Real Estate Investing:
How to Find Private
Money Lenders
William Johnson
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@ 2012 William Johnson, REIClub.com
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YOUR NEED FOR LEGAL AND TAX ADVICE
While the information contained in this material was prepared with best efforts and in good faith, the publisher and author make no representations or warranties with respect to the accuracy or completeness of the contents herein.
The publisher and author specifically disclaim any implied warranties of merchantability or fitness for any particular purpose. This material and all associated documents and examples should not be used as a substitute for your legal advice on matters related to business, taxation, estate planning, or other business and financial-management matters.
Each individual’s circumstances are different. Consult with your legal and tax advisers before making any decision to borrow, raise, solicit, or lend money through privately placed mortgages.
If your legal and tax advisors are not familiar with private mortgage lending, you may need to find additional legal and professional advisors who are familiar with and experienced in private mortgage lending.
Table of Contents
Alternative Investments for Private Lenders
Basic Qualities of Private Money Lenders
How to Speak with Private Lenders
Marketing to Private Money Lenders
Private Lender Presentation
Qualifying Prospective Lenders
Appendix
PREFACE
First, I want to thank you for your interest in this book. I am certain that if you read this book you will find at least a few nuggets for you to take with you on your journey to finding and landing private money lenders.
As you can see from the Table of Contents there is a natural progression from thinking about ideal lenders to targeting them to marketing them to qualifying the private lenders you find.
Second, I want to explain what this book is and what it is not. This book is a summary explanation of the many aspects of locating and attracting private money lenders. Although the book does provide the reader with many useful and actionable ideas, there is no way a book of this size can adequately address and explain all the details and nuances of finding private money lenders.
There is a large amount of useful and practical information contained within these few pages and for the price paid, it’s a “deal” as any real estate investor can tell.
Finally, as my way of saying “thank you” for taking the time to read this ebook, I’d like to offer you the opportunity to download a free copy of the Getting Private Money Fast Start audio CD available at…
(use Passcode “FPML”)
Alternative Investments for Private Lenders
Preparing to Find Private Money
How often have you found a sweet deal, only to realize that you can’t finance it yourself?
Private money will open the most important doors for you in the real estate investment business. Having a regular stream of funds available will enable you to move forward with rehab projects, property purchases, and anything else that requires cash up front. It will enable you to handle multiple deals without having to jump through the bank’s hoops or be told that you have too many irons in the fire. Almost everything else you do depends on the availability of private money — that’s why this manual needed to be written. It’s that important.
There’s a little voice in your head that tells you when you’re on the right track, and when you’re still unsure of yourself. Somewhere in your mind, you instinctively know when you’re being productive and when you’re wasting your time. You can call it intuition, or you can call it a sixth sense. Here, let’s call it your inner compass. You’ll need to use it as you deal with people. “Am I going in the right direction? Does this conversation need to change course? Do I need an attitude adjustment? Do they need more information or do I need to change the subject?” Your inner compass will help to answer these questions.
People can seem a little unpredictable sometimes, but they’re the most important variable in the process of finding private money. You can’t secure those funds without paying attention to that compass and adjust what you’re doing as you go in order to head in the right direction with the people who have the money.
Stop worrying about lenders and their requirements. With private lenders, you qualify the deals themselves, not your background.
Stop worrying about whether or not you know anyone with money. You’ll learn how to meet them and get to know them in this manual.
Always keep the end goal in sight. Just learn all you can, put these ideas in motion, listen to your compass, and start getting the private money you need to make these deals happen! The dividends of getting private money are absolutely amazing, and they’re all yours, if you’re willing to work for them.
The Rise and Fall of the Stock Market
We can’t really talk about private money without talking about the mainstream investment funnel that we all know as Wall Street. Can you imagine how many people lost a third to half of their retirement savings a few years ago? The collapse of the housing market and the failure of Wall Street to respond to the warning signs put a lot of otherwise innocent bystanders at risk of losing their life savings. Like it or not, this is the backdrop of our financial environment now.
People have begun to recover in terms of re-evaluating their plans for retirement, but most will probably never completely recover from the loss of their savings. People are looking for alternative investments.
As strange as it sounds, though, it’s hard for a lot of people to evaluate safety where investments are concerned. They wonder, “If we don’t stick with the Plan that the Man is offering, who will take care of our money? I don’t know…” and they stay with the status quo because they don’t know what else to do. CDs are safe, but they don’t yield the returns that investors are looking for. Mutual funds aren’t insured by the FDIC, as we’re all very aware of now, and the only thing the SIPC does is insure your investments if your broker goes bankrupt.
There are any number of other ventures where one could invest retirement money, but there are the two operative words: retirement money. One wrong decision, and the crystal ball will show visions of that hard-working couple spending their golden years living in a van down by the river.
This is where you come in. Wall Street isn’t seen as the powerful, fun, benevolent money-changer any more. People still look to Wall Street as a powerful institution, but the glitter is gone. People are ready to switch gears, and it’s up to you to show them how.
Taking Charge of Retirement Funds
If people think Wall Street is mismanaging their retirement accounts, a few words of encouragement may inspire many of them to trust their instincts again and refuse to leave their future up to someone else. They just need to learn how.
Real estate is the perfect venue for this. Everyone knows something about houses. Many of them know something about the process of buying houses. Make a connection there. And out of everyone who has purchased a house, almost none thought the paperwork was fun or easy. Make a connection there as well.
People need to know that taking the reins themselves isn’t as scary as it sounds. You can be the one to explain to people how investing in real estate can be one way for someone to take charge of their savings and increase their account balances without completely risking their future. They will have an investment in something tangible, which is the real estate, and they will be earning higher returns than any Wall Street broker can guarantee them.
