How To Use Private Financing For Your Real Estate Deal
One of the ways you can finance your real estate investment deal is through private financing thru private lenders.
There are lots of private investors that are just going to give you a mortgage.
This means if you are buying a property, let’s say for $300,000, and you put 20% down … so that’s $60K. What the private investor will do is they will give the remaining funds and put a lien on your property, in the form of a mortgage.
The other private investor you can get is a joint venture partner.
A joint venture partner is not just a mortgage provider. They are part of the whole deal.
For example, let’s say you’re buying a property and you’re going to fix and flip. You buy that property for $200,000 and it’s actually worth $400,000 and you’re going to put another $100,000 into it. So you are into it for $300,000. Depending on where you are in the relationship with that person, that person may lend you up to the entire $300,000 that’s required to purchase the property and to actually do the renovation costs.
Normally you are NOT going to get that kind of investment commitment from somebody you just met or somebody that’s new to you.
As you do more deals, your investors may be willing to advance you more funds and they would be willing to have more skin in the game as you get into bigger and better deals and as you prove to them that you are creditworthy.
So the difference between joint venture partners and the private lenders that you might get through a mortgage broker, is that these joint venture partners are going to share in the risks and the rewards.
It’s not just “Hey, I’ll give you this $300,000 and we’re going to make a $100,000 profit. I’m going to get my $300,000 back plus another $50,000 profit split. And that’s all going to happen in six months, right?”
If there are changes in the cost of the renovations, they are going to know about this, and their returns are going to be reduced.
If you do the work in less time and there is actually a higher profit, they’re also going to benefit.
Normally when I invest with joint venture partners, it’s a 50/50 deal, meaning we’re going to split all of the profits and any losses 50/50.
And normally this is for a shorter period of time if you are doing a fix and flip for three to six months.
However, I have had joint venture partners on rent-to-own deals where the partner has gone out, purchased the entire property, and stayed on the property for three years. At the end of the three years, we sold the property to the tenant-buyer and whatever profit was made through that whole transaction we split it 50 / 50.
I say 50 / 50 because that is normally the split that I want to do with any of my investors.
So, what the split is, is something to consider as well when you’re working with joint venture partners or investors.
