When you close a deal as a real estate investor, you’re not the only one getting paid. And if that deal went well, you’re probably not the only one eager to repeat the process. But will your private lender want to work with you again?
If you adopt these five habits, you’re sure to be pitching investments to your private lenders…again, and again, and again.
ALWAYS EARLY, NEVER LATE
When you raise private money for a fix and flip, you get a one year mortgage and note. But it shouldn’t take you 12 months to finish that job. In most cases, you should be repaying your private lender in 3–4 months. And if something goes sideways and the deal takes a little longer to finish, it might be 6–8 months. But It should never be a year.
Always deliver early. Private lenders love that.
COMMUNICATE AND CELEBRATE
Your lender probably likes to know what’s happening with your business. Include lenders in your monthly or quarterly newsletter. Include them on property launches.
Make your lender feel involved and appreciated by celebrating your successes. They gave you the opportunity to make your vision of this rehab project a reality.
DOUBLE YOUR PURCHASING POWER
And if your lender feels involved and appreciated, they will probably also be excited about their part in the process—and want to do it again. When they know that paycheck is coming (sooner than they expected), they’ll be ready to do it again.
You’re recycling money if you can work with that lender again right away. If you have two private lenders, one with $150,000 to invest and one with $300,000 to invest, you could do four flips in a year with the right crew. That means you’ve got $900,000 purchasing power with rehabs, with just those two investors.
CREDIBILITY = SURPRISE FUNDS
The quicker you can repay your lender or reinvest in a new deal, the more credibility you earn with your lender. And your lender might just have some additional funds they weren’t quite ready to invest. Once you get through that first rehab, your lender might just offer you another $100,000—if you exceed their expectations.
KNOW THE GOING RATES
Whenever you’re having conversations with private lenders, keep the going rates in mind. There are different rates for different types of investments. Sometimes you can negotiate with a private lender, but this gives you a starting point and helps you assess the investor’s expectation of return.
|Type of Investment||Going Rate|
|Fix and Flip||12% interest or 15% profit, whichever is greater|
|Back to Back Closing||2 points or $2,500, whichever is greater|
|Rental (2–5 years)||7–11% annualized interest|
|30–90 Day Money||2 points and 15%|
For fix and flips, annual interest can be 12–22%. I recommend offering 12% annualized interest or 15% of the profit, whichever is greater. In general, if you can liquidate a rehab in 3 months or less, the 15% profit will outweigh interest. The longer you have the property, the more likely interest will be a better payoff. You might also need to pay a flat fee up front (typically $500 or 2%).
For wholesale deals (back to back closings), make sure your numbers are going to work out for both you and your investor. The going rate is 2 points or $2,500, whichever is greater, so for a $100,000 deal since 2% is $2,000, the lender would make the greater amount of $2,500.
If you’re working with someone to invest in a rental (someone who doesn’t need the funds, since this is a longer-term investment), the going rate is 7–11% annualized interest. You might use those funds to invest in a single-family rental, an apartment, or self-storage.
Finally, there are bridge loans (30–90 day money). If a rehab goes over budget and you need another $5,000 to finish a job, for example, the going rate is 2 points and 15%. This is the toughest money to get. You might also need this kind of loan for properties that you buy and put right back on the market in as-is condition.
Regardless of your sweet spot for investing, know the going rates and use that to inform your conversations with private lenders.