Funding your real estate deals can be as challenging as finding a red-hair in a haystack. What? That’s not how the saying goes? Whatever. You get the point. When you’ve got a bunch of experience and you’re ready to start looking for private money to fund your real estate deals, you’ll come to a fork in the road. Go right, you’ll work with debt partners, and if you hang a lefty, you’ll find equity partners. Both can be helpful, and both are very different. Money don’t come for nothin’, so one thing is for sure; no matter which way you go, you’re going to pay a price in exchange for debt or equity services.
Debt partners will lend you the money you need to fund your deals, but you’ll have to pay a designated interest rate, which is discussed up front along with the time frame that you’ll be given for the loan. Of course, they’re going to want to protect their investment, and they’ll do this with either a promissory note or mortgage on the property and may be even of your skin in the game. Here’s the catch. You have to pay the interest rate and return their principal during that agreed upon time frame or they can take your property and leave you “eff’d”. Debt Partners will generally charge higher interest rates, but they require little to no equity. So, all in all, they are the cheaper option, and you’ll get more bang for your buck.
When Should I Use Debt Partners?
Here’s the double banger rule for knowing when to use debt partners. If your deal can be financed by one investor, or if you’re confident you can beef up your property value in record time, run with debt partners. It’s that simple, folks. Just be to cover your ass, and by that I mean be sure you have enough cash to cover the interest, and make sure to pay off the loan by the deadline.
Unlike the debt dudes, the return is not always established up front with equity partners. Simply stated – they get a piece whatever the property makes. If it generates a crap-ton (yes, that’s a word), their return will be high. If the deal loses, they’ll invest mo’ money to sustain the property. They’ll invest money in exchange for an ownership percentage, which enables them to stay involved every step of the way. Their investment isn’t secured like with debt partners, rather it’s protected by property’s cash flow. This of course is one very simplified scenario. Deals with equity partners (like debt partners) can be structured in a bazliion different ways.
When Should I Use Equity Partners?
If you’ve got a long-term investment opportunity, the equity guys are the way to go, and if your deal requires more than one private money partner, equity partners can be used to pool money.
Don’t Be a Wuss
It’s a given. It’s gonna take more than one shot until you finally get a “yes” from a private money partner, no matter which way you decide to go. Stop bitchin’ and like Soul-2-Soul said, keep on movin’. Keep making those calls and negotiating, and whatever you do, don’t throw in the towel. If you know some common mistakes up front, and you know how to best deal with them, you’ll be better prepared to deal with either equity or debt partners. So listen up…
Build a Solid Rep
Trust is the key to any deal. I’m shocked at the number of letter my private money guys get from newbies asking, “Hey – will you lend me money?” Duh, Dumbass! You, my readers are smart, however. You already know that the way to establish trust is to build credibility. How do you do that? Build a track record of success, stay true to your word, meet payments with current lenders. Once potential investors know they can trust you and their money is safe as cute little kittens, they’ll work with you every time.
Push ‘Em Off the Fence
Well, not literally, although it is always funny to see people fall for some reason. Here’s the thing about investors; they can be wishy-washy, indecisive, and just plain noncommittal. You have to change that up front, right away. All investors must show the money before close. Get an EMD, fees for entity creation, or a reserves deposit as a way for investors to say “we’re in” before close. Make them commit. Don’t wait until settlement for them to back out and leave you with your ____ uh, house in your hand.
Both equity and debt private money partners can help grow your biz. You just have to know how each one works and what the differences are. Remember, money doesn’t go away, money isn’t real and it isn’t hard to come by. It just gets passed from one filthy, e. coli infested hand to another (excuse me while I dip myself in bleach). Stay motivated, stay confident, and do the right thing. Sooner or later, you’ll have all the money you need to do your deals.