Don’t be private about private money

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What is private money?  It is one of your most valuable resources that is available all around you and most people aren’t even aware of it.  A very informal defintion of private money is simply money that an individual is willing to lend to you as an investment.  These individuals can be anybody…family, friends, acquaintances, business associates, your barber, the old lady in the elevator, anybody with a home equity line of credit, etc. 

So the next natural question would be, “why would any of these people want to lend me money,” right?  The answer is because THEY WANT TO MAKE MONEY TOO!!  Every private lender earns interest on their money.  They earn typically anywhere between 7%-15% depending on the reason and lenght of the loan term.  The lower interest rates are typically given to private lenders that are willing to invest for a longer period of time.  For example, you want to purchase a mult-family property and need a 20% down payment.  A private lender may be interested in loaning you this money for a period of 5-30 years at 7% interest.  The higher interest rates on the other hand,are typically given to private lenders who are investing for the short term, approximately 6-12 months.  You would use this type of lender for your rehab projects that you renovate and put back on the market in a short period of time. 

The other reason these individuals would want to lend you money for your real estate invesment endeavors is because they won’t get that type of financial return anywhere else.  Where else can you earn 15% interest?  Unless you’re a credit card company or an extremely savvy stocks investor, the answer is no where.  Most people put their oney in CD’s that earn them 3% interest.  So if someone is happy earning 3% interest, don’t you think they’ll be more than happy to earn 15%?!! 

Another factor to consider is using your family’s money.  Many people are fearful because now their family’s money is on the line.  My answer to that is….great, that will only make you a better investor.  You need to stop thinking negative and start thinking positive.  Don’t think “what if I lose their money?” and instead think, “I am more than happy to make my family money.”  Fearful thoughts will kill your entreprenuerial endeavors.  Always approach this as a positive situation for both you and your loved ones.  When your family’s money is on the line, don’t you think you will do your absolute best?  What’s wrong with that?  As I said, it will only make you a better investor and it will help you to make better business decisions. 

Next time we’ll talk about how to approach these individuals about lending you money.  Stay tuned!!