At the MAREI meeting (that’s our local real estate investment association here in the Kansas City area) we were talking about using Private Partners or Private Lenders during the networking both the planned networking before the meeting and at the meeting after the meeting. If you are not going to your local REIA group and taking part in both the planned events and the meetings after the meetings, YOU ARE MISSING OUT.
Anyway, back to the Private Lending We were talking about how a deal that our team had put together last year and the fact that we utilized private money to do the deal. The person I was talking with emailed me this morning to ask for more info. He is doing great using hard money lenders, however he would like to cultivate a few private lenders. He wanted my advice and poor guy, now he is getting an entire blog post about it.
Now before we go into cultivating private lenders let’s first consider the ways we might partner. Sometimes my private lenders wanted a flat fee of $5,000, not bad until you work that into an interest rate. Other Private Lenders want 40 to 50% of the profits, again a great deal, although in some cases the Hard Money Lender would still have cost less. Other times, the private lender only got paid 10% interest, great deal for us and really cheap money if we could turn the deal fast enough, but the one time we had a house where the only road too and from the subdivision was promptly ripped out right after we purchased the house and it took us over 6 months to sell. The private lender made all the money, our profits were eaten up by 9 months of interest.
So, don’t discount your hard money lenders, they really are a great deal and a great place to start. But as you build your portfolio of completed deals, you will be able to cultivate more people who are willing to partner with you or lend you money on the deal.
Let’s dig in, how to you find or cultivate a private lender.
- Brag a Lot . . . ok, don’t be obnoxious about it but tell people what you do. Our first private lenders were our insurance agent and family members. We were borrowing money from a local bank for our rehab loans, they made those back in the day. Our insurance agent noted we kept buying and selling houses and based on how often he was insuring us and then canceling insurance he decided he wanted in on the deals. We also shared every deal with family and one day they asked us how much we were paying the bank for money and if he could lend to us for less than the bank, would we partner with him. All of this is because we told them what we were doing.
Now along the lines of bragging a lot, it is helpful to have something you could actually show people. We created two items we used to show people what we were doing. One was a website we where we could share more information and the other was a brag book of sorts. Both had a section that explained what private lending or partnering actually is and a section explaining how we protect the private lender. Then we had page after page, or blog post after blog posts showing all of our deals – the good and the not so good. In each we shared the Story of the deal, the photos and the numbers from what we paid for it, what rehab and holding costs were, our profits AND the private partners profits. The bragging works, but takes time, and when you want to condense that time and having a marketing piece like the brag book or the website gives someone a place to go to learn more about you.
2. Teach . . . this is where our next private lenders came from. We attended a workshop with Alan Cowgill who talked about putting together a presentation explaining who he was, some example deals, having a credibility kit (my brag book and website) and then having luncheons where you invite people of high net worth. But to me, that felt too much a life insurance or financial planner that stalks old people. So instead, I approached the local REIA group and offered to have workshops explaining how private lending works and how self directed IRA’s work. My first class I charged people a small fee and had about 5 people who came to a 2 different 2 hour workshops.
The first was how to protect yourself as a private lender. This one explained what a private lender was, told them how to screen and select potential borrowers and how to protect themselves with the paperwork. It ended with a couple of example deals that I had done with my first private lenders from #1. The second workshop went into Self Directed IRAs and included an informational packet on self directed IRAs that I received from Equity Trust. Out of that I found two potential private lenders and one who had enough money to actually fund a few of our wholesale deals out of his Self Directed IRAs.
On a side note for the members of MAREI . . there is a book from Alan Cowgill in the MAREI Member Library – How to Find all The Money You Need to do All the Deals You Want. Be sure to log in and read through that, it has a wealth of information.
