Private investors often act as lenders to finance deals that provide reliable security on which to earn income and asset growth. This sector of real estate lending and investment is the least regulated, which is a good thing because you can get creative to add value in the deal; it also means that you need to have professional advice on hand at every stage of the process.
The Local Hard Money Lender
A private investor can help you get ownership of real property; you can then install a tenant and refinance at a lower interest rate. These hard money loans secured by real estate are an excellent way for investors to negotiate favorable terms on the right properties.
The investors who make hard money loans have the experience to judge the issues of asset value and risk to make intelligent choices about the loans they write. These lenders make quick decisions, so you get the leverage of a quick close, which gives you leverage in negotiation with owners who are motivated to sell.
Hard money loans are relatively expensive, and short-term solutions but they allow you to gain the title, make all the necessary repairs and improvements, and then rent out to a new tenant at the market rate. Once you have a cash flow from your investment, banks will view it as suitable for lending on favorable terms; you will be able to refinance for the long-term, at a market rate of interest.
Hybrid Debt And Equity investments
A more elaborate variation on this strategy is to find a private lender who will consider becoming an equity partner as well as a creditor. Your offer to this investor is to borrow half the buying price from them and to exchange half of your equity in return for the remainder of the price. If they agree, they earn interest on the loan plus they are entitled to an equal share of the gain as the asset grows value.
The ownership ratio does not have to be a half; it can be any split that you can agree with your lender, who will also be your partner. For example, instead of lending a half, they may consider two-thirds of the value and a half stake in the equity. It is a matter of the market, the property in question, and your negotiating skills.
Banks Love Portfolios
Once you have established a strong track record and a reputation in your business community as a smart developer, you will find doors opening more readily. Banks will consider funding your projects earlier in the process. They will also consider offering portfolio loans secured against some or all of your investments, which will be less expensive and simpler than first borrowing from hard-money lenders and refinancing it later.
Hit The Syndicate Circuit
Create a syndicate of several investors as partners who each take a smaller share in your project; this is more widely used to finance multi-unit properties that are beyond the reach of these investors individually. You become the general partner, responsible for every aspect of the project, and the others become limited partners who provide capital but remain in the background awaiting their shares.
Investing Requires Sound Legal Guidance
Forming a syndicate or any of these you are the general partner and your investors take a passive role demands the sharp eye of a competent real estate attorney. You can be sure that your hard-money lenders get and limited partners get sound legal advice and if you want a chance to succeed you should too.
Talk to hard money investors in your community; it is not hard to find them in any metropolitan area. Build a network of contacts and start looking for that potential first investments. Once you have cash flow coming in from that first rental unit, you will be at the starting point of a career as a real estate investor.