Jan. 24, 2020

All About Private Money & the 4 Secrets to Raising it

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In this episode we talk all about private money and the 4 secrets to raising it to fund your house flipping business.

We cover:

  • What private money actually is
  • How private money differs from hard money
  • The pros and cons of private money
  • Where to find private money
  • The 4 secrets to raising private money

...and of course, so much more!


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Intro 00:01
You're listening to the flip houses like a girl podcast where we educate, empower and celebrate everyday women who are facing their fears, juggling family and business, embracing their awesomeness and wholeheartedly chasing their dream of flipping houses. Each episode delivers honest to goodness tools, tips and strategies you can implement today to get closer to your first or next successful house flip. Here's your spiky haired breakfast taco loving host house flipping coach, Debbie DeBerry? 

Debbie DeBerry 00:39
What’s going on you guys, I hope that whatever you're up to today, it's an easy one. Okay. So before we get into today's topic, I want to bring you up to speed on something. If you're in the Facebook group, or your my coaching program, you know, well, you may know that I'm under contract with a partner to purchase a $3.6 million. Basically, it's a portfolio of 10, freestanding condominiums that are new construction, that the previous investor, basically he ran out of money. And he got these buildings to anywhere from about 70% complete. So they're at the sheet rock phase to like 95% complete where they might need some light fixtures and some countertops. So he was really close to being done. But he was spread too thin. All right, he had several of these large developments going and ran out of money. And they've got mechanic's liens on them, he didn't pay vendors, it's a mess. It's getting cleared up. But here's the point of all of this.

So the person we're buying the property from, it's actually the hard money lender who foreclose on the previous investor, okay. And he's giving us amazing finance terms. And we had a private money investor who was going to also be part of the deal with us. All right, it needs about five to maybe Max 650 grand worth of cash in case of any owes and to finish out the spaces and pay for carrying costs and all of that jazz.

Okay, so we're looking at five to 650. Okay, so we had a private lender, who was going to partner with us on that. Okay, so we've been waiting for some of the title stuff to get cleared up. In order to close. In this morning, I had an email from the lender saying, hey, if we can close next week, are you guys ready to go? And I'm like, whew, well, what had happened was, when I reached out to my partner to check in, to make sure our private money sources good, she let me know that his accounts have been frozen by the IRS. Oh, my gosh, right. We are finally here to get too close on this property that we've been thinking about and planning for a little over a month. And then the private money. It's not there. It's frozen. Oh, my gosh, what a mess. Right? It was apparently something with his ex wife or something. I don't know. Anyway. So of course, I have to let the hard money lender slash seller know what's going on. Because we don't have that five to 650 cash that we thought we were going to have.

So you know, this is a relationship business. And I am not going to let my reputation be tarnished. Because I'm not willing to have what may be a tough conversation. If I'm calling this guy to say, hey, by the way, our money source isn't available.

So about that closing next week. Right? So I call him and I'm like, Look, this is exactly what's going on. We're, we are totally in shock. And we are coming up with alternatives. But this is where we are right now. And I was just completely honest, that's all we can be is completely honest, transparent, and communicate openly. Guess what he said? He's like, you know what, Debbie, because it's you. And we don't want to end up in this same situation with some other investor who runs out of funds or can't finish the deal. We're gonna make this work with you. We Front all of that money that you need, all you need to do is come up with the interest payments. So the ongoing monthly loan carrying costs, which are $3.6 million deal are pretty hefty. Granted, they could be way worse, he's actually giving us a killer deal on the financing as well, he charging us less than 5%, which is unheard of. I mean, it's just crazy. This whole deal is just, it's crazy. Anyway, all of that is to say that relationships matter. He said, Thank you for calling me and thank you for being honest with me and just communicating with me. Most people don't do that. Why don't most people do that? It's so simple. You guys, please just be transparent, be open, and just communicate, okay? Because this deal would not be coming together otherwise. And you better believe that your reputation is incredibly important. It matters. 

