Author Archive for The Professor

Private Lending Scams

Some entrepreneurs have been advised to search the internet for private lenders...and there are sites offering this service.  I don't recommend it.  First, it is very difficult to build the trust you need with someone you don't know and can't meet.

Second, there are actually private lending scam artists on some of these sites.  They pretend to be legitimate private lenders, but in fact intend to take money from you, rather than give it to you.

Check out the short video I did on "Private Lending Scams" that you received for becoming a member of the Private Lending Insider.  And don't go surfing online for private lenders until you view.

Private Lending Scams - Video

Private Lenders are impressed with degrees--especially post-graduate degrees.  It is one measure of your ability to overcome challenges.  However, there are many private investors who are self-made, and became fabulously wealthy without the benefit of a college education.

In the end it is what you can achieve that makes the difference with a Private Investor.  So, starting a successful business, succeeding in your corporate job(s), and surrounding yourself with an experienced top notch team.

See our "Building Credibility" webinar under the events tab--available to all members

Hey, nobody's perfect.  In fact, being anxious about "being perfect" will do more to harm your presentation than anything else.  However, you do need to be prepared as possible.  This means have you have tested and revised your presentation.  And you have practiced your presentation until your are comfortable and confident with what you are going to say and how you are going to say it.  Also, you have taken care of arranging all the details of your meeting.

I have given a 2-day training a making a presentation to private lenders that is available FREE to all Private Lending Insider Members that covers all these details, and much, much more.

To Join, go to the home page and click the orange Membership Button.

When you are in the process of networking -- that is meeting people and mutually evaluating whether you and they would be a good match for an investment opportunity, specific terms need not come up.  In fact, your first goal should be to get someone  to like, respect and trust you, before mentioning anything about an investment.  Secondly, when you are promoting your investment opportunity to a private investor, your goal is to paint a picture of a highly profitable, low risk investment.

Once the investor expresses some interest in the investment, then you can arrange a separate meeting where you can discuss the details, including specific terms.

You can find out more details by reviewing the training sessions listed in the "Events" tab.

Most private lending gurus will tell you to prepare an elevator speech--a 30-60 verbal advertisement about your investment opportunity.  The goal is the attract a person's interest in your deal.

However, most people respond negatively to unsolicited advertising.  If you want to raise private money, you first need to Build Relationships with potential private lenders.  The goal is to get them to like you, respect you and trust you.  Of course, you do want them to be interested in your opportunity, but the kind of "in your face" approach that is often recommended, sounds cool but is usually a turn off. 

First demonstrate that you are interested in them, and then draw them into your opportunity.

Private Lenders as with most other investors, invest their money in businesses.  Having a business entity builds credibility with a private investor and provides other benefits such as liability protection, tax advantages, etc.  So, before one begins raising provide money for any kind of investment, it is highly recommended you incorporate in the state in which your business is located, so that you are a legally recognized corporate entity: Corporation, LLC, Partnership... A sole proprietor or DBA (doing business as), marks you as an amateur, and an investment risk.

When you are doing leveraged financing, where an institution (like a bank) lends money on the property and creates a mortgage lien in the first (senior position).  That means in case of default, the institution gets fully paid back the principal and it's collection costs before any other lien holder gets paid.

Other lien holders (e.g. you investor) are in the 2nd position--holding a junior lien.  In case of default it is unlikely that little or any of their investment will be repaid.  This risk can be unacceptable to many private lenders.

First, use  the MAO (Maximum Allowable Offer) rule.

MAO =  70% of the after repair market value - the costs of repairs.

AND Market value is not what the RE Agents say, but what it would actually sell for these days

You don't want to just ask for the "exact" (e.g. estimated ) cost of a rehab project.  Often costs will increase due higher material costs, unexpected repairs, and time delays.  The professor's rule of thumb is to add an additional 10% for minor rehab (<= $5,000), and higher percentages as the rehab becomes more extensive.

The professor as created a useful algorithm for this in his Deal Evaluation Tool.  This is an excel spreadsheet you can use to generate all your financial information for you and your investors for any type of real estate deal.  You can check it out at:

The valuation of a quad is based on comps (sales of similar properties in the last 3-6 mos), just like single family homes.

For multi-family, the valuation is generally based on the NOI "net operating income" which is defined as the total actual annual income from the property minus the total actual annual expenses.  Then the formula for the Estimated value is:

Estimated Value = NOI/(cap rate)

Thus if the cap rate is 10% and the NOI is $50,000, then the estimated value is $500,000.

The cap rate will depend on the class of the apartment (from "A" - high end living space & amenities, to "C" - working class functional, to "D" - livable but not nice.)  and the economy.  "A" has the lowest cap rate (5-6%), B (6-8%), C (9-11%), D (12% or greater).  A bad economy tends to increase the cap rate.