Investing as a Private Money Lender
Making money first on every real estate deal
Private lending offers a competitive fixed rate of return and security on your original investment - without the burden of owning or managing real estate.
When most people think about real estate investing, they think of the process of finding properties to buy, negotiating the purchase, applying for loans, hiring contractors, and being a landlord.
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Although there is money to be made in all of these direct investment activities, there is another set of investors who have learned the secret of benefiting from the work of others, without ever needing to own real estate themselves.
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In return, they provide an important piece of the acquisition funding for many small to mid-sized active investors, who are willing to pay above market returns for the use of their capital.
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What is Private Lending?
Private lending is exactly what the name implies, it is one individual making a (private) loan to another individual or company.
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In the context of real estate, it is making a short term investment loan to another real estate investor who will use your investment as part of the overall funding strategy to acquire (buy) and improve (rehab or remodel) a piece of real estate.
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Just like a bank loan used by a homeowner to purchase a house, the private loan repayment performance is secured, or guaranteed, by a lien against the value of the real estate the loan is being used to acquire and improve.
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Is Private Lending Legal?
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Yes. Private lending is legal.
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This question comes up occasionally from investors that are familiar with investing in stocks, bonds, and mutual funds, but never heard of privately lending money as an investment strategy.
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Private lending is very similar to investing in bonds. Just like bonds, you are investing your money for an agreed period of time (the term) at an annual interest rate (the return).
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Where bonds are making investment loans to financial institutions and large companies, private loans are investments in smaller companies and on specific deals.
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How does Private Lending Work?
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We follow these five steps with the private lenders that fund our real estate deals:
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We present an overview of the real estate project and the financial plan to our private lenders, along with the amount we are asking to borrow, the expected term, and the annual interest rate we can offer.
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We answer questions about the opportunity from interested private lenders, provide additional financial information as needed, and a draft promissory note for lender approval. The promissory note outlines the investment loan amount, interest rate, term, payment terms, collateral for the loan, and contract language to protect the private lender in the event of a default.
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When the investment loan terms are agreed, we provide wire/ACH transfer instructions to the private lender to transfer their investment funds to the third-party title company and attorney we hire to manage the signing of the promissory note and recording of the lien against the property in the public records.
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Once everything is signed and recorded, the investment funds are released to us to be used on the project.
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During the course of the project, we make interest payments directly to the private lender based on the amount and frequency agreed in the promissory note.
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When the project is complete and the property is sold or refinanced, we have the title company notify the private lender and arrange for a certificate of satisfaction to be signed by the lender.
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The original investment principal and any unpaid interest are distributed by the title company to the private lender once the certificate of loan satisfaction is recorded on public record and the lien on the property is removed.
What are the Advantages of Private Lending?
As a lender and not an owner/investor, your earned interest and loan payoff is paid first as part of the operating expenses of the deal, before the owner/investor(s) get their share of the profits.
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The resale value of the real estate is used as the collateral to protect your initial investment.
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Limited time is needed as the lender to participate in a deal.
You have no legal responsibility for the property or liability exposure if something goes wrong on the deal.
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How Much Money is Needed to Private Lend?
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You should have at least $50,000 to invest as a second position lender to cover part of the acquisition cost or fund just the rehab/remodeling costs of the project.
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Typically, opportunity providers are looking for private lenders that can make $100,000-$200,000 loans on small projects as the primary lender.
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How Do I get Started in Private Lending?
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The first step to start your private lending investment journey is to determine the source and amount of funds you are willing an able to invest. Along with this, you need to decide how long you can have your funds locked into an investment.
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You won't necessarily need to educate yourself on the details of how to fix and flip a house, or buy and reposition a small apartment building, but you will need to be comfortable with evaluating the experience and credibility of one or more potential investors that you might lend to. You should also be comfortable asking enough questions about them and their investment opportunities so you can decide if it is a good investment for you.
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We also recommend having an attorney you can consult if you don't feel comfortable reviewing the details of the promissory note or other legal documents.
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If you would like to learn more about investing in real estate to build wealth using your savings, HELOC, or 401k/IRA funds, feel free to contact us. We would love to talk about investment strategies and share our experience to help you leverage your resources to achieve financial success.