Private Money: Cash is King
Cash is king in commercial real estate investments especially since the sub-prime meltdown. Even hard money lenders are screening borrowers more carefully these days compared to past years and quite frankly, loans aren't as easy to come by. This is where private money comes in.
Private money is money obtained through private investors such as business people, lawyers, doctors and even you and I. Believe it or not, there are many people who are looking for higher yielding returns on investments. These investors want to earn more for their investment dollar compared to what they've been getting in money market, bonds and stock market returns and they are turning to real estate investments as their prime opportunity.
First off, let me just say that if the idea of finding private investors for your commercial deals scares you, I completely understand. But don't let that stop you from reaping the benefits of utilizing private money. One reason that private money is one of my favorite funding sources is because you can still get the money without the challenges of dealing with the banks lending process. Basically, there are no credit checks to endure. You can get the money fairly quickly and there is virtually an unlimited supply of funds. You are only limited by the number of private investors you want to utilize.
There are two types of private money that you will use in your commercial dealings – equity partnerships and debt partnerships. Equity partnerships most of take the form of the private investor funding the down payment and any closing costs incurred. In this type of partnership, you work on finding and negotiating the deal. Any profits generated are then split. Equity partners are generally given a chunk of the profits. With debt partnerships, private investors are given a fairly good interest rate for the use of their money in the deal – typically 10% - 15%. This second type of private money also takes longer to raise funds because the return isn't as high as with equity partners. This form of private money is also considered as a debt and must be paid before profits are split with any equity partners you may be working with.
We're just skimming the top of the potential of what private money can do for your investment career. Investors have many options on how to use private investors in their deals, but the first step is to get started. Here are a few key actions to help you get started.
Key Action #1: Build a List of Private Money Investors
Lumped into building a list are networking and marketing activities for your business. From my experience, one of the easiest places to find investors is the local real estate club. Just request a few short minutes at the end of meeting to talk about the deal you're working on. You can also work real estate investment forums as well as angel investor websites for investors.
Key Action #2: Have a Business Plan
Commercial real estate investments (or any investments for that matter) are not deals you want to present unprepared. Have a business plan prepared and ready to share with your potential investor. At the very least, you'll want to share the purpose of your project and what your goals are. You'll also want to present information on how the money will be used and what the investor can expect from the deal. You'll also want to present your investment strategy.
Key Action #3: Have a Hook
If you're serious about finding private investors, you need to have a hook – you must know what their needs are. Are they looking for short term or long term returns? Are they looking for equity or cash? What is their fear and greed level? Most importantly, does the deal match their needs? Knowing these factors will provide you with a hook so that you can close the deal.
Find your investors and find your deal. Working with a pool of private investors mean you could potentially have an unlimited and recurring supply of funds. For that reason, you'll want to be prepared to work with private investors by having a business plan. You'll also want to tailor that plan to your prospective investor's personal needs. Remember, that private money is not an elusive opportunity reserved for the mega stars of real estate. Instead, know that anyone can get private money, but it will take getting started first.
Private money is money obtained through private investors such as business people, lawyers, doctors and even you and I. Believe it or not, there are many people who are looking for higher yielding returns on investments. These investors want to earn more for their investment dollar compared to what they've been getting in money market, bonds and stock market returns and they are turning to real estate investments as their prime opportunity.
First off, let me just say that if the idea of finding private investors for your commercial deals scares you, I completely understand. But don't let that stop you from reaping the benefits of utilizing private money. One reason that private money is one of my favorite funding sources is because you can still get the money without the challenges of dealing with the banks lending process. Basically, there are no credit checks to endure. You can get the money fairly quickly and there is virtually an unlimited supply of funds. You are only limited by the number of private investors you want to utilize.
There are two types of private money that you will use in your commercial dealings – equity partnerships and debt partnerships. Equity partnerships most of take the form of the private investor funding the down payment and any closing costs incurred. In this type of partnership, you work on finding and negotiating the deal. Any profits generated are then split. Equity partners are generally given a chunk of the profits. With debt partnerships, private investors are given a fairly good interest rate for the use of their money in the deal – typically 10% - 15%. This second type of private money also takes longer to raise funds because the return isn't as high as with equity partners. This form of private money is also considered as a debt and must be paid before profits are split with any equity partners you may be working with.
We're just skimming the top of the potential of what private money can do for your investment career. Investors have many options on how to use private investors in their deals, but the first step is to get started. Here are a few key actions to help you get started.
Key Action #1: Build a List of Private Money Investors
Lumped into building a list are networking and marketing activities for your business. From my experience, one of the easiest places to find investors is the local real estate club. Just request a few short minutes at the end of meeting to talk about the deal you're working on. You can also work real estate investment forums as well as angel investor websites for investors.
Key Action #2: Have a Business Plan
Commercial real estate investments (or any investments for that matter) are not deals you want to present unprepared. Have a business plan prepared and ready to share with your potential investor. At the very least, you'll want to share the purpose of your project and what your goals are. You'll also want to present information on how the money will be used and what the investor can expect from the deal. You'll also want to present your investment strategy.
Key Action #3: Have a Hook
If you're serious about finding private investors, you need to have a hook – you must know what their needs are. Are they looking for short term or long term returns? Are they looking for equity or cash? What is their fear and greed level? Most importantly, does the deal match their needs? Knowing these factors will provide you with a hook so that you can close the deal.
Find your investors and find your deal. Working with a pool of private investors mean you could potentially have an unlimited and recurring supply of funds. For that reason, you'll want to be prepared to work with private investors by having a business plan. You'll also want to tailor that plan to your prospective investor's personal needs. Remember, that private money is not an elusive opportunity reserved for the mega stars of real estate. Instead, know that anyone can get private money, but it will take getting started first.
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