Working with Private Money Lenders
So, you have found a great building to renovate and you know you can realize a huge profit at the sale…what are you waiting for? The answer to such a question is probably one word – money. Millions of potentially profitable business ventures and projects never get off the ground because there isn’t enough money to fund them. Interestingly enough there are now also millions of private money lenders hoping to enjoy a higher rate of return by making such ventures possible.
The way that private money lenders make their profits are very simple – they ask for a much higher rate of interest on the loans along with much faster “turnaround” times. They usually require the entrepreneur or borrower to lock into a specific set of terms, and to also provide documentation such as a first mortgage claim or a promissory note on the asset as well.
What sorts of rates do private money lenders require? While this varies from venture to venture, most will demand from ten to twenty percent on the sums that they lend. They can do this because the ventures tend to be far too risky for traditional bank borrowing. For example, the project mentioned at the opening of this discussion would face many challenges when seeking funds from a traditional bank. Such a building might not meet certain value requirements for instance, but private money lenders are often willing to hand over far more than a bank in order to see a project through to its final sale or success.
How does someone acquire private lenders? This too varies from venture to venture because some lenders look only to invest in real estate, while others might want to pour money into business startups. The first step to acquiring any investors, however, is to develop a workable business plan. This includes a very detailed explanation of the intended program or business venture, and gives very accurate financial information (including anticipated returns and target dates for them). Not only will the business plan have to paint a very appealing picture to those with money to invest, but it is going to have to deliver the “human” side as well.
What does this mean? Well, the reasons that most entrepreneurs seeking investment fail to get the funding they require includes unqualified or unknown management, a misinterpreted lack of potential in the proposed project, and a perception that the equity is overpriced. While the last two issues are covered by thorough financial documentation and data, the first issue demands the entrepreneur to make a clear representation of their skills, and that of any employees for the project or business. It also means looking at local private money lenders in addition to any identified through online searching too.
Why local? It has been determined that most private investors tend to pour money into businesses that are within a set radius from their home offices, usually in the area of fifty miles or less. This means that a pool of willing investors may be in the next city or even the next block, but you will have to seek them out and make an impressive presentation in order to obtain the funds required for your business venture.
Self Directed IRA administrators are also a great source for private funds. These companies are in the business of managing the IRA accounts and have thousands of potential money lenders wanting good opportunities to grow their tax deferred accounts. Start networking with these representatives and see if you can present your next deal to their clients!