3. Teach Some More . . . take on a few newbies. As leaders at MAREI we were in the front of people a lot and newbies naturally flocked to us. We really didn’t want to partner on deals that way because many of them wanted to learn how to do a deal but had no money. They didn’t bring much to the table in the way of a trade – they had no knowledge and no money. But when a newbie came to us and said teach me to do what you do and by the way I have access to cash to fund the deals . . . well then we partnered on deal and taught him the ropes over about a 2 year span. We sat down and decided who was to do what and how everything was to be divided up before hand. And along the way, we learned from him.
So you are sitting there and saying no way am I going to go out and start a group, that takes a lot of time and effort, but you don’t have too. In most areas there is already a group there and if you join, take part and volunteer your time to teach, write articles, help at the check in table, take over social media duty . . . what ever it is that you are good at, you can instantly over a few month period become on of the movers and shakers. Here at MAREI we have several people that have built their status to almost leadership level because they are willing to share. The volunteer to teach a class, they write an article, they stick around after the meeting to help clean up, they come early to help set up . . . and that’s when you start becoming the go to person. Then the newbies who don’t want to spend 3 years learning the ropes will come to you. Some of them will have the funding to be your private lender, you just have to be willing to teach them something in exchange . . . not a bad deal, you teach, they do all the work and bring the money.2
4. Become Famous . . . I am serious. There are many ways to become famous and most ways are low cost and just require you to put yourself out there a bit. Share your stories in article form, newsletter form, video or audio. So let’s give you some examples.
One person I know here in Kansas City had the backing to fund his deals, but he needed deals so they started a radio show. . . never mind he started investing in real estate a few months before, he started a real estate radio show and interviewed people. He became famous overnight.
Another way is to write a book and while I have not written my book yet, it’s on my to do list. You can self publish a book on Amazon.com and do a product launch where ever place on the internet and at your local REIA is talking about your book. You might even be able to give it away for free on your website in exchange for some contact information and cultivate private lenders that way.
And one of the easiest right now is to become an author for BiggerPockets.com . So go to BiggerPockets, create your own account and profile and start writing a blog for them. They like longer well thought out articles like this one, not short 2 paragraphs that say nothing. After a while they may feature some of your blog posts and possibly ask you to be a featured writer . . two of our very own members here from MAREI have done that, so look up Andrew Syrios and JJ Pawlowski . . . both of which also volunteer to teach at MAREI from time to time. After you get to be a featured writer, then your articles go out on their weekly emails and get published on their social media pages.
There are numerous real estate sites out there where you can contribute your knowledge . . . so pick one or two and start participating.
5. Networking . . . at local business associations. Now this can be at your local REIA group or other business associations, like the chamber of commerce or maybe a trade association around what you do in life outside of real estate. Now, do this monthly at MAREI. I go every month and network before the meeting and after the meeting. You will notice if you attend the folks that come every month and who are willing to share. These are the people with a circle of people around them. The movers and shakers of the group and people will bring them deals, ask for help and sometimes these are people with funding.
Let’s talk a bit about networking outside of the REIA for a moment. One person I know is a dentist by trade and he has done all of the above. He sat back and thought about the dentists he knows. They make good money as a dentist and want to invest for retirement. He took the teaching thing to heart and started explaining the concept of Self Directed IRA’s, Tax Free Investing and Real Estate Investing. Only he focused his training on his fellow dentists. People he already knew and had rapport with as a dentist, but who are not quite as willing to take the time to learn how to invest in real estate, but wanted to get the better returns, tax free on their money. He basically went out and created his own private lenders, people who had never even thought about real estate before.
6. Speed Networking Events at the REIA . . . just a fun time where I have came up with a few lenders every time. Basically in speed networking, you break into pairs and each person gets a minute or two to give their elevator pitch. After each person in the pair has their turn, you trade partners. So you need to have a clear concise message or elevator pitch . . .
“I buy, rehab and sell houses for a profit. We have completed 30 deals. Our average hold time is 3 months. Our average profit is $15,000 to $20,000 a deal. We utilize private partners to do those deals and they earn on average $5,000. Do you know anyone who might be interested in earning about $5,000 over 3 months by lending $60,000.”
