Investing in real estate is basically one of the cleverest and easiest methods for creating wealth. With the right base and experience it can be extremely profitable for everyone to invest in real estate. Yet let’s be honest, that you knew already. But what an investor can do with the money they earn from a successful profession, is of particular interest.
Although a portion of income will inevitably be allocated to their choice of lifestyle, investors are advised to be careful with their cash. You can reinvest in another house, of course, but if you are looking for an alternative, there might be one choice that you have not yet considered: private money lending.
Investors who have the funds for this should consider investing private capital in real estate. This method offers the same kind of underlying protection and benefit opportunities as rehabilitation or wholesaling, but without purchasing new assets.
What Is Private Money Lending?
Private money loans are when individuals lend their own capital to other investors or professionally managed real estate funds, while securing that loan against real estate with a mortgage. Private money lending basically acts as an alternative to mainstream lending institutions, such as big banks.
When novice investors gain experience, they aspire to higher goals. Leaving your hard-earned money in a savings account is no way to keep your assets safe and expand them. At the end of the day, private money lending enables you to secure a loan with real estate property worth much more than the loan. This method can be less risky in certain ways than owning properties. That’s why it’s important to get acquainted with the best real estate financing options available to investors today.
Historically, real-estate funding originated from banks, government agencies, insurance companies, and pension funds. However, a need for alternative sources of lending rapidly emerged with a list of strict criteria and a timetable not conducive to the average real estate investor. Around the same time it was clear to those with sufficient funds that their capital could represent investors better than big institutions. Private money loans are now a crucial component of the real estate investment industry. Indeed, its presence makes the average investor more able to run and maintain a sustainable career.
In case you weren’t aware, there are several benefits for those who choose to lend private money. If done correctly, it can reduce risk by providing alternative financing solutions for real estate while at the same time building capital. It is definitely not a course for everyone. You have to ask yourself if you can afford to do so. Having a little extra money in the bank doesn’t necessarily mean you ought to throw it at the first investor that comes along. If you are prepared to mitigate potential risks and maximize the opportunities that arise, private money lending can warrant consideration.
If one of the following applies to you, you may wish to look into private money lending:
- You are an investor in real estate, seeking to expand your portfolio.
- You are a doctor, lawyer, CEO, or other type of professional who has a large income or cash surplus.
- You have a sizeable savings account for retirement.
- You are a pensioner looking for an investment in passive income.
- You are a real estate owner or owner of another trust fund.
- You are a tech businessman who runs a successful startup.
- You are winner of the lottery.
- You want to help a friend or family member, and are able to.
Still not sure? Do not worry; any questions or concerns you might have about running a private money lending company will be addressed below:
The Anatomy Of Private Lending
The definition of a private money loan is fairly easy, for a loan of this nature to transpire, three elements are required: a borrower, a lender and a lot of paperwork.
Private money lending is probably your best chance to invest in real estate without your own money, for all intents and purposes. If nothing, loans from private capital will provide for investors in need. Although they appear to serve the same purpose as traditional lending institutions, there are several significant differences. Private money loans usually charge higher rates than banks but in situations where an ordinary bank will pass on, they are often more affordable. In addition, banks and other financial institutions do not usually provide the same combination of speed and openness in the decision-making process.
How to Be a Personal Money Lender
As I said earlier, private money lending can bring many benefits for those concerned. Because of those benefits, investors are not uncommon to eventually expand into private money lending themselves. If you are interested in loaning private money, you may follow a few steps:
- Establish your business, and get the insurance you need.
- Meet with a lawyer to build structure for your business.
- Identify your desired emphasis on lending.
- Enter a peer-to-peer lending site or network to search for future investments.
- Evaluate any potential clients by calculating possible returns and levels of risk.
- Start your business by loaning private money.
Private Loans: How to Identify Borrowers
The concept of private money lending is relatively simple: no real estate investment exists without money. Money is an investor’s life-blood, as in any other industry. Real estate investors have to work actively to secure private money loans to finance their deals. More often than not, the average investor can not fund a deal with his or her own capital. In fact, even though the funds are readily available, investors may try private money’s support. Regardless of the condition of a specific individual, there is a strong possibility that they may need support from private capital. Instead of pooling money or stretching out every dollar, investors are given more options to grow their business using private money.
