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Private Money, either through private equity or a private lender can be used if you’re missing one of the 3Cs (Collateral, Capacity, Credit). This option allows for you to bring in a partner to fulfill the 3C that you don’t have.
1. Down payment assistance from various sources:
- Private Equity: This model is used when someone not only puts up money for the deal, but also wants a percentage of the ownership. In this scenario, since you don’t have the 3Cs, your position will be considered the GP (General Partner) in which you’ll require 19% of the equity and 1 to 3% at closing of the purchase price. Else the lender will require your financials.
- Private Lender: This model is used when someone does not want any ownership in the deal. They want a full return on their money invested with interest.
- The terms for receiving their loan can be as simple as 5% interest paid over a 5 year period. Points or no points, interest only or not interest only, the length of time it will take to pay back the partner, can all be negotiated between yourself and your partner(s).
- Use the Promissory Note to contract the deal.
- When the partner(s) agrees to move forward with the deal, this is the time you will need to gather all their documents for the credibility package and use a sharpie to black out each partner(s) personal identification information on the documents received.
- Do not collect any money from your limited or private money partner(s). Have funds sent directly to the settlement company or closing attorney.
2. Personal finance
- Cash of your own can also be used to finance your deals if you have it available, but it must be seasoned in the bank for a minimum of two months.
- Cash includes savings, tax refunds, stimulus checks, bonus checks, business credit that’s been converted to cash and not personal credit cards, HELOCS, cash out refinance, seller financing at 10% LTV, etc.
- With seller financing, be sure to include an extension clause in the contract, no prepayment penalties, and interest only payments to reduce debt service payments
- Business credit should be applied for at every six month interval.
3. Prepare your fields
Once you find the money to fund your deal, prepare your credibility package.
- Gather your Personal Financial Statement, most recent credit report, two months of bank statements, and your pre-qualification or pre-approved letter. It’s recommended to have at minimum $32,000 for the out of pocket expenses.
4. Schedule your priorities
Set up your calendar for appointments, meetings, tasks, etc.
5. Do things in order
Don’t put the cart before the horse, meaning don’t look for deals if you have not secured financing, because this will cause you to lose credibility.
6. Know your numbers
Seek additional funding by first reviewing your personal financial statement, and then based on that information, you can then leverage your assets vs your liabilities.
7. The Exit Strategy
- Use the cash flow and or reserves to pay off business credit, seller financing or private money that was used for financing the deal.
- Reinvest and pay down debts with any additional funds you receive.
- In order to accept a cash injection, amend the offering agreement by adding this partner’s name and injection amount to the document.
- With business credit, it must be made to use as quickly as possible because the 0% introductory APR is scheduled to expire typically within 6 months to 1 year.
- Apply for another round of business credit once the 0% APR is expired in order to get a new business credit card with a 0% introductory rate.
Words of advice
- The way to find private money is by attending networking events. During an event, introduce yourself as a real estate investor and ask people at the event to join your teleconferencing call.
- During the call, educate the attendants on deals you’ve located, and ask if anyone wants to partner with you on the deal you’re most interested in.
- Cash injections are considered additional funds.
- Concerning business credit, if the 0% APR has already expired, then only use business credit on an emergency fund basis.
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