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A Guide For Private Money Lenders (Part 1)

Last updated on Tuesday - March 01, 2016

Investing in real estate is essentially one of the smartest and safest strategies to promote wealth building. With the proper foundation and knowledge, investing in real estate – or in our case, private lending – can prove to be highly lucrative for anyone. But let’s be honest – you already knew that. Of particular interest, however, is what an investor can do with the money they make from a profitable career. While a portion of profits will undoubtedly be allocated to the lifestyle of their choice, investors are advised to be smart with their money. Of course you can reinvest your money into another property, but if you are looking for an alternative, there may be one option you haven’t considered yet. Investors who have the funds to do so should consider becoming a private money lender. That’s right, private money lenders – the same folks that most likely facilitated your own career. Investing in private mortgages for real estate offers the same type of underlying security and profit potential as rehabbing or wholesaling, but without getting your hands dirty.

For those of you who may be unfamiliar with the concept of a private money lender, these individuals lend their own capital to other investors or professionally managed real estate funds, while securing said loan with a mortgage against real estate. Essentially, private money lenders serve as an alternative to the traditional lending institutions (big banks) people are so familiar with.

As rookie investors become seasoned investors, they strive to aim higher. Leaving your hard-earned money in a savings account is no way to protect and grow your assets. At the end of the day, you are securing a loan with real estate that is worth much more than the loan. Private money lending can sometimes be less risky than owning real estate, if done properly. That’s why it’s important to familiarize yourself with the best real estate financing options made available to today’s investors.

In the past, real estate financing typically came from banks, government agencies, insurance companies, and pension funds. However, with a nauseating list of strict requirements and a timeline that was not conducive to the average real estate investor, a need for an alternative lending source quickly developed. It became obvious to those with the appropriate funds that their money could better serve investors than large institutions. Now, private money lenders are a critical component to the real estate investment industry. In fact, their presence makes it possible for the average investor to run and maintain a sustainable career.

In case you aren’t aware, there are several benefits to taking on the role of a private money lender. Subsequently, if done correctly, offering alternative real estate financing options can mitigate risk while simultaneously establishing true wealth. Of course, this is not a path anyone can walk. You need to ask yourself if you can afford to do so. Having a little extra money in the bank doesn’t mean that you should throw it at the first investor that comes your way. In fact, it is pretty straightforward: don’t become a private lender if you are not willing to take the time to understand the risks involved. However, if you are equipped to mitigate potential risks and take advantage of the opportunities that present themselves, becoming a private money lender may warrant your consideration.

Still on the fence? Don’t worry; the following will answer any questions or concerns you may have about pursuing your private lending business:
private lending

Private Lending: The Anatomy of a Private Loan

While the concept of a private money loan is relatively simple, three elements are required for a loan of this nature to transpire: a borrower, a lender, and a lot of paperwork.

For all intents and purposes, a private money lender is an investor who makes loans secured by real estate. While they may serve the same purpose as a traditional lending institution, there are several key differences: private money lenders typically charge higher rates than banks, but will also make loans that the average bank would usually pass on. It is important to note the difference between the two. While banks and similar lenders may offer the most attractive rates, they do not provide the same combination of speed and transparency in the decision-making process.
private lending business

Find A Private Lender: Identifying Borrowers

The concept of a private money lender is relatively simple: without money, real estate investing does not exist. Money, like it is in every other industry, is the lifeblood of an investor. Real estate investors need to actively work on bringing in private money loans to fund their deals. More often than not, the average investor isn’t capable of funding a deal with their own money. Moreover, even if the funds are readily available, investors will seek the assistance of a private money lender. Regardless of a particular investor’s situation, there is an increased likelihood of them needing private money assistance. Instead of having to pool money or stretch every dollar, investors are given more options to grow their business with the use of private money.

Perhaps even more importantly, is the speed and efficiency in which private money may be obtained. The speed of implementation is critical to an investor, and can mean the difference between closing on a deal and losing one. Having the money in a timely manner make it that much easier to bring a deal to closing.

As a private money lender, you will be confronted by several types of borrowers. While each is unique, they are all looking for the same thing. Essentially there are four types of borrowers:

Rehab/Sell: This type of investor will typically purchase a residential property and complete renovations with the intention of reselling it once the project is complete. Borrowers in this sector find private money attractive because conventional banks will often not lend on properties in poor condition. Perhaps even more importantly, access to private money is more conducive to a timely and profitable flip.
Rehab/Rent: These investors typically purchase a residential property and complete renovations with the intention of renting the property for cash flow purposes. These borrowers find private money attractive for the same reasons as investors in the rehab/sell category.
Builders/Developers: Builders and developers will purchase vacant land to permit and develop into residential or commercial use. Borrowers in this sector are interested in private money primarily based on the speed with which the funds can be available. Also, many banks will not lend on speculative development.
Commercial Investors: This population of investors may seek to use private money as a “bridge loan” for a commercial property where a conventional bank will not lend on an un-stabilized asset.

Again, private money loans are going to cost more and are accompanied by more burdensome terms. However, the few benefits of private money outweigh the negatives. Borrowing from a private money lender will result in a quicker loan, as you do not have to navigate the same process that comes with traditional lending institutions. Moreover, private money lenders will take risks that most banks are not willing to. Private money, for all intents and purposes, is a fundamental tool to the average investor.

For More Information On Private Lending…

Does becoming a private lender sound appealing now? Read Part 2 of our series: A Guide For Private Money Lenders: Breaking Down A Private Loan, for an in depth breakdown of what a private money loan really is.  If you’ve had a successful real estate career thus far and have a decent amount of capital in the bank, you will benefit from providing loans for other aspiring investors.  There is a specific process that occurs when it comes to generating a private loan.  You must get to know the lender – are they qualified? – while also determining the viability of the deal.  Read on to understand the proper legal documentation such as a letter of intent, a purchase and sale agreement, a preliminary title report, and much more.  

And if you are ready to learn how to start attracting investors, read Part 3 of our series: A Guide For Private Money Lenders: How To Attract Investors.  Part 3 will teach you the benefits your loans will provide to borrowers along with the potential drawbacks.  Additionally, once you’ve made the official decision to start your private lending business, you’ll need to understand the specific steps of how to get started.  Will you focus on residential or commercial real estate?  Will you distribute short term or long term loans? Do you prefer a more direct or passive income? All of these questions will be addressed when you continue our series.  

If you are unclear on the difference between private and hard money, read part 4 of our series: A Guide For Private Money Lenders: Private Vs. Hard Money.  Part 4 will explain the benefits and disadvantages of funding deals with private money vs funding deals with a hard money lender. A private lender can be anyone you know who as a little extra cash that they want to invest.  A hard money lender is similar to a private lender; however, hard money lenders are typically more organized and semi-institutional.  Decide which is best for you and your deal by reviewing the last part in our series.

If you have any additional tips on how to private lending or how to become a private lenders, share your stories below:

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