Investing in real estate is basically one of the cleverest and most secure methods for creating wealth. With the proper base and experience it can be extremely profitable for everyone to invest in real estate. But let’s be honest, that you knew already. However, 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 searching 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 provides the same kind of fundamental protection and benefit potential as recovery or wholesale but without dirtying your hands.
What Is Private Money Lending?
Private money loaning is when individuals lend their own cash to other creditors or professionally run real estate funds, thus securing the loan against real estate with a mortgage. Private money lending basically acts as an alternative to mainstream lending institutions, such as big banks.
As newbie investors gain experience, they aspire to higher goals. Leaving your hard-earned money in a savings account is no way to keep your assets secure and expand. At the end of the day, private money lending allows you to obtain a loan with immovable property worth much more than the loan. This method can be less costly in certain ways than owning immovables. That’s why it’s important to get acquainted with the best real estate financing options available to investors today.
Historically, real-estate funding came from banks, government agencies, insurance companies, and pension funds. Nevertheless, 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. At 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 key part of the real estate investment industry. Indeed, its existence makes the average investor more likely to run and maintain a successful career.
In case you weren’t aware, there are many advantages for those who want to also lend private capital. 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 does not necessarily mean you should throw it at the first investor who comes your way. If you are equipped to mitigate potential risks and take advantage of the opportunities that present themselves, private money lending may warrant your consideration.
You may want to consider private money lending if one of the following applies to you:
- You are an investor in real estate, looking to broaden your portfolio.
- You are a doctor, lawyer, CEO, or other form of professional who has a significant income or cash surplus.
- You have a sizable savings plan for retirement.
- You are a pensioner looking for an opportunity in passive income.
- You are a real estate owner or an owner of an other investment fund.
- You are a tech businessman who operates a profitable startup.
- You are winner of the lottery.
- You want to support a friend or family member.
Still on the fence? Do not worry; any questions or concerns you might have about running a private money lending company will be answered below.
The Anatomy Of Private Lending
The definition of a private money loan is fairly simple, 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 else, loans from private capital will provide for vulnerable investors. While they tend to serve the same function as conventional lending institutions, there are some major variations. 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 blend of speed and openness in the decision-making process.
How To Be A Personal Lender
As said earlier, private money lending can provide many benefits for those concerned. Because of those incentives, investors are not unusual to eventually move into private money lending themselves. If you are interested in loaning private money, you may follow a few steps:
- Build 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 platform or network to search for future investments.
- Test any potential clients by measuring future returns and levels of risk.
- Start your business by loaning private capital.
Private Money Lending: How To Identify Borrowers
The definition of private money lending is fairly simple: no real estate investment exists without capital. Money is an investor’s life-blood, as with any other business. Real estate developers have to work aggressively to secure private money loans to finance their transactions. More often than not, the average investor cannot fund a deal with his or her own capital. In addition, even though the funds are readily accessible, investors may try private money’s assistance. Regardless of the condition of a particular investor, there is an increased probability that they may need support from private capital. Instead of pooling capital or stretching out every dollar, investors are given more options to expand their company using private money.
More significant, though, is the speed and efficiency at which private money can be collected. Implementation speed is important for an investor, and this can mean the difference between closing a transaction 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 special but they’re all looking for the same thing. Here are the four types of lenders that you may come across:
- Rehab/Sell: Usually, this type of developer may purchase a residential property and complete repairs 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 assets. More significantly perhaps, exposure to private capital is more conducive to a timely and profitable flip.
- Rehab/Rent: Usually these investors purchase a residential property and complete repairs with the intent to rent the property for cash flow purposes. Those lenders find private capital appealing in the rehab/sell segment for the same reasons as investors.
- Builders/Developers: Builders and developers can purchase vacant land to make and convert it into residential or commercial use. Borrowers in this sector are mainly interested in private capital based on the pace at which the funds can be made available. Many banks are not going to lend on speculative growth.
- Commercial Investors: This investor population may attempt to use private money as a “bridge loan” for a commercial property when a traditional bank is not lending on an unstable asset.
Money Lending: How To Get Paid
Private money lending is attractive due to the versatility it provides not just for borrowers but also for lenders. You see, the borrower can generate revenue through interest payments with a conventional loan lender. At the other hand, private loans allow borrowers to decide exactly how (and when) they’ll be compensated for the loan. This opportunity opens up other opportunities that are not usually provided to investors. Read on to learn more about making money as a private lender through the following agreements.
- Joint Ventures: As a private money lender, a benefit split may be one of the most enticing choices for funding an project. Investors may bargain to a obtain a percentage of the final income under this form of agreement. The amount would vary depending on the contract and the investment, but it may be very profitable. In certain cases, private money lenders may also consider borrowers who suggest this alternative. Only make sure you believe in the future success of the deal and you are all set.