All right. So all of that leads beautifully into today's topic, which is raising private money. All right, so we're going to talk all about what private money actually is, how it differs from hard money lending, some of the advantages and potential disadvantages, and four secrets to raising all the private money you could ever need. Okay, and where to find it. All right, you guys. Let's do this. So what is private money? Exactly. So just as the name implies, it just means borrowing money from an individual investor. All right, real estate investors use private lenders to finance deals that either won't qualify for a traditional loan, or maybe they don't have the standard 30 days for a conventional loan to close. Or maybe they need gap funding. Or they want to fund the repairs, and carrying costs and closing costs and all of that jazz through a private money source. Okay, so let's give some examples. Let's say I go buy a house to flip and I get a hard money loan for the purchase price. And then for the repairs, closing costs, carrying costs down payment, like any other money I could possibly need. for that project, I go get from a private money source, okay. Or, let's say I get a loan for the purchase, and renovations. But let's say that loan doesn't cover all of the renovation amount. And it also isn't covering carrying costs or closing costs.

Okay, so that gap, that's what that means that gap between the funding that you will have secured and the total funding amount that you need. So let's say you need a total of just easy numbers, let's say you need a total of 100 grand, and your fund all of your funding totals up to 85 grand. Okay, so that gap, that $15,000 is what you would go get from a private money source. Okay, so that's gap funding. Okay, so those are reasons why people use private money. And I'm sure there are many others. But those are the main reasons that come to mind when it comes to flipping houses. Now, how is private money different from hard money. So with private money, again, we are typically referring to individuals, maybe they're a friend or a family member, or anybody in your inner circle, maybe it's a mutual friend, or it's an individual investor, who's just intrigued by your project, and by your proposal, and they just want to be part of your investment. There are typically fewer hoops to jump through with a private money lender, now, a hard money lender, they kind of live between a conventional lender and a private money lender, okay, so they may not have all the usual hoops to jump through that a conventional lender would have, but they are semi institutional, okay. And they are going to have their own set of established criteria that they go by. most investors use some form of both hard money and private money loans. So what are the advantages of private money versus hard money say, well, private money is typically the terms are typically more negotiable with a private money lender. Again, it's not an established institution that has an established criteria that they go by, it's usually just an average individual who wants to make money on their money, right? They have money sitting there making nothing or next to nothing in a savings account or any other vehicle, and they want to invest it and make a great return. Okay? So typically, the terms are more negotiable, all right? And they're not necessarily based on the borrower's creditworthiness, or financial history, or finances at all. It's really typically asset based, and hard money loans are too for that matter, but more so with private money. So if the deal looks great, and the numbers make sense, you will find money, I promise you that, okay, there is a plethora of investors out there who they don't have any desire to actually do the house flipping, they don't want to manage the project, they want nothing to do with it. They want to invest their money and make a sweet return that they can't do otherwise. Okay, it all comes down to your deal. And some other things like confidence, which we'll get to in a minute. Okay. So what are some disadvantages of private money? Well, their interest rates are going to be higher than, say, a conventional loan. All right. Again, a conventional loan typically isn't going to be realistic for investors or flippers to use. Because it's tough to find a conventional bank that can close really quickly, which most of these sellers are looking for. And on top of that will fund the purchase and the repairs and all the carrying and closing costs that go along with it. Now, it's not totally impossible at all. Yes, banks do exist, that offer these types of loans, they're typically harder to get, and they will qualify you more so than just being based on the asset. Okay. Something else that could be seen as a disadvantage of private money is that they, it's not going to be a 30 year loan, right? It's going to be a six, maybe 12 month term. And I would recommend sticking to the 12 months with all of the financing you get, I don't care how great you are at flipping houses, I don't care how experienced you are, you never know. And if six months come up, and you're still not out of this house, and you've got to go through the process, financially of refinancing a hard money loan, you're out those same points that you paid the first time around. So just be safer, right, minimize your risk and find 12 month loans, which is pretty standard, but there are lenders out there who do six months. So watch those terms. Okay.

