Getting Started with Private Money Lending
Investing in real estate is one of the smartest and safest ways to build wealth. Some investors may want to take a more active role in their investments by rehabbing properties for profit or by becoming a landlord. Other investors may decide to take a more passive approach. Instead, they may decide to become money lenders for other investors and developers. If you are looking for a less hands-on approach to investment, getting started with private money lending is a great way for both you and the borrower to turn a nice profit on a deal.
What is private money lending?
Private money lending is when you act as a money lender for other investors or a professionally managed real estate company. You do this in the form of loans which you can charge interest on, just like a bank! These investors or companies are either looking to buy up properties, build new properties, or rehab existing ones. They need capital in order to do so in the form of loans. It may be that the investor is looking to purchase a big rehab job. Many traditional banks are less inclined to lend if the property is a true fixer-upper. It could also be that the developer needs the money quickly, and going through a bank might take too long. In these instances, these investors are seeking out loans from individuals who are looking to turn a profit.
When an investor/developer finds a home that is well under market value, they may give their private lenders (you) an opportunity to fund the purchase and rehab of the deal. Through this process, as the lender, you can yield extremely high interest rates. These rates may be four or five times the rates the borrower would obtain on bank CDs or other traditional investment plans.
Essentially, private money lending has the same money-making potential as rehabbing or wholesaling your own property, but without all the fuss of actually having to do any of the work yourself. It is a secure and highly lucrative way to build on your existing wealth.
Why become a private money lender?
Do you have a high-level job with great savings that you want to invest in order to build on your wealth? Are you a retiree with a sizeable retirement account who is looking for a passive income investment? Do you have a trust fund you are looking to grow? Have you recently won a large sum of money and want to add interest to your winnings? If so, then getting started with private money lending could be just the thing for you.
Becoming a lender is a quick, hands-off approach to real estate that will bring you a much faster return than taking on the responsibility of flipping a fixer-upper yourself. Returns are higher than the stock market, and will help you generate optimal cash flow quickly. Private money lending allows for a predictable income stream where you set the rates and collect at consistent intervals. It lets you do what the banks have been doing for years–make a profitable return on real estate investments!
First steps in becoming a lender
Getting started with private money lending begins with a review of your current net worth and cash flow. All investments carry some degree of risk, and it’s necessary to access how much risk you are willing to take. It’s very important to speak to a legal professional, as well as a tax specialist, before making any lending decisions.
While not required, we recommend that you qualify as an Accredited Investor before becoming a private money lender. Qualifying as an accredited investor will help lower your chances of becoming involved in high-risk lending situations. Your lawyer will be able to help with the rest. They will help you obtain the required insurance if needed for your new business venture. They’ll also be able to guide you on what type of lending focus is right for you, help you create any business structures, and evaluate potential clients. They will point you towards seasoned investors with a history of doing good deals. It is also worth noting there are online peer to peer networks that can help assist with finding recommended clients.
There may be limits on how much you can charge in interest without a banking license. It is important to pay attention to State Usury Laws that help set rates. According to the usury laws of Wisconsin, “The legal interest rate is 5% per year unless the parties contract otherwise or as provided by law. There are specific provisions for residential mortgage loans, variable rate contracts, interest adjustment provisions, reverse mortgage loans, licensed lenders, pawnbrokers, and insurance premium finance companies.” There are also limits on how many loans a private money lender can give out. These vary according to your state, but your real estate lawyer will be able to advise accordingly.
Choosing the right clients
Considering the risks involved in any type of investment, it is a good idea to work with your lawyer when assessing potential clients. Firstly, you will want to look at the borrower’s credit score. How often have they borrowed money in the past? Have they paid off their debt in their contracted amount of time?
Due diligence on the borrower is essential in order to verify anything they have told you. That way, you can be sure you have been given accurate information. It is then wise to approach the client with a competitive interest rate. Lastly, make sure you pick a date for the borrower to complete payback on the loan.
There are contingencies that will help you through a foreclosure process in the unlikely event that your borrower doesn’t repay you. That way, you will still be able to make back the money on your loan if things don’t progress as planned.
How much documentation is involved?
Just like any loan, documentation is not only necessary, but essential in making sure your investment stays low-risk. Letters of Intent, promissory notes, mortgage documentation, and the borrower’s financial records are all documents your lawyer will be collating in moving forward on a lending deal. On average, the paperwork involved with private money lending is about the same amount as any loan. The only difference is the time it takes for everything to go through. Loans that go through a bank usually take around 90 days to clear. Private loans only take between one week to twenty-one days before they are in the hands of your borrower.
How we can help you become a private money lender
Getting started on private money lending is simple. Firstly, we find an undervalued property we want to purchase. When you give us the green light, we borrow the funds from you to purchase and renovate the property. At closing, you receive a mortgage on the home along with other important legal documents. These include the proof of insurance and the promissory note. The documents are what help keep you protected. Once we have completed the renovations after three to six months, we will either refinance or sell the property. When we close on that refinance or sale, you will receive your principal. You will also receive an interest payment that will be calculated based on our analysis of the deal itself.
The goal is to keep making substantial profits for you so that you keep coming back to us. We would love to build a long term, mutually beneficial relationship.
If you are interested in working with us as a private money lender, contact us today.