To leverage more deals than you have cash for, you can obtain capital from private money lenders. Unlike a traditional mortgage loan, hard money lenders care more about your real estate track record than your credit score. They want to be protected by having a first deed of trust—or the primary mortgage—on the property. That means their money is secured by a hard asset. If you don’t pay, the property serves as collateral.
Unlike hard money lenders, private money lenders are more relationship-based. They may even be a friend or family member.
Before we delve into finding lenders, it’s important to know how to use private money. The simple answer? Any way that you and the lender can agree to. You can use it for buy and hold, fix and flip, and everything in between. Lending terms can be short or long term; money can come in lump sums or installments, with or without interest payments, with profit-sharing or not. The possibilities are only limited by you, the lender, and the creativity you both bring to the table.
Now that you know what private money is and the ways you can use it, let’s answer the first question this article poses: “Who should I approach to raise the equity capital?” There are three circles of people you can reach out to fund your deals.
Related: Creative Financing: 5 Outside-the-Box Tools Savvy Investors Use to Build Wealth
The primary circle
This circle is made up of family, friends, and acquaintances. It could be a parent, aunt, coworker, the goalie from your rec soccer team—any individual you personally know. Many real estate investors find their first funding from this circle. Why? Because there’s a low barrier of entry. Also, they are inclined to say yes because they know you and hopefully would want to partner with you.
There are, however, negative aspects of raising money from friends and family. They may not be knowledgeable enough to know the difference between a good and bad deal. Be very clear about the risks. Make sure your lender truly has enough money for the deal and could afford to lose the investment if it goes south. Otherwise, the deal may sour the relationship.
This circle can provide that essential initial source of funds—like an earnest deposit money. Using money from primary circle lenders gives you time to create value by locating and locking up deals so that you can raise additional money.
The secondary circle
The secondary circle of investors is the friends and colleagues of your primary circle. The bigger your primary circle, the bigger your secondary—so get out there and make more friends and contacts through the BiggerPockets Forums and other social networking groups. Your secondary circle is, appropriately, the second-best source for raising capital. They’ll generally be receptive to listening to your proposal, given that your primary circle’s mutual contact gave the nod of approval.
But take the good with the bad: It will likely take more time to raise money, since this group is less positively inclined to say yes. You’ll need to prove your worth by preparing an investment presentation and meeting investors face-to-face.
The third-party circle
This circle consists of people you don’t know personally, like investors removed from your network. This circle is the biggest capital pool that you can access, but it takes the longest to convert them into capital partners since they don’t know you personally or professionally.
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