All right, Debbie, this all sounds fantastic. So how do we find private lenders? All right. There are a number of investors out there who specialize in these types of loans. Exactly. All right, you can find them through your existing real estate network, or social media, particularly LinkedIn for this kind of thing. If you aren't building out a nice LinkedIn profile, please be doing that. You want to look like a professional live events, okay. So anywhere that investors go. So local, real estate investing, networking, clubs, organizations, any types of events that attracts you will also attract private money lenders, okay? Your friends and family. All right, your acquaintances, mutual friends, or rely on google google and search for private money lenders in your area. Now, they don't have to be professionals. They're just people who want to make a great return on their money. A parent, relative, acquaintances, colleagues, other investors in your area. If they've got cash on hand, and they want to make a great profit on it or even a decent return on it. They're likely going to be willing to loan you money. I see posts pretty much every day from people in local real estate investing Facebook groups who are posting these deals asking for money and they're not great deals. Okay. Post great deals. Present offers they can't refuse. Okay? There are so many ways to find these private sources of funds. You've got to be willing, though, to get uncomfortable, and put yourself out there and present these deals, don't focus on selling yourself. That's not what we're doing. We're presenting information. And we're presenting deals to people, and we are providing them with a great return on their investment. Now, I want to talk about securing a private loan and protecting those investors. Because this is really important. You need to protect their money, more so than you would protect your own. Okay, it's a really big deal that somebody would say, Yes, I believe in you and your project, and I'm going to invest. So how do you protect them? Well, you want them to have a deed of trust, and a note, and you want this to be recorded. So you want them to be recorded as a lien holder, all right, on the title. This protects them. Because if you go to sell the property, and the title company or attorney, whatever is in your state that does title searches, if they pull up the title, they will see that there is somebody on there. So there's a first lien holder, right, the hard money lender, usually, they are in the first position because the loan is much bigger. Like let's say it's $150,000 loan, great, they're in first position, second position goes to the private money lender, because you've recorded this with the county, and they are protected. So let's say they loaned you 50 grand, great title searches done, and both of those liens are pulled up. Meaning both of those investors will be paid off at closing. Okay, they will be paid directly by the closing officer, you don't get the money and then pay them back. The closing officer pays them back directly. All right. That is how they're protected. And it is really, really, really important to do this. Please protect your lenders. This is non negotiable. All right. Okay. Now, look, it can be really tempting, when you're in the process of trying to attract private money to really just focus on closing the deal. And think about all the wonderful opportunities that are going to come your way when you have all this financing available.

You've got to think of it from the private money lenders point of view. So if you were dipping your toe into private money lending, what would you want to hear to ensure that your financial investment was secure, and that you had a pretty strong chance of seeing a decent return on your money. The real breakthrough comes when you think like an investor yourself, and you present the offer or the opportunity to make a great return on their investment. And it's safe. All right. So that's going to lead us into the four secrets to raising private money. For starters, if you're meeting with a potential private money lender in person, I highly recommend approaching that initial meeting as just a chance to either develop a new long term relationship with this person, or to deepen your existing relationship with them. Okay, and really focus on okay, how can I protect their capital and help this person get a great return on their investment? Instead of focusing on walking away with a check right then and there? or walking away with a yes. Focus on the relationship? Focus on the person first? A lot of times we get so wrapped up in oh my gosh, I need a Yes, I'm desperate. Right. And people will feel that desperation. If you go into a meeting, desperate for money. That doesn't look pretty. Alright, it doesn't look good on anyone. And that's a perfect way to not secure any funding. Go into any meeting or presentation or whatever you're doing with the mindset of building relationships. That leads us into the first secret of raising private money that I'm going to share.

