From house flipping to owning rental properties — and even investing in tax liens — there are several real estate investing strategies to choose from.
Oh, the choices!
If you’re looking for a passive strategy — and you already have cash on hand — with high potential upside, then private money lending might be right for you.
That’s right: Private money lenders help borrowers access much-needed capital when traditional financing, like banks, is not an option.
So …
Why is it a passive investing method?
You can earn money from monthly interest payments after lending out your money.
Sounds pretty great, right?!
In this article, we’ll break down everything you need to know about private money lending so that you can decide if it’s the right real estate investing method for you.
Let’s get started!
What is Private Money Lending?
Private money lending involves providing capital to someone who needs financing, like a business owner or real estate investor.
It’s an alternative way to finance real estate investments and may be obtained by someone who finds it challenging to get a loan from a bank or other traditional forms of lending — or is looking for an alternative financing method all together.
Previously, real estate financing only came from traditional sources like banks, insurance companies, or government agencies.
But since these sources often have strict requirements, high interest rates, and strict timelines, the average real estate investor may find these lending sources unfeasible.
Enter private money lenders, who loan money to these investors!
Private lenders provide “bridge loans” to help these investors diversify their investment portfolios.
In private money lending, the real estate asset itself serves as collateral in the bridge loan.
As the lender, you can charge interest and earn from monthly payments until the loan is fully paid.
You can also invest in a particular project or several different ones.
The real estate investor, also called the “note owner,” owns these projects and takes the responsibility of completing them and paying you back.
Advantages of Becoming a Private Money Lender
Here are a few advantages of private money lending.
Fast Loan Process + Returns
Because of the fast-paced nature of real estate deals, private money lenders and note owners have a leg up against those seeking out traditional financing.
Provided that you’ve done your due diligence in ensuring that the note owner you’re dealing with is legitimate, you don’t have to deal with as much paperwork and documentation, making for a much faster process.
This gives you and the note owner a competitive edge in the real estate game because they can snatch good deals off the market faster than those relying on traditional loans — and you get paid quicker, too.
Flexible Loan Terms
Because both parties aren’t held down by the strictures of a bank, they can decide on terms and conditions that are mutually beneficial to them.
Real estate investors can get into the details of what they need to fix and flip a property, for example, and private money lenders can let them know whether or not they think the requests are reasonable.
Transparency
As mentioned earlier, private money lending is often relationship-based, so there’s usually a sense of transparency in seeing the developments made on a project.
Often, private money lenders are local investors funding projects within their community, so it isn’t some intangible investment that they aren’t seeing.
There’s also a lot more transparency on both ends with regard to the costs, interest rates, and fees involved.
Disadvantages of Becoming a Private Money Lender
If you’re serious about learning how to become a private money lender, here are some risks you should be aware of.
Connecting With Borrowers
If you’re still just learning the ropes on how to become a private money lender and don’t readily have ties with note owners yet, it may be a bit challenging to connect with potential borrowers.
It can be challenging if you’re not yet well-connected.
But you can still tap into your network or ask for recommendations from your colleagues and acquaintances.
Legal and Regulatory Risks
Private money lending is a practice that is subject to certain federal and state laws.
You should stay aware and up to date of relevant regulations, as noncompliance can get you into hot water and result in legal consequences.
Private Money Lenders Vs. Hard Money Lenders: What’s the Difference?
It’s important to keep in mind that acting as a private money lender is different from a hard money lender.
After all, there’s a lot of real estate investing terms out there.
So what’s the difference?
Hard money lenders are semi-institutional, structured lenders that provide short-term and high-interest loans.
Real estate investors may borrow for them to fund property acquisitions and renovations as well.
Hard money lenders are also strictly required to be licensed and need to follow more stringent regulations.
Private money lenders, on the other hand, are not strictly required to get a license, except in some states where there are certain limitations.
In New York, for instance, you must get a lending license once you have more than five borrowers.
Also, whereas hard money lending is more regulated and structured in terms of financing, private money lending is more interpersonal.
This means that the money lent comes from a person’s private funds, not from an institution, unlike hard money lending.
How to Become a Private Money Lender
If you’re interested in becoming a private money lender, here are a few steps you can take to get off the ground.
Research and Risk Management
As with any money-making endeavor, you should first understand the basics and risks of private money lending.
You can’t learn everything about how to become a private money lender in a day, so reading up and doing your research is crucial!
Also, manage risks by ensuring that you’re partnering with reliable note owners.
You can do this by looking at their portfolio of previous deal outcomes, examining their records, and asking for referrals from peers.
To learn more about private money lending, you can also take the private money lending course The Capital Syndicate!
Taught by Lee Arnold, who has been deal-making for over 20 years and teaching people his real estate investment lending strategies since 1995, this private money lending course explains specific strategies for how to systematically find (and be found by) real estate investors who truly need deal funding across the U.S.— and make great money connecting them with the private real estate funding they so desperately need.
If you’re looking to discover the entire private money lending & brokering process broken down in the fewest possible steps, watch this private money lending course today.
Legal and Regulatory Compliance
As you begin your private money lending journey, it’s essential to consult a lawyer to ensure that you have all your bases covered with regard to compliance.
This includes federal and state-level regulations, as well as usury laws.
This is also when you should get licensed, depending on the scope of your operations.
Decide on a Niche
When starting out, focusing on a specific lending niche may be helpful.
You can choose a specific type of property to invest in and concentrate your finances on that before you branch out to more diverse projects.
Network a Lot
This is another crucial step for those learning how to become a private money lender.
Joining networking events and peer-to-peer lending platforms will help you expand your professional network and help you get to know other borrowers and investors.
It will also help you stay abreast of industry trends, scams, and other relevant information.
Tips When Private Money Lending
Here’s a list of quick tips to help you get the most out of private money lending:
- Organize Documents: Early on, you’ll want to develop a procedure for documenting all your transactions so that you can have a streamlined lending process as you scale your operations.
- Start Small: Don’t spread yourself too thin when you’re just starting out. Yes, it can be exciting, and there’s always a sense of urgency in real estate — but you’ll want to balance that out with a level-headed approach to ensure that you’re getting the best returns.
Frequently Asked Questions: Private Money Lending
Next, we’ll break down some of the most frequently asked questions associated with private money lending.
Ready?
Let’s go!
Q. Do you need a license to become a private money lender?
Not all the time! Often, states will have a limit on the number of loans you can offer before you’re required to get a license, so make sure to check relevant regulations in your specific state.
Q. Is private lending a good business?
With the right network, private lending can definitely offer you higher returns than traditional investments like stocks and bonds.
It’s also generally low-risk because the note owner insures the property, so you’re not carrying any additional risk.
Q. What are the four types of private lenders?
The four types of private lenders are private individuals, private equity firms/funds, family offices, and hedge funds.
Q. Is becoming a private lender profitable?
Yes, you can definitely profit from being a private lender because you decide on the terms you offer your borrowers, as well as the projects you’re going to invest in.
It’s more profitable than keeping your money in a bank, too.
The Bottom Line: Private Money Lending
Provided you’ve done your due diligence in ensuring you’re partnering with reliable note owners, private money lending is a win-win opportunity for you and your borrower and can help you gain a competitive edge in the real estate game.
Whether you’re just starting as a private money lender or you are looking for additional insight into the private money lending industry, watch the private money lending course The Capital Syndicate for answers, solutions, and ways to level up your lending experience!
