Real estate investors and landlords are well aware that it takes money to make money. They also know that using leverage, such as a bank loan, allows them to add “other people’s money (OPM)” to their own money. Leverage allows them to buy more properties, increase cash flow, be more efficient, and grow their net worth.
Unfortunately, many banks and traditional (institutional) lenders will deny loans to real estate investors and landlords because they have too many mortgages or because of some other technicality mandated by Wall Street and the secondary market.
While some investors are able to obtain funds from a friend or family member, mixing business with friendship or family doesn’t always work out as planned, and it can create more stress, hassle, and anxiety that it’s worth. For example, sometimes friends and family-members believe that their investment in a project gives them the right to micro-manage it. Even if a friend or family-member doesn’t meddle, this “solution” is usually only temporary, since eventually, that friend or family member will run out of money to invest.
On the bright side, there are private investors who invest their own capital in solid income-producing projects. This is known as “Private Money.” (Sometimes Private Money is referred to as Hard Money).
An advantage of working with a provider of private capital is the ability to customize a transaction to suit your needs and fit the particular project. While banks and other institutions tend to work great for situations where the “square peg fits the square hole,” many sensible situations just don’t fit the rigid institutional criteria. Whether it’s a blanket-transaction involving a number of properties, or a deal that has to close fast, a private investor is very often more flexible, and able to offer a custom-tailored solution. Of course, it is best if the principals possess knowledge, experience, ability, and have a significant amount of their own money invested in the project (often referred to as “skin in the game”).
This is not to say that a property owner will find a private investor who can handle every deal. Just like some investors prefer single-family rentals and some prefer larger apartment buildings, private investors may also have a preferred niche. Some may specialize in providing working capital to professional landlords who buy and hold cash-flow properties to grow long-term wealth, while others may offer solutions for those who buy-fix, and sell homes at a profit.