You know what? To tell them you don't want their money yet. All right. You Aren't there to get the money, what you're there to do is educate them on the private money lending process. Let them know what your business is about, and what you're about, and how you might help them see a return on their investment. And then also, the third purpose of the meeting is to determine whether they'd be interested in possibly investing with you at all. All right, it's not about walking away with the Yes. Or with the check. It's okay to walk away with a Yes, I'm interested in investing, but stop focusing on just walking away with a check, educate them on the process, educate them on you and your business, and gauge whether they'd be interested in possibly investing with you and making a return on investment. But here's the deal when you start the meeting off with, look, I'm not trying to get your money right now, I just want to talk to you about this, that puts people at ease. It lets them know that okay, I don't need to be defensive. I don't need to think of all the objections, I don't need to be a hard sale. Right? It puts people at ease. If they know, they don't have to say yes, right then and there. And the goal shouldn't be to hard sell someone, I promise you that will bite you in the butt in the long run, if you're trying to close people constantly, that energy does not work well for people. All right. So that's step one, start with telling them, you don't want their money yet. All right. Number two, you want to build some sort of rapport. And if you don't already know this person, you want to have done some research ahead of time, so that you can understand more about who this person is, what they're up to, maybe what their values are, if you can glean that from social media accounts, or maybe mutual friends, they are people first, this is a people business, this is a relationship business, actually care about the person that you're talking to. Because here's the thing, they will know, if you are only out for one thing, and that one thing being money, they will know that nobody wants to be a part of that. It will come off as Super inauthentic or phony. Or maybe that all you care about is you. And I know that's not the case. I know that you are good people. All right. Okay, so number two, you want to establish some rapport. And if you don't know this person, already, you want to do a little bit of homework ahead of time, so that you can understand a little bit more about them. Okay, number three, while you're presenting to them, while you're sharing with them, you want to come across as a teacher versus a salesperson. So it's really important to remember that some of these investors have never invested before, or potential investors, some of these potential private money investors have never invested in real estate before. They don't know, any, like they don't know what kind of opportunities are out there. They have no idea what kind of profits can be made, they have no idea that they can be protected. Like they just don't know. Remember this, most of the time, they're going to be thinking, two thoughts. All right? One, I don't know how the investing process works. And two, I want to make sure my money is safe. So do all that you can to speak to those two things thoroughly. And again, if you go into this meeting with a mindset of just getting the sale, you're going to likely encounter some pretty sharp resistance and closing the deal will become that much harder for you. But if let's just think about this, when you are approached by somebody, and you can tell that they actually care about you and they're educating you versus hard selling or hard closing you. Does that put you at ease and does that make you want to invest with that person? More so than if they had come across as a salesperson and a hard closer? I am a wholehearted yes on that all day long, wholehearted? Yes. So that means that when you go into this meeting, you darn well better know how the closing process works, how any payment schedules will work, how the investor is going to be protected via a promissory note insurance, Elaine all of those things The risks and rewards for that investor are? What happens if the house sells for less than expected? What happens if there are multiple private money investors involved? What happens if it takes longer to sell the house? All of these things, you need to be able to speak to those things. And if you don't know those answers, you better go get them. These are things you need to know. You need to know these as an investor yourself, you better know these answers. All right? Go educate yourselves, people, please. Education is crucial. The beauty of focusing on answering these questions that they're going to have swarming around, is that you will have addressed most of the objections that are going on in their mind. Okay, so speak to securing their money, and how the investing process works.

Okay. And lastly, number four, is you want to make sure that you are presenting yourself in a professional way, from the way you dress. I'm not saying you need to wear like a suit. No, but, but like holy clothes, probably not the cool thing to wear. dress like you care, right dress out of respect for the other person. You want to wear clothes that you feel comfortable and confident in bottom line, okay? It's not about being fancy. It's about showing that you care, okay. And then you also want any of your company information, you want it to look polished, and professional. If you're doing a PowerPoint presentation, you don't want it to have, you know, outdated images, you want it to look current, modern, and professional.

Okay, so use those things as guidelines.

All right, you guys. Again, a lot of people look at attracting private money as this really difficult thing to do. And they also look at it as oh my gosh, if I only can do that, then everything else will fall into place. So super easily. And this is going to be super easy peasy.

Now, what happens there is you get really hung up on the money. And again, you come across as desperate and not necessarily caring about the other person. If you approach these meetings, as a chance to really build relationships with people and help them get a return on their investment, I promise you, the money will find you. Money always finds good deals, find the good deals, and you will find plenty of money. Okay. All right, you guys. That's it for today's episode. Now, I want to say, if you don't know the process, if you're stuck on the sidelines still get the help you need. Why are you making this harder on yourself? Look, my coaching tribe is awesome. And we've got women across the US who are changing their lives, because they are successfully flipping houses. If you want to learn how to work with us, go to first flip dunrite.com to get different results. You have to do things differently. If you've been doing the same old things for years, and making no progress. How on earth do you think you're going to make progress still doing the same things? The only way to do so is by changing the things you're doing. All right you guys. That's it for today's episode. Until next time, go out there. flip houses like a girl. Leave people and places better than you find them and make it a great day.

Bye y’all