Christina and I spend a lot of time in our real estate coaching sessions talking about how to find the funding for investment properties. As you start researching funding opportunities, you’ll find a lot of hard money “fix and flip” loans out there. These can work, but you have to maintain a very strict timeline if you want to avoid accruing interest (which is almost always set at a very high rate). While you always want to work fast when flipping houses, that timeline can’t always be predetermined.
You can say, “I want to flip this house within three months,” all day long, but—as you’ve seen on Flip or Flop—sometimes things don’t go as planned. That’s why private lenders are often the better choice for funding, as you can often negotiate a much better interest rate (usually 6-12%, as opposed to 14-16% for hard money loans).
Let’s take a look at how to find and approach a private lender.
Finding Potential Lenders
As you begin looking for a private lender to fund your investment, remember that these kinds of loans are frequently based on your relationship with the lender. Think about the people in your inner circle of family and friends.
Who among your family, friends, neighbors, and coworkers has liquid assets available for a loan? Keep in mind that no investment is ever completely risk-free, so don’t approach anyone who could not afford to lose their investment money.
If you’re not comfortable with borrowing from someone in your inner circle, take a step outside this circle. Look at the people that your family and friends associate with. Does one of your friends have a colleague who’s looking for an investment opportunity?
Finally, you can often find people within your community through networking and advertising who can lend you the investment capital you need. Are there professionals (doctors, attorneys, businesspeople, etc.) in your area whom you’re not affiliated with yet who might be interested in your investment?
Approaching Your Lenders
Identifying private lenders is only the first part of this process, of course. Next, you’ll need to approach them and convince them that loaning you capital is a good investment for them.
If your potential lender is a friend or family member, you can bring the subject of real estate investment up when you’re chatting with them about other things. Don’t immediately pitch your investment idea to them, and don’t try to hard sell them.
Instead, give them the opportunity to mull over the idea of investing in flipping houses. I recommend talking about what it takes to fix and flip a house and why you’re going into the business. Talk about your research in the market and how the timing is perfect to get into it. You might be surprised. If they’re already looking for investment opportunities for their liquid capital, they might just approach you before you approach them directly.
Approaching private lenders you aren’t personally affiliated with will require a simple and direct presentation. You’ll need to show them what they get out of it when they provide the capital to let you flip this house. For more information on giving this kind of presentation, check out our real estate coaching workshops through Success Path Education. In just one workshop, you can learn how to flip a house—just like we do on Flip or Flop.