It Takes All Kinds: Who Uses Private Capital?

In the wake of the 2008 financial crisis, private capital gained traction with investors because traditional, Goliath-sized banks essentially froze their lending operations. As a result, many aspiring and seasoned entrepreneurs alike had to pass on opportunities that were seized by those with deeper pockets. This private money lending boom, however, has broadened access to real estate investing for a larger field of would-be entrepreneurs.

Despite ‘private money’ entering the lexicon of some of the most bankable and well-respected people in the industry, a myth still perpetuated by leery borrowers and lenders is that those who use private capital sources are not ‘bankable,’ or that they are simply unable to obtain financing through more traditional channels. But as banking regulations relaxed in the aftermath of the 2008 crisis, many real estate professionals (and those in other fields) decided to stay with private capital because it allows for scalability infeasible through the lens of traditional lenders.

This is due to the risk involved with privatized equity; these lenders typically take on more of a gamble than the bank and usually do not lend the vast sums that require a large financial institution; these potential concerns, however, are paired with many positives which include a quicker, more predictable, and reliable process.

In any case, the types of entrepreneurs who utilize private capital are about as diverse as the projects the equity is applied to. One of these types includes enthusiastic newcomers who are idealistic about the earning potential and scope of the real estate world. These professionals have most likely been investing for some time, but have been eyeballing real estate investments and wish to apply private equity to different types of properties.

This person’s strength is in their enthusiasm and burning desire to do something different, something new. Although this optimism can be quite wearing to those who have been in the field for any considerable amount of time, every real estate investor starts as a freshman at one point. The opposite of this deal-seeker, naturally, is the industry pro, who has ‘been around the block’ a few times and understands the past, present, and future landscape of the real estate market.

The industry pro’s ability to network and accurately predict trends is second-to-none. It is no secret, then, that these people are the most active of the bunch, as they are plugged into the inner-workings of the world that has grown around them. Although these hard money pros tend to invest in fix & flips and new residential constructions, they will sporadically participate with others in multi-family deals (if the opportunity is right, of course.)

Although some may view investors (and investing as a whole) as the ‘sport of the wealthy,’ there is certainly nothing sanctimonious or lazy about the developer, who oversees the real estate process from start to finish. Although the developer may wear many hats, they certainly wear them well.

You might assume that these various responsibilities – and a wide array of projects in various stages of completion – would spread the developer thin, but that is simply not the case because this type of entrepreneur thrives on the action of seeing a project through in its entirety. Another professional who thrives off of this pressure is the flipper, a professional who, like the title suggests, professionally buys and sells homes.

This type, as you may have noticed from spending any amount of time with HGTV, has become especially prevalent in recent years, with a number of shows highlighting the trials and tribulations of those who buy low, renovate, and sell high. Although there is a certain amount of risk associated with this line of investing, the flipper knows how to spot diamonds in the rough. But it is not as easy as it looks: to be an expert flipper, you have to know the entrepreneurial, marketing, and networking sides of real estate.

Far-removed from the stereotypical suit-and-tie aesthetic of ‘the investor,’ the general contractoris used to rolling up their sleeves and getting the job done. These entrepreneurs usually come from a project management or superintendent background and know the ins and outs of the construction process. Though these professionals usually gravitate towards fix & flips and residential properties, they may lean towards community developments with time.

What happens when you combine general contractors and seasoned business professionals? You get home builders, who are the best at scaling amongst the group – these professionals take a concept and go above and beyond the one-off spec home. Above all else, the builders are expert operators and understand the importance of the craft of real estate investment. Their business savvy and operational skills speak volumes, not only in their ability to complete a given task, but their growth in profit as their process becomes more refined.

No matter what type you encounter or your level of experience in the real estate investment field, one fact remains – there is no reason to be afraid of private money lending. Despite its ‘reputation,’ its scalability and ease-of-use are unparalleled when it comes to securing your next real estate development investment.