There’s a myth that people who use private sources of capital are somehow not “bankable”, that they’re unable to obtain financing through traditional channels. This myth exists in large part because the cost of alternative financing (referred to as private money or hard money) are more expensive than traditional sources of funding. During the recession, private capital gained more traction with investors because traditional banks essentially froze lending operations. As a result, many entrepreneurs had to pass on great opportunities that were snatched up by those with deeper pockets. But the advent of private money has broadened access to real estate investing for many more would-be entrepreneurs.
Private money began entering the lexicon of some of even the most bankable and well-respected people in the industry. Once banking regulations relaxed, many of those people decided to stay with private capital because it allowed them to scale their vision and their businesses far beyond what they could have achieved through traditional lenders. This is partially because private lenders typically take on more risk than the bank and may not require nearly as much equity, but also because it is quicker, more predictable, and more reliable.
Here is a breakdown of the types of entrepreneurs who prefer private capital and some of their unique characteristics:
- The Freshman
The most enthusiastic of the group, the Freshman has been eyeballing real estate investing for some time and is now finally taking the leap. Before they are considered Freshman, they are just spectators, the only difference between the two being action. That is because the Freshman acts and the Spectator watches from the sidelines. People graduate to Freshman from all walks of life from service and labor workers to office professionals to Ivy League MBA’s. Every real estate entrepreneur starts as a freshman at some point in their life.
Superpower(s): Enthusiasm, burning desire to do something special, beginner’s mindset – having an attitude of openness and eagerness with a lack of preconceptions.
Deal Types: Fix & Flips and Landlord properties.
- The Craftsman
If the Freshman is the most enthusiastic, the Craftsman is the proudest of their efforts. They take great pride in their work, far beyond what any other home builder or remodeler will ever be able to stake a claim to. Craftsmen are meticulous. Nothing is more important to them than the look and feel of their one-of-a-kind creations. Craftsmen stick to one or two projects at a time, but those projects often yield the highest returns in the industry because the quality of their finished product is unrivaled.
Superpower(s): Pride in craft
Deal Types: Fix & Flips, Residential New Construction and Landlord properties.
- The G.C. (General Contractor)
You know what a General Contractor is but, when it comes to real estate investing, the General Contractor stands out because they get things done right. This is someone who has made a career in construction and knows how to build. These folks often come from a project management or project superintendent background and enter the world of real estate investing because they know they can do it better than the next guy. On the job site, few are better at logistics and know how to put the right people in the right places to deliver an above-average product and to do so well within budget and in a timely manner.
Superpower(s): Project management and logistics
Types of Deals: Fix & Flips, Residential New Construction and (with time) may graduate to Community Developments.
- The Industry Pros
Probably the most active of the bunch in the real estate investment circuit, the Industry Pro is the ultimate networker and deal finder. The Industry Pro may be a full time real estate agent, mortgage professional or wholesaler (the people who find properties at a discount and resell them to willing and able investors at a profit). While their pedigree may not be in real estate investing, per se, they are immersed in this world, so they have access to just about any tool they need.
Superpower(s): Their network and ability to spot deals
Deal Types: Fix & Flips, Residential New Construction and Landlord properties. Sometimes they may even participate in conjunction with more experienced operators in Multi-family deals and Community Developments.
- The Professional Flipper
If you think you can already have your very own HGTV show, then you are probably a Professional Flipper. Professional Flippers are just that – people who make a living solely by flipping houses. Even in a saturated market, Professional Flippers know how to spot winning deals and have a knack for multi-tasking to maximize profits. To truly be a Professional Flipper, one must be equal parts entrepreneur, contractor, marketer and networker but also 100% a “boss”.
Superpower(s): Juggling and creativity
Deal Types: Fix & Flip with the occasional Residential New Construction and Landlord property.
- The Portfolio Builder
Take all of the best attributes of a Professional Flipper and sprinkle in a little more financial modeling with aspirations to build a portfolio of rental properties with significant size and scale, and you have the Portfolio Builder. The Portfolio Builder does not take as many “shots” as some of the others on this list as they patiently await those opportunities that make sense for their model. Some of the most prominent Portfolio Builders exercise great discipline by sticking to what they know and never deviating.
Deal Types: Landlord properties with the occasional Fix & Flip
- The Investor
In some capacity, everyone trying to earn a yield in real estate can be considered an “investor”, but this “investor” is not like everyone else. The “investor” that I’m referring to is not a “real estate guy”. Instead, this is a person who diligently looks for opportunities to find high returns and often lands upon a real estate opportunity that does just that. Mostly passive, the Investor is likely to be an executive or high wage-earner who has made a career of making good decisions. Unlike the Craftsman, the investor may not understand (nor care to understand) the intricacies of a project but they sure do know numbers. Not only are they masters of the spreadsheet, they are also masters of the gut instinct. When both of those things align, the Investor pounces and more often than not hits the target return.
Superpower(s): Rational and opportunistic
Deal Types: All deals, with an emphasis on Multi-family and Community Development
- The Home Builder
What do you get when you mix a General Contractor and a seasoned Business Person? You get a Home Builder. Home Builders are the ultimate scalers on the list. They take a concept and convert it into a business far beyond the one-off spec home. Above all else, the Home Builder is an expert operator. The Home Builder understands the importance of the craft in his line of business but is more business savvy. You will not find a Home Builder at a job site swinging a hammer or managing crews, yet somehow the Home Builder builds more homes than just about anyone on this list. These people run construction companies with full-time staff and every year become more efficient which leads to more profits for their organization.
Superpower(s): Business savvy, operations and logistics
Deal Types: Residential New Construction and Community Development
- The Developer
What is timid, weak and forgiving? I don’t know but it certainly isn’t the Developer. The Developer is a machine. While they may not have been born into development, they once had the courage to take the leap, and now they are in it for life. Much like the Professional Flipper, the Developer excels in just about every part of their business because they wear many hats – yet somehow, they wear them oh so well. Developing real estate from trees to keys, as they say, is the only thing that the Developer works on; it is their passion and success that motivates them. The Developer is busy, always looking for a deal yet spending the majority of the days organizing project logistics (from financing to construction). Yet they still find time every evening to reconcile projects.
Superpower(s): Tenacity, multi-tasking and logistics
Deal Types: Community Development, Multi-family and the occasional Residential New Construction.
To learn more about this topic and to hear directly from the people who structure loans for people just like these, tune in to Streamline Funding’s Firestarters podcast and download the episode “The Nine People Who Use Hard Money”. It’s available wherever you get your podcasts!