, when that property is sold, the first $250,000 plus agreed-upon interest is getting paid back to that investor.
Number three, you want a hazard insurance policy, listing them as loss payees. Whoever loans you money in the bank, they’re going to be listed as an additional insured by your insurance company. That’s another layer of protection. Those are the three main documents that you need to provide. Fourth that may come up periodically is the investor might want a personal guarantee from you, “I appreciate the promissory note from your business, but I want a personal guarantee from you, not something I’m going to offer or bring up, but if push comes to shove, I’ll sign a personal guarantee because you should never borrow money that you don’t intend on paying back.”
People are not taught financial education very well in this country.
Those are the quick thoughts there, the document and protection. From there, if you have a specific deal that you need funding on now, I would bring that specific deal to them. You’ll answer questions along the way, and then we’re going to end the conversation by going back doing what we said in the very beginning, “From everything that you’ve heard, would you be interested in lending on this property or one of our upcoming deals?”
Joint Venturing
From there, you’ll get a yes, no, maybe or maybe you would get some more questions that you can answer very simply. One question I used to get a lot as a new investor was, “This sounds great. I’m definitely interested, but instead of just me loaning the money, can I partner with you on the deal? Can we do a joint venture together?” I typically would say no to that. A lot of times, when I meet new investors, I got an education. I learned what to do. I have a private lender that’s going to fund the whole entire deal. We’re going to go 50/50.
Talking about that like it’s a good thing and it’s better than nothing, but joint venturing is a very expensive form of capital. If you have a private lender, you’re just paying 10% of what they loan you versus a partner that’s taking 50% of all the profit, you are better off over here. There always is a time and place for partnerships. I’m not anti-partnerships, but how I would overcome that objection?
Especially if this is the first time this lender is loaning on any of my stuff, I would say, “Partnership wouldn’t be an option for me right now on the deal. Here’s why. One of my goals is to put myself in the position that you’re in right now being the bank to this deal because over the course of the next six months, I’m going to have about 40 hours a week invested into managing this project, marketing this deal, all of these things.”
“You’re going to have two hours invested over the next six months. Most of that time is going to be cashing the checks I send you on a monthly basis. On a per-hour basis, you’re making a lot more than I am on this deal. Let’s start it this way. If we enjoy working together, maybe we could look at partnering on a future deal,” and leave it at that unless you want a partner or they add something to the deal that you just don’t have yourself.
Raising Private Money: Joint venturing is a very expensive form of capital. For a private lender, you’re just paying 10% of what they loan you versus a partner that’s taking 50% of all the profit.
Conclusion
Maybe they ask, “Can I get a higher interest rate than what you’re offering?” I would say no. I believe in setting your program and standing firm. You make exceptions and you’re going to get into negotiating, but a 10% rate of return for the average person is very appealing and attractive, especially when it’s backed and secured by real estate. Those are my thoughts. This episode was looking at notes on my computer from one of the last presentations I gave to raise money in my business. Those boxes that I checked are what I go through.
I like to have a PowerPoint or keynote prepared, so they’re seeing visuals and I never also have to remember what to say. I’ve been doing this a long time. It’s ingrained in me now, but you always want to have that guide to walk you through. Let me give you the close with this final tip. At our live seminars, I’ll always give people a tip for new investors.
I would say, “If you’ve never done this before, once you get your presentation together, approach a family member or a friend that you know has money, but maybe you’re a little intimidated to ask them or whatever it may be. Say, ‘I respect your opinion. You’re a good friend. As you know, I’m starting a real estate investment company. I’m at the point where I’m starting to raise funding for the deals, I put together a presentation and I would love you to role play with me, pretend you’re a potential lender. Give me some tips and advice on how I can make this thing better.’”
I’ve said this year over year to our students. Every time I go to a live event, I get, “I did that to my uncle and he’s investing in my deal now.” When you lay this thing out properly, it is very attractive for people out there that are looking to grow their money. That is this episode. Leave me some questions and comments, maybe some things I didn’t hit on that you want to hear more about in the future or maybe different objections that have been getting thrown at you that you want tips.
That’d be a good episode to do. I would talk with JD about how to overcome the top objections real estate investors will face when it comes to raising money or maybe any other area of the business. I appreciate you. Continue to follow us and share this program. We’re looking to reach as many people across the nation with this incredible financial education. God bless you. Have a great week. See you on the next show.
