Welcome to The Letter Home, my weekly newsletter about building financial confidence on the path to the life you want 🏡
Each week, we break down one meaningful money concept and leave you with an exercise that you can use to put it into practice.
This week, we’re looking at where investors find money when the bank turns them down 👇️
A rejection from the bank feels final.
You find a property with real potential, run the numbers, pull together the application. And the answer comes back no.
Most people take that no as a verdict. On the deal, or worse, on themselves.
But banks say no for all kinds of reasons that have nothing to do with whether an investment is any good.
Maybe the property needs too much work to qualify for a conventional loan.
Maybe you’re self-employed and your income looks messy on paper.
Maybe your credit took a hit a few years ago and hasn’t fully recovered.
Banks run on checklists. If your situation doesn’t fit the boxes, the answer is no, even when the deal itself is solid.
That’s why experienced investors keep a second source of capital in their back pocket: private money.
Private money is exactly what it sounds like. Instead of borrowing from an institution, you borrow from an individual.
That could be a retired business owner looking for better returns than her savings account pays. A colleague with capital sitting idle. Sometimes family, though that comes with its own rules (more on that in a minute).
Private lenders evaluate things completely differently than banks do.
A bank underwrites you. They factor in your credit score, your tax returns, your debt-to-income ratio.
A private lender underwrites the deal. What the property is worth, what it’ll be worth after the work is done, and how they get their money back if things go sideways.
That difference is why a fixer-upper the bank won’t touch can still get funded. And it’s why newer investors without a long track record can still move on a good opportunity.
Now for the part nobody should skip over: private money costs more.
Where a bank might charge 6-7%, private lenders typically charge 8-15%, sometimes with fees on top.
At first glance, that sounds like a dealbreaker, but run the actual numbers.
Say you borrow $100,000 for a year. At 7%, the interest is $7,000. At 12%, it’s $12,000.
That’s a $5,000 difference. Real money, no question.
But if the deal produces a $40,000 profit, that $5,000 doesn’t kill it. And if a deal dies over $5,000, it was too thin to be doing in the first place.
The principle underneath all of it: the quality of the deal matters more than the cost of the money.
A good deal survives an expensive loan. A bad deal fails with a cheap one.
A few rules before you go anywhere near this:
Private money is for investments that produce a return. It is not for plugging holes in your personal budget. Borrowing at 12% to cover lifestyle spending is how people dig holes they can’t climb out of.
Everything goes in writing. The amount, the rate, the timeline, what happens if you’re late, what happens if the deal fails.
That goes double when the lender is family. A clear contract protects the relationship as much as it protects the money.
Know your exit before you borrow a dollar. Private loans are usually short, one to three years, so you need to know exactly how the lender gets paid back. A sale, a refinance into a conventional loan, income from the property.
A few weeks back, we talked about never investing in something you can’t explain in plain language. The same rule applies to borrowing.
If you can’t explain your exit in two sentences, you’re not ready to take the loan.
One more thing:
The time to build relationships with potential lenders is before you need them.
Nobody hands $100,000 to a stranger with an urgent deadline. But people do hand it to someone they’ve watched operate carefully for a year or two. Someone who talks openly about what they’re working on and treats other people’s money with respect.
A no from the bank was never the end of the road. It’s just the end of one road.
Take Action: The Lender Map 📝
Set aside 25 minutes this week, even if borrowing is years away. Work through these three steps:
1. Stress-test a deal. Take a real investment you’re considering (or sketch a realistic one) and run the numbers twice: once with a 7% loan, once at 12%. Write down both outcomes. If the deal only works at 7%, the rate isn’t the problem, the deal is.
2. Draft your lender list. Write down three to five people in your orbit who might have capital looking for a better return. You’re not asking anyone for anything yet. You’re just seeing the network you already have.
3. Write your two-sentence exit. Take the deal from step one and explain, in plain language, exactly how a lender would get their money back. If you can’t do it in two sentences, that’s your homework for the week.
You don’t need to treat the bank as the only door. The investors who move fastest are the ones who knew where the other doors were before they needed them.
Until next week,
Darren McLellan
Editor-in-Chief @ The Letter Home