The Benefits of Passive Investing
Then let people know how completely possible it is to let someone else handle all the paperwork and the legwork in order to complete an investment deal from start to finish.
What if someone approached you about this? What if that person told you they’d do all the research on a property and present it to you for approval before moving forward? What if they said they’d take care of the property management, the paperwork, and the rest of the headaches for you? Would that sound attractive to you? What questions would you have for them?
Passive investing is every investor’s dream. It may be why some people don’t want to migrate away from the traditional model of investing where they go about their business every day, some money is withheld from each paycheck for their retirement account, and the money managers take care of the rest. Coasting through the investment process is certainly an easy thing to do. It seems safe - until they open up their account statement every quarter and look at the little red numbers.
With the right investments, people don’t have to dread getting those statements in the mail on a quarterly basis. People don’t have to wonder what Wall Street is doing with their money. With the right investments, a family can take a vacation now and then without worrying about the system coming back to bite them. Passive investing means you can relax while the money is in a truly safe place, working for you.
What Can They Invest?
Of course, once they understand the benefits of investing in real estate, they may want to invest as much money as possible with you. Liquidity is king here. Liquidity is the ability to convert noncash assets into cash, and that includes cash assets that are currently tied up in other ways. Stocks can be sold - that’s easy. Traditional and Roth IRAs can be converted into self-directed IRAs, where the individual has more control over what to do with the cash and still has the tax-deferred benefits that an IRA offers.
401(k) plans work a little differently; if the individual is still employed by the company that sponsors the 401(k) plan, he or she can’t move the money around. If it’s an old 401(k), a rollover is completely possible.
The Basics of Self-Directed IRAs
Self-directed IRAs are possibly the least familiar of these options, so you could make yourself indispensable to private money lenders by being able to explain the basics of creating one. Again, knowing the facts about something like this will bring you a lot closer to being considered an expert in your field, so learn everything you can. If you’re not a financial advisor, always be ready to refer people to a professional in that field if they ask what they personally should do.
There are several benefits for the private money lender who wishes to use their retirement account to invest in real estate. If the new account is set up correctly, the money in the account (and all income from it) is tax-deferred, just as it is in the original account. Nothing changes in that area except the availability of investing options. With the correct setup, this retirement account can also be set up with checkbook control, where the IRA owner simply needs to write a check in order to invest funds from it.
The IRS rules say that the owner of the IRA is not allowed to be the owner of the investment property, so the IRA must have a name and must be controlled by an IRS-approved custodian or trustee. Let’s say that your private money prospect, Patrick M. Lender, wants to set up an account with Equity Trust so he can invest with you. The IRA’s name - the name that will go on the closing paperwork - would be “Equity Trust, Custodian FBO (for benefit of) Patrick M. Lender IRA,” perhaps with an IRA account number added at the end.
You should also be ready to recommend a good attorney with experience in self-directed investing in case the private money lender is interested in setting up an LLC for income tax and investing purposes. An LLC is a limited liability company that must have a unique name in its state and can be named on a mortgage deed as the owner of the promissory note. The lender and the LLC are two separate entities, each with their own tax ID number and name, which satisfies the IRS rule about having a third party (the LLC) responsible for directing the retirement account’s investments. The name that goes on the closing paperwork would then be the name of the LLC.
With this type of arrangement, the private money lender can have what’s known as “checkbook control” over their retirement account. If the owner of the IRA is an LLC, then the custodian of the IRA can invest the retirement funds in the LLC by transferring the money into the LLC’s bank account. Then the manager of the LLC (the private money lender) can be the one to write the checks without having to consult the custodian or trustee for every transaction. This comes in handy when purchasing properties on short notice, such as a sweet deal that’s about to go into foreclosure.
If they want to roll over their retirement account into a self-directed IRA, whatever else happens, they need to start the process by speaking with either the brokerage in charge of the existing account(s) or a broker that handles self-directed IRAs about setting up a new self-directed account.
Once they get the paperwork rolling and the tax issues sorted out (most transactions will be tax-deferred if they’re done correctly), they can talk to you all they want about investing with you. And when they start investing with you and seeing the kind of cash they can earn, their friends and relatives will hear about it, look through their savings, and ask to do exactly the same thing. It’s the cycle of cash flow in action.
Basic Qualities of Private Money Lenders
Know Who You’re Looking For
Believe it or not, everyone with a pulse is not necessarily a good private lender. Gurus left and right will tell you to talk to every single person you meet within arm’s reach. That’s not necessarily a good way to increase your chances of getting money, but it is a good way to increase your chances of being considered a pain in the neck.
Be smart about it. There is a time and a place to work the room. If you talk about your business to absolutely everyone you meet within minutes of meeting them, you’ll be depressed with rejection by the end of the day. Maximize your chances of having a fruitful conversation by knowing who you’re looking for, when to speak casually with them, when to go into more detail, and when to change the subject.
Your best bet is to stick to the old standbys “Where are you from?” and “What do you do for a living?” and see how people react to those questions. Watch the body language, and be mindful of the unwritten rules of polite conversation. Don’t judge by their looks, but watch their reaction. Then, when the conversation moves into exactly what you do for people and what you’re looking for, lean toward an approach of “If you know anyone who might be interested, I’d love to talk with them” rather than “If you have any money, I’d love to talk with you.” Again, there’s a fine line between being persistent and being pushy. The used-car-salesman routine only works on used-car lots, and sometimes not even then.