How to Find Private Investors in Real Estate


Thanks to the recent credit crunch, banks and lending institutions have tightened up their lending protocols. The Western real estate industry used to be characterized by ease of financing. Not anymore.

Today, a blemish-free credit profile and robust employment records have become the minimum requirements in securing a bank loan, and it is safe to say that these two things have become harder to attain. Ironically, real estate prices have started to drop and attractive deals abound left and right.

Seek private lenders

On the other end, there are private lenders who have all the money in the world and are looking for better investments. These people can practically be anyone. They can be friends, family, or business acquaintances. They can be doctors, lawyers, businessmen, or even retirees.

Private Investors

These people normally agree to finance your real estate because you can give better rates than where they usually invest their money, such as in bank CDs, bonds, IRA, or even mutual funds that are low-yield. With these channels typically yielding an almost inconsequential rate of 3% to 6% (or even negative returns due to unfavorable inflation), offering a private lender some 9% to 15% in returns will have them saying yes. The discrepancy between the two rates represents an up to 300% difference in all.

Private investments in real estate offer distinct advantages. For starters, the recent meltdown has put a lot of people in a difficult position. If you have no capital and a less-than-terrific credit score, private investments may be your only option.

Do your due diligence

On the other hand, private money is hardly easy cash in the long run. If you are planning to go this route, remember that the terms you would arrive at with your private financer would depend on a mutual agreement. Do not dilly-dally with how you go about it. You need to have sound fundamentals on the property and a thorough worksheet that can detail where the money will be spent and how much profit you can expect. In any case, your private investors would most likely look for these things when you present the deal to them.

Demonstrate Positive ROI

Convincing a private investor to agree to your deal will take more than the comparatively higher returns you can offer. You need to show them the profit potential first and foremost, then the anticipated sale price, purchase price, holding costs, repair costs, loan-to-value, and so on.

Typically, private investors agree to a deal when you convince them that you know what you are talking about. In case of disapproval, remember that having this information will allow you to go around and talk to more prospective investors.

As mentioned, lenders would have 15% in mind in agreeing to these transactions. The loan-to-value ratio would usually range between 65% and 75%. In other words, you would need around $112,500 to purchase a house worth $150,000.

Now more than ever, people who have been victims of the credit crunch have turned to more creative means to finance their real estate needs. And the best part is no one loses when it comes to these deals, as private investors would like their money to earn rather than sit idle.

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About the Author: Marie Mayle is a contributor to the MegaHowTo team, writer, and entrepreneur based in California USA. She holds a degree in Business Administration. She loves to write about business and finance issues and how to tackle them.

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