Always be prepared with a flyer or a business card so you can send provide them with all of your contact information and send them to your website that you created above where you can showcase your deals.
7. Self Directed IRA Events . . . . build in lenders. Now when a large self directed IRA custodian or administrator rolls into town and holds an event, you will want to attend. There will be 3 types of people at these events. The first are people like you who saw them speak at the local REIA and are coming to learn about Self Directed IRAs as a beginner or Self Directed IRA’s as an advanced user. There will also be people there who are already clients of the people putting on the event, people who already have the money saved up and growing, who understand real estate, and would rather lend their IRA money to you, that go buy a deal in their IRA.
So when you go to these events, having your business cards and your elevator pitch. Then while you are networking during the breaks, lunches and before and after, you have something to refer back on and are prepared. And if you happen to find a good fit at the event, follow it up with happy hour after the event . . . again the meeting after the meeting is very important.
8. Direct Mail Marketing . . . not my favorite, but I have seen it taught many times, so I want to share it. All of the previous methods deal with a warm market . . . either people you know or people who are a part of your a similar group. With Direct Mail Marketing you are going after a totally cold market. It has been suggested to me that you create a master mind group of people who want to talk about some specific topic, real estate investing, self directed IRAs, what have you. Then go out and buy a list of high networth people in your area from a list broker, or many of the list brokers that cater to the real estate investor offer a potential private lender list. Then in your direct mail piece you invite them out to your master mind group or maybe to a workshop where you will teach a concept or maybe a private one on one session online.
This is a great way to connect with new people that you don’t know and who are not directly in your current circle of influence. Then once you meet them, you set yourself up as the expert who teaches or leads the master mind and then you share your knowledge and expertise always showing off and bragging about the latest deal and how it all works. And telling them how the private lender fits into the deal and asking from time to time if they know anyone who might want to fit into that private lender deal.
9. Buying Creatively . . means you find a way to take over payments or it might mean you get the seller to carry your note.
A good friend here at MAREI buys a lot of deals where she either takes over the seller’s payments with very little money down is any then she rents them out for cash flow, because she needs very little down or for the renovation she could cultivate private lenders from the REIA who only have $5,000 to $10,000 in their self directed IRA to lend out.
She also may find people who own the house free and clear and agree to seller finance the house to her. Let’s say that further, she lease options the house and they eventually buy the house and pay her off and she pays the seller who financed her off. You follow so far. Original Seller financed the Investor who lease options to End Buyer. End Buyer goes to the bank, gets a loan and pays off the Investor and the underlying loan from Original Seller. Now the Original Seller didn’t need the money that bad to begin with or they would not have seller financed the property in the first place. So when the Investor calls the Original Owner to get the pay off, she can ask, so once we pay off the loan, what are you going to do with the money? Would you be interested in keeping the same monthly payments with a new loan on a house that I am buying.”
I don’t do a lot of creative buying, however, my friends that do have found this to be a great way to get private lenders, cultivate your motivated sellers.
10. Marketing . . . . actively putting out marketing pieces asking for a private lender. I don’t directly market for private lenders because I keep hearing or seeing that you have to do this, that and the other thing to legally market for lenders and not get crosswise with the SEC. This is an area, that if you are going to do it, you should spend some time and money learning a lot more about to find out what you can and cannot do.
There you have it folks, how our team here at KCInvest work to cultivate private lenders. Please take note as you read this that here in Kansas City we have a couple of large opportunities coming up . . First this Saturday, November 11th is the Equity Universities Wealth Building Workshop – it’s on the calendar of events at MAREI.org and you still have time to get signed up for it – there will be ample time to network before the event and on breaks, but they also have built in a speed networking portion. Next is the December 8th MAREI meeting which is the annual Speed Networking Event where we network and collect for Toys for Tots. And if you are not in the Kansas City area . . find your local REIA as there are going to be similar events coming your way at your REIA in the next year.