More significant, however, is the speed and efficiency at which private money can be collected. Implementation speed is critical for an investor, and this can mean the difference between concluding a deal and losing one. Getting the money in a timely manner will make closing on a deal that much simpler.
You’ll be faced with many forms of lenders with private money lending. Everyone is unique but they’re all looking for the same thing. Here are the four types of borrowers that you might come across:
- Rehab/Sell: Typically, this type of investor will buy a residential property and complete renovations with the intent to resell it once the project is complete. Borrowers in this sector find private capital attractive, as traditional banks also do not lend in bad condition to assets. More importantly perhaps, access to private money is more conducive to a timely and profitable flip.
- Rehab/Rent: Typically these investors buy a residential property and complete renovations with the intent to rent the property for cash flow purposes. Those borrowers find private money attractive in the rehab/sell category for the same reasons as investors.
- Builders/Developers: Builders and developers will buy vacant land to allow and transform it into residential or commercial use. Borrowers in this sector are primarily interested in private money based on the speed at which the funds can be made available. Many banks are not going to lend on speculative growth, either.
- Commercial Investors: This investor population may attempt to use private money as a “bridge loan” for a commercial property when a conventional bank is not lending on an unstable asset.
Lending Money: How to Get Paid
Private money lending is desirable due to the versatility it offers not just for borrowers but also for lenders. You see, the borrower can generate revenue through interest payments with a conventional loan lender. On the other hand, private loans allow borrowers to decide precisely how (and when) they’ll be compensated for the loan. This opportunity opens up certain benefits that are not traditionally offered to investors. Read on to learn more about making money as a private lender through the following agreements.
- Joint Ventures: A profit split as a private money lender can be one of the most attractive financing options for an investment. In this type of agreement, investors can negotiate to get a percentage of the final profits. The sum varies depending on the contract and the investment, but it may be very profitable. Private money lenders may in some cases also consider borrowers who suggest this alternative. Just make sure you believe in the deal’s potential success and you’re all set for it.
- Exit Fees: This credit arrangement demands that the borrower pay a fixed fee at the end of the loan period. The exit charges are often negotiated as a percentage of the investment’s overall price. In some cases, lenders may even negotiate a higher exit fee that changes depending on when the loan is fully paid. Of instance, if the borrower took a few more months to repay the loan, then they would pay a higher exit fee.
- Interest Payments: Interest payments are one of several ways of generating revenue from a private money loan, as mentioned. This is actually the most common private-money set-ups. At the time of credit approval, lenders can set an interest rate and sit back and wait for the money to arrive. Private money loans are usually connected with higher interest rates than other loans, rendering this a specifically enticing deal for lenders.
- Points: Points are essentially borrowers paying fees in exchange for lower interest rates. Points are measured as percentages of the overall lending, with one point corresponding to one percent of the value of the lending. The reason this scheme is favored by some borrowers is that points allow them to be paid in greater amounts, with additional interest payments to follow. More often than not, points are paid at the beginning of the loan term, and are suggested as an incentive by the borrower to grant the loan.
Become a Private Lender of Money: Pro Tips
Simply put: private money lending gives you the opportunity to act as a bank for other investors. Instead of buying assets directly, you get a chance to fund those owned by colleagues and partners. By now you probably realize how useful this setup can be. There are, however, a few more things you should learn before you get going. Before taking on your first deal as a private money lender, read through the following tips:
- Start Out Small: Define, and stick to, a range in which you are comfortable working. The number one mistake private money lenders make is spreading themselves too thin when they start out. Assess the resources and desired risk level, and set specific guidelines for future projects. If someone approaches you searching for more than you’d like to offer, don’t worry about referring them elsewhere.
- Find A Good Advocate: Becoming a private money lender does not make you an advocate. When it comes to drafting and updating contracts you will always need support. Furthermore, there are a variety of legal provisions you need to have in place before you start a private money lending company. Find and bring to your team a qualified real estate attorney in your area. Over time, their role within your company will be invaluable.
