How to Raise Private Money for House Flipping
With the rise of flipped homes across the nation, more and more investors are entering the market (according to a research from Trulia). So how do these investors raise enough capital for deals that are worth hundreds of thousands of dollars?
Due to the nature of house flipping, investors need to obtain funds as fast as possible to maximize profits—which is why private money has become a such a valuable option for investors who are looking to raise capital quickly.
Raising private money is not simple like what you see on TV. But with the right knowledge, it’s totally possible for you to make a huge profit. In this article, we’ll go over the steps by steps instruction on how to raise private money for house flipping.
How to find a house
Finding a cheap house that’s suitable for flipping should be the priority before finding a private lender. A good deal with great profit potential will always attract people. Let’s look at the options for finding your first house:
Drive For Dollars
This technique involves you getting in your car and driving around the neighborhood you want to invest in (Simple, right?). The idea is to look for houses that are poorly maintained. This indicates that the owners could be having financial difficulty with the house, which means they will be more than likely to entertain the idea of selling their properties.
Tell everyone in your circles that you are looking for a house to invest in. In addition, join your local real estate investing groups, attend meetings and let people know your intention. Always assume that someone you know could be having a deal for you. Networking is a powerful tool because you will be able to build relationships that’s not only benefit you now, but later on in your career.
Find lists on the internet
It’s very easy to find all sorts of lists for flipping houses. Sites like ClassicProperties.com and Zillow.com are great for finding distressed properties, foreclosures, and short sales. You can also find wholesale deals on websites such as MyHouseDeals.com.
With all of these methods, it’s important to know what to look for in a flipping property. Factors such as location, market value, and house condition can significantly affect your bottom line.
How to Raise Private Money
There is simply no shortcut to raise private money. You need to put in a lot of work to find the right lender. Remember, the more you market yourself, the more people you connect with and who know about what you do, the better chance you will find a private lender.
Create a habit of telling everyone you meet about your real estate career. Start with your inner circle—you’ll find that it’s much easier to talk and convince them. Once you’ve done your first or second deal, you can then market to strangers who have more skepticism.
In order to avoid rejection, you need to present your deals to the lenders in a way that’s irresistible. One way to do that is to create a solid business plan and show the lender how you can help them meet their own goals.
Write a Business Plan
A house flipping business plan is a summary that explains the goals and steps you need to take in order to make a profit. A clear, concrete business plan will build trust with your lenders and help you to organize your to-do lists. To save time, download a free business plan template to get an idea of what should be included in yours. In essence, lenders are looking for 3 main things:
- The After Repair Value (ARV) of the property
- Evidence supporting the ARV value such as comparable houses in the area
- How much it costs to rehab the property
This is perhaps the most important thing when it comes to raising private money. While data and statistics are important, none of these will matter if you are unable to build authentic relationships with your lenders. No one wants to work with a person who is untrustworthy and acts like a robot. Get your face out there and talk with like-minded individuals. And remember to make building relationship your #1 priority when interacting with them.
Potential Term Options with Private Lenders
There are many ways to structure a term option for private money loans. It’s all depends on what you are trying to do with the loan and how you want the loan to be paid.
- Short Term Loans: this loan type is perfect for rehab-flips. There are a lot of variations of short-term loans. These variations can involve monthly payment, points (we’ll explain this later), and balloon payment (a large one-time payment at the end of a loan).
- Mid-Term Loans: usually lasts about 2-5 years. This can be an option for investors who want to do a lease or would like to get a long-term loan but hasn’t found any yet.
- Long Term Loans: less prevalent than the previous two loans, long-term loans are usually hard to find. Although it is possible to find one with a low-interest rate.
How to Pay Lenders Returns
Keep in mind that you need to structure the compensation to make it appealing for the lenders. Here are 4 main ways to compensate your private lenders:
- Guaranteed Interest: this works much like a traditional loan, in which you will make a down payment and is expected to pay a specified interest rate for a set amount of time.
- Profit Split (Joint Venue): the lender will get half of the profit at the end of the project. This type of compensation is best for beginners because it’s very enticing to lenders, which establish trust very well early on.
- Points: each point is equal to 1 percentage of a loan. For example, if you are paying 100k at 10% and one point, that means you will pay an additional 1% interest rate at the beginning. This is a great way to sweeten the pot for lenders who are on the fence.
- Exit Fees: this is an additional fee which will be paid at the end of a project.
While raising private money is challenging and requires experience and proper guidance, it boils down to two things. First, know your business, then market yourself all the time. Second, know what the lenders want and provide it to them. Focus on learning these fundamentals will dramatically increase the chance of you getting an investment.
While you are at it, check out PrivateMoneyMastery.com. It’s a course that teaches you how to build relationships with private money lenders and get the funding you’ve always wanted. They offer certifications, scripts, and even live coaching calls to help you to reach your goals the soonest.