Finding a private money lender often begins with friends, family and co-workers and expands to their professional connections, explains Bigger Pockets. Sometimes it extends further to a third-party group of accredited investors, networking contacts and lenders sought through advertising.
A private money lender is nonbank entity or person that offers loans for real estate investments secured by a note or deed of trust, explains BiggerPockets. Borrowers develop a closer working relationship with these lenders than with traditional lenders. Because of the large amounts of capital required in real estate investing, only those with substantial asset portfolios are able to secure big loans from traditional lenders.
When raising initial capital from friends and family, investors must accurately communicate the level of risk of the investment and accept only money that these people can afford to lose, notes BiggerPockets. Friends and family, however, are likely to know the borrower well and are inclined to agree to a loan if they think it is helpful. These funds are crucial in establishing a capital base to close the first deals and move on to bigger ones, for which a real estate investor needs his inner circle's business contacts. This group and the peripheral group of more seasoned investors are likely to be more informed than the inner group and better understand the risk and potential.