Real Estate Investors: Tips on Starting Out with Private Lending

One of the mistakes I was making early in my real estate investing business was I was putting my own money into deals. I would go out and get a primary mortgage mostly from - I was using WAMU at the time. Fortunately, I think they're still in business. Then I would put my personal funds as the balance. I'd borrow 80% of the proceeds from WAMU. I'd put in 20% of the remaining purchase price of my own funds and then I would continue to put my own funds to rehab the property.

Like everybody, I have limited funds. I did that for a while and I ran out of money. Then it became kind of a shell game. I had to sell a property and recover all those monies to do the next deal. It became very inefficient.

I knew at that point, after a couple of years of that, that I had to figure out how to do this in a better way. At that point I went out and got a lot of education, started reading a lot, and started learning a lot from various real estate gurus to learn how to do this business the proper way.

Refining Private Lending

One of the things I started out very early on was private lending. I figured this would be the way that I could avoid having to put my own funds into a deal and would suddenly unlock the key here which would be I could go out and buy real estate without necessarily having to have the funds in my own bank account to get the deal done.

We went out and we started doing transactions with private lenders. Some of them went very smoothly. We were very successful and paid them off and were very successful. Other deals did not go particularly as smoothly, but ultimately those investors also got paid off, complete full payoffs. Some of them were very happy and have continued to do business with me today. Some have migrated on to other things.

One of the things we learned in this process was we refined our forms. We refined our marketing approach. We refined our program, what appealed to investors, what didn't, and we continued to just refine it.

Seller Financing

Today I do some private lending, a lot less than I used to. Today when I do a real estate transaction I deal with seller financing. That's the only way I'll do a deal today, flat out. If the seller is not putting in 20-30% of the deal and in some cases 90 or 95%, if they're free and clear property, I won't do the deal.

There is less and less reason right now to do it with private lending. Ultimately, you do need private lenders to get off the ground and get started, but today there are a lot of sellers willing to put money into deals. One of the much larger sources of private lending funds right now is the sellers themselves.

As I spoke about, that's the other half of private lending but that clearly is becoming more and more important, that piece of it. I'm sure it will continue to do so for a couple of years as the mortgage market and the financial market continue to struggle and to deteriorate somewhat. That's where we're at.