- Work Locally: There are lucrative real estate deals throughout the world, but there are deals right under your nose, too. If you decide to start your local private-money lending business, you can meet investors face to face. Additionally, communications and future investment options will likely be more available to you. Don’t underestimate your own market’s potential, you never know what kind of deals your path can come across. In the future you can always expand.
- Be Transparent: To attract potential investments, avoid inflating your portfolio or background. No matter what point in your investment career you are at, let your work speak for itself. You don’t want to get yourself or your lending company misrepresented. Always keep transparency, and remain true to your mission and values.
- Don’t Forget About Yourself: Just because you don’t buy assets directly doesn’t mean you’re not an investor. Continue your vocational and financial education, even if you opt for lender role. You still need to keep up with market trends, financial news and other factors that impact the real estate world. Although you don’t have a hand on the role in the investments that you finance, you still need a strong business acumen.
- Learn The Subject Matter: Review the types of borrowers listed above, and get to know the different types of deal. Learn what factors go into a successful rehabilitation, purchase and hold or rent property. That way, you know how to judge it for yourself when a borrower pitches a contract. They’ll certainly paint the investment in a positive light, but is it really profitable? To be a successful private money lender, understanding exactly what is going on in the niche in which you choose to invest is crucial.
What Hard Money Lending Is
Hard money loans are another alternative to conventional sources of lending which allow lenders to use the investment (in many cases a property) as collateral on the loan. While many lending sources rely on a credit history of borrowers, lending hard money relies on the asset at issue. Hard money loans will typically require higher interest charges than traditional loans, but may provide increased access to capital for borrowers and a smoother approval process. Low-credit and high-equity property investors often turn to hard money for funding. In addition, property owners at risk of foreclosure may also take advantage of hard money loans.
How To Become a Hard Money Lender
Hard money loans can be a unique opportunity for investors who have extra capital in their hands. However, it is necessary to bear in mind due diligence for any financial decision and to premeditate any possible risks. If you’re interested in becoming a lender of hard money, here are a few steps you can follow:
- Name your company, and build the framework of your company.
- Set up your business’ online presence.
- Search for legal advice on forming a limited liability business.
- Examine future prospects for investment.
- Make a business plan, and draft future loan criteria.
- Project any possible loans into the future financial result.
- Start your business of loaning hard money.
Pros Of Lending Hard Cash
Lending hard money gives investors the opportunity to remain active in real estate, without necessarily adding a property to their portfolios. Some hard money lenders may never buy a property themselves. This can will be a huge advantage for anyone without the time and resources to actually acquire a real estate deal, as it allows lenders to tap into the lucrative real estate potential without so to speak “getting their hands dirty”.
Another major advantage to lending hard money is the degree of control it offers. Hard-money lenders get the final say about who they are working with and what terms. Everyone who has purchased a piece of real estate also knows the process of applying for money, waiting for approvals for applications and negotiating. Being a hard money lender puts you in the driver’s seat — and for many, that’s a pretty enticing perk.
Cons of Hard Cash Loans
There will be disadvantages involving any financial opportunity. The most obvious challenge for those interested in hard money lending is getting enough capital to get started. The amount of funds needed can serve as a steep entry barrier, but it is important to note that immovable property provides a great way in. Investors can work their way up by managing successful real estate deals themselves; they can generate the necessary funds over time to start lending.
Hard money loans often bear an implicit degree of risk to the lender. By operating outside the traditional loan application process used by big banks, lenders of hard money can truly choose with whom they work. This means taking a gamble on an investor who might not be accepted according to those criteria. To combat this risk, lenders of hard money have to come up with their own standards. Lenders should be able to evaluate applicants, assets, and eventually trust their instinct about a potential client.
Private money lending can be an enticing tool for all parties involved. Investors searching for alternative sources of funding will note the advantages include a speedier approval process and improved access to funding. But those loans can give unique access to potential investment and deals. Whatever side of the deal you’re on, private money lending is a viable choice to broaden your financial holdings and create wealth.