How to Get Private Investors for Real Estate
If you're looking for non-traditional financing for your next real estate investment, here are some tips for getting private investors.
There are many challenges to entering the real estate market. Unless you already have a large amount of capital, the first step will be finding financing. There are a number of ways that you can get financing for your real estate ventures. One of the best ways is through private investors. Here we will discuss what a private investor is, the benefits of having them and how exactly to get them on board.
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Different ways of getting financing for a real estate investment
One of the biggest hurdles when it comes to entering the real estate investment market is start-up capital. While there are ways to invest with little to no capital, some different ventures will require upfront money. So, what are the main ways that you can get financing for your real estate? Connected Investors highlight the main ways as being the following.
- Loans, such as a mortgage. This will be through a bank or other lender. You will end up paying large amounts of interest over a long period of time.
- Home Equity. This only works if you already have an asset of value. Basically, you will use the existing equity to finance a new property. This will raise the costs of retaining your original asset so this needs to be considered.
- Private Investors. This will be discussed in more detail below. Private investors are individual investors rather than institutions.
No matter what source of financing you use, there will still be costs. However, you can see why many people are choosing to invest with private investors over getting traditional loans.
What is a private investor for real estate?
We already know that using private investors is an alternative to acquiring an expensive mortgage, but what exactly does it mean? Fortune Builders explain that a private investor is anyone who uses their capital to help finance a real estate investment. And most importantly, private investors are not affiliated with any financial institution such as a bank or any other lender organization. Private lenders can be individual people that you know or seek out. Or they can be found through a private lending company.
Some people may personally know their private investors, or it may be someone separate from them. As long as they are providing capital for a real estate investment and they are not part of a bank, then they are considered to be a private investor. You can use a private investor for purchasing a new property. Or for refinancing a current property.
What are the pros and cons of having a private investor?
Because traditional loans such as mortgages can be difficult to obtain and come with many hoops to jump through, there is a high demand for private investors when it comes to real estate investing. While it may seem like a private investor is the best method period, you need to consider the pros and cons. These are discussed by Investor Junkie as being the following.
- Few qualifications are needed. All you need to do is find someone who is willing to invest with you. That is the only qualification that they need to have.
- Loan structure is flexible, and any loan terms simply need to be agreed upon. If you both agree on a shorter-term loan that is fine. If you prefer a longer agreement, that is fine also. Whatever is included in the loan agreement is between you and the investor.
- Private investor loans typically carry a higher interest rate. While the interest rate is agreed upon between you and the investor, it is unlikely that they will agree to a low-interest rate. It would not be in their favor to do so. Monthly payments will therefore tend to be higher than a traditional loan.
- Can be expensive to finalize. Unless you or the investor are experienced in real estate contracts, you will need to hire a lawyer to draft the final agreement and file it.
- Has the potential to ruin relationships if the investor is already close to you. Nothing destroys a relationship faster than money arguments. And real estate investing can cause some real issues if not managed properly.
What are the ways to get a private real estate investor?
There are a few ways that you can get yourself a private investor, and the best way will depend on the type of investment you want, the amount of capital you already have, and what connections you have. Some people will prefer to invest with a private investor that they already know and trust, whether it be a family member or someone that they know from a real estate group. Others may prefer to keep relationships completely separate from their investment and will opt for a completely new investor that they have never met before.
If you choose to use a private investor that you do not already know, or if you are starting fresh and have no connections, then there are certain investor companies that specialize in linking up potential investors. These companies may charge a premium however you will have the peace of mind that the investor you will be working with will be experienced and will be better equipped to assist you in the investment. No matter where you find your potential investor, ensure that you have a legal contract or agreement written up to protect all parties.
There are a few ways of financing a real estate investment, and if you choose to go down the route of a private investor you need to know what to expect and where to find them. Simply choosing to use a private investor is not enough, you will need to decide whether you will choose someone that you know or find someone that is completely separate from you. No matter who you decide to invest with, real estate can be a great investment strategy and can result in long-term wealth and be mutually beneficial.
Charles is the founder of infoSpike.com. He enjoys real estate investing, marketing, and personal finance. Read more about Charles here.