Ever wonder how you can start investing with little or no money down? Here is how!
We will discuss how you can invest in real estate using very little of your own money. Keep in mind that there is no such thing as “free” in real estate. Even though you may not be putting in a lot of money, you may be trading your time and expertise in exchange for funding.
What is a Private Lending?
Private lending is a creative tool that savvy real estate investors have utilized to fund their real estate purchases and rehab projects without putting ANY of their own capital down. However, making the most of this process requires understanding and careful planning.
Who can be a Private Lender?
Private lenders can be friends, family members, co-workers or anyone willing to lend you money for a short period.
Borrowing from friends/family is usually the least expensive option as private lenders have fewer to no fees and are usually satisfied with any return greater than what their traditional savings account can guarantee them.
Secondly, private lenders do not receive any equity stake in the property (such as cash flow from the rental properties) as their main purpose is to receive their initial investment back in a short period, in addition to interest earned from their investment.
Real life example: Let say that you have completed your first real estate rental project where you have used your own cash to buy, rehab, rent, and refinanced a property to regain all your initial capital back. You mentioned this success to a fellow family member who works a stressful but high earning job. They tell you of their interest in becoming a private lender in your next real estate investment project.
Your private lending promissory note can be a period of 6 months with a guaranteed 2% origination fee paid at 10% interest only per month. In other words, if you were to borrow $60K from a family friend, the friend would automatically get a $1200 payment for lending the $60,000 and would be paid 10% APR Interest only payments per month, which calculates to be $500/monthly ($60K x 10% divided by 12 months = $500/month).
Keep in mind, every real estate investment needs to have at least two distinct exit plans.
(1) One is to sell the property and pay back the private lender their initial capital including any fees/interest.
(2) The other is to hold the property over time while utilizing the BRRRR strategy to recapture the initial cash investment after the cash out refinance to pay back the private lender.
If you are utilizing the BRRRR strategy, assuming a 6-month seasoning period plus 2 month contingency for any delays, you will have paid your private lender $500/monthly interest for 8 months, which totals to $4000 in interest payments plus the initial $1200 in points.
The total cost for using the private lender comes out to be $5200 on a $60,000 promissory note to your friend. In return, you have a cash flowing rental property that you have spent zero of your own money, while your friend has made an annual return of 13%. APR ($5200/8 x 12/$60000), much greater than what they would earn from a typical savings account or even many other types of investments.
Without this partnership, your friend would have made just only 2% in interest if he were to hold his $60000 in a money market for 8 months (this calculates for about $800), while you on the other hand would have no deal.
Private lending, if done correctly and with proper due diligence on the investor’s part, is a win-win for both parties.