"People just like you frequently say to me,
'You have the best business in the world.' because
your business grows when mine does...

With hard money lenders, each and every deal you do is on trial. A hard money lender relies on their skill and knowledge in lending. Consequently, while they will lend on the value of the property rather than the purchase price of the deal, they often do it in a very small geography. What this means is, you have to find a local hard money lender for every area you want to invest.

Private money partners, like you the investor, are happy to live where they want andinvest where it is best.

A Private Money Deal
Before showing you a sample of private money partner arrangements, there are some differences in using a private money partner you should know.

A private money partner is going to be both the least expensive and the most expensive money you use. It will be the least expensive because it will be the easiest to access; you will save a lot of time working with me over trying to do creative finance and get blood from a rock, (conventional finance) and paying fees on 100% of the deal, or hard money lenders who you must find in each area you invest.

Basically, I will do it all for you and I will do it as a partner.
Consequently, it may be some of the "most expensive" money you use. After all, if you and I are 50-50 partners, half of the profits are yours, and the other half, mine. That can be a lot of money for both of us. And it will often be more money than you would have had to pay a bank. Of course, the real cost to using bank financing is the lost profits on the deals you can't do. That's the other way in which you'll find private money to be the least expensive option. With this understanding, let's put some numbers to a real opportunity.

A Real Opportunity
Let's say you find a $450,000 property with $330,000 in total debt on it. Of that debt, $13,500 is in arrears and due right now. The property also needs $20,000 in repairs. You start with creative finance and you get the seller to sign a purchase agreement on the property for what is owed on it (you're assuming the mortgage).

At this point, you and I would enter into an agreement so you can keep the deal and not have the bank foreclose, I would write a $13,500 check to the bank to catch-up or reinstate the loan. Further, because you said it would take you 3 to 6 months to exit the deal, I agree to pay the mortgage payments for up to 6 months. At this point, you use your skills and abilities to generate a profit for both of us. Consider these different approaches. Perhaps you have a list of wholesale investor buyers. They plan to rehab it themselves and agree to pay you $20,000 and assume the mortgage. Let's say this takes less than 30-days. Then, at the closing table, you would return the $13,500 so we can use it for future deals. That leaves $6500 in profits. Because you moved so quickly, our agreement says my piece of the pie is 25-percent of the profits, or $1625. Now, that's a nice return on investment for me; I earned $1625 out of $13,500 invested after a few weeks of marketing. That's a 12-percent cash-on-cash return-on-investment. It's even better for YOU. Your return on investment cannot be calculated because it's infinite. Youhad nothing at risk in the deal.

Okay, let's consider a different exit strategy. Say you couldn't find a wholesale buyer willing to offer enough. So, you move on to plan b which has already been agreed upon in our agreement. In this case, I write a $20,000 check for the materials and labor to finish the rehab work. After 3 months, and another $7500 in mortgage payments, the property sells for 90-percent of fair market value ($450,000 * 0.9 = $405,000). This time here's what happens; about $316,500 goes to pay the balance of the loan. Next, $41,000 goes to repay the private money lender's funds. That leaves $47,500 in profits. That means you make between $23,750 and $35,625 and you did it with none of your own money. Heck, even if you use a realtor to sell the property, there's almost $20,000 in profits you split. As you can see, the total size of the pie you divide with the private money partner depends on what exit strategy you employ. Because of the importance of exit strategy, private money partners will want to know your plans, your alternative plans, and after agreeing with the plans will want to get out of your way and let you do the active part of investing without their interference.

Basically, when you learn to use a private money partner, you're able to make a whole lot more money because you can do more profitable real estate deals and waste less time in the area of real estate finance.

Copyright 2009 Kathy Strahan