- Exit Fees: This credit arrangement demands that the borrower pay a fixed sum at the end of the loan period. The exit charges are also negotiated as a percentage of the investment’s total amount. In certain situations, lenders can also demand a higher exit fee that varies based on when the loan is completely paid. For instance, if the borrower took a few more months to repay the loan, then they would pay a higher exit charge.
- Interest Payments: Interest payments are one of the forms of producing income from a private money loan, as described. In fact — this is the most prevalent private money setup. During the time of credit approval, lenders will set an interest rate and sit back and wait for the money to arrive. Private money loans are usually associated with higher interest rates than other investments, making this an especially lucrative situation for lenders.
- Points: Points are simply lenders charging premiums in exchange for lower interest rates. Points are measured as percentages of the overall loan, with one point corresponding to one percent of the value of the lending. The reason this scheme is favored by some lenders is that points allow them to be paid in greater amounts, with additional interest payments to follow. Most often than not, points are charged at the beginning of the loan period, which are provided as an incentive by the borrower to approve the loan.
Become A Private Money Lender: Tips From The Pros
Simply put: private money lending gives you the ability to serve as a bank for other investors. Instead of purchasing properties directly, you get a chance to finance those owned by colleagues and partners. By now you already know how useful this system can be. There are, however, a few more things you should learn before you start. Before taking on your first contract as a private money lender, read through the following tips:
- Start Out Small: Define and stick to a selection in which you are comfortable working. The number one mistake private money lenders make is spreading themselves too thin when they start out. Assess your finances and desired risk level and develop specific guidelines for potential projects. If someone asks you in search of more than you would like to give, don’t be afraid to refer them somewhere else.
- Find A Strong Lawyer: Being a private money lender does not make you a lawyer. When it comes to drafting and updating contracts you will always need support. Additionally, there are a variety of legal provisions you need to have in place before you start a private money lending company. Find and add to your team a professional real estate attorney in your city. Over time, their position within your organization 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 want to start your local private-money lending company, you can meet investors face to face. Additionally, correspondence and future investment opportunities will definitely be more open to you. Don’t underestimate your own market’s ability, you never know what kind of deals the path can bring you. For the future, you can branch out.
- Be Transparent: To draw in new investors, avoid inflating your portfolio or history. 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 accountability, and remain true to your mission and principles.
- 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 position. You also need to keep up with industry patterns, financial news and other factors that affect the real estate environment. While you don’t have a hands on position in the investments that you fund, you do need a good business acumen.
- Learn The Subject Matter: Study the types of borrowers listed above, and get to know the various types of contract. Learn what factors go into a good recovery, buy and hold or rent land. This way, you know how to judge things for yourself when a borrower pitches a contract. They’ll probably 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 Is Hard Money Lending
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. Although other lending outlets rely on a credit background of lenders, lending tough money relies on the asset at issue. Hard-money loans may generally require higher interest rates than conventional loans, which can provide improved access to capital for lenders and a smoother approval process. Low-credit and high-equity creditors in a property often turn to hard capital for financing. In fact, property owners at risk of bankruptcy can also take advantage of hard money loans.
How To Become a Hard Money Lender
Hard money loans can be a rare opportunity for investors who have extra cash in their pockets. 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 company’s online presence.
- Search for legal advice on forming a limited liability corporation.
- Examine future prospects for investment.
- Create a business plan, and draft future loan conditions.
- Project any possible loans into the future financial result.
- Start your business of loaning hard money.
Pros Of Hard Money Lending
Hard money lending allows investors to remain active in real estate without actually adding a house to their portfolios. Some hard-money lenders may never buy property themselves. This is 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 big advantage to lending hard money is the degree to regulation. Hard money lenders get the final say about who they work with and what are the terms. Anyone who has bought a piece of real estate will probably remember the process of applying for grants, asking for permits, and bargaining. Being a hard money lender places you in the driver’s seat — and that’s pretty attractive to many.
Cons of Hard Loaning
Any financial incentive would have drawbacks. To anyone involved in investing hard money, the most apparent obstacle is finding enough funding to get going. The sum of funds required may be a high entrance obstacle, but it’s important to note that real estate provides a fantastic way in. Investors can work their way up by themselves running good real estate deals; over time, they can produce the funds needed to start lending.
Hard money lending also has inherent risk to the lender. Through working outside the conventional loan application process used by big banks, hard-money borrowers will genuinely choose who they partner with. This means losing an investor that might not be recognized by any criteria. To overcome this possibility, hard-money lenders must establish their own standards. Lenders should be prepared for borrowers, property, and eventually trust their intestinal feeling regarding a prospective nominee.
Private money lending can be an enticing tool for the parties involved. Investors searching for alternative sources of financing will note the advantages include a speedier approval process and improved access to funding. Those loans, on the other hand, can find they have unique access to potential investment and deals. Whichever side of the deal you’re on, private money lending is a viable alternative to broaden your financial portfolio and create wealth.