With the proper foundation and knowledge, investing
in real estate can be highly lucrative for anyone. But let us be honest, you
already knew that. Of interest, however, is what an investor can do with the
money they make from a profitable career.
While a portion of profits will undoubtedly be
allocated to the lifestyle of their choice, investors are advised to be smart
with their money. Of course, you can reinvest into another property, but if you
are looking for an alternative there may be one option you have not considered
yet: private money lending.
Investors who have the funds to do so should consider
private money lending in real estate. This process offers the same type of
underlying security and profit potential as rehabbing or wholesaling,
but without acquiring new properties.
What Is Private Money Lending?
Private money lending is when individuals lend their
own capital to other investors or professionally managed real estate funds,
while securing said loan with a mortgage against real estate. Essentially, private money
lending
serves as an alternative to traditional lending institutions, like big banks.
As rookie investors gain experience, they strive to
aim higher. Leaving your hard-earned money in a savings account is no way to
protect and grow your assets. At the end of the day, private money lending
allows you to secure a loan with real estate that is worth much more than the
loan. In some ways, this process can be less risky than owning real estate.
That is why it’s important to familiarize yourself with the best real estate
financing options available to today’s investors.
In the past, real estate financing typically
came from banks, government agencies, insurance companies, and pension
funds. However, with a list of strict requirements and a timeline not conducive
to the average real estate investor, a need for alternative lending sources
quickly developed. At the same time, it became obvious to those with
appropriate funds that their money could better serve investors than large
institutions. Now, private money
lending
is a critical component to the real estate investment industry. In fact, its
presence makes it more possible for the average investor to run and maintain a
sustainable career.
In case you were unaware, there are several benefits
involved for those who choose to lend private money as well. If done
correctly, offering alternative real estate financing options can
mitigate risk while simultaneously establishing wealth. Of course, this is not
a path for everyone. You need 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 a real estate investor looking to expand your portfolio.
·
You
are a doctor, lawyer, CEO, or professional of another kind who has a great
income or a surplus of cash.
·
You
have a sizable retirement savings account.
·
You
are a retiree looking for a passive income investment.
·
You
are owner of an estate or other trust fund.
·
You
are a tech entrepreneur who owns a successful startup.
·
You
are a lottery winner.
·
You
want to and can help a friend or family member.
Still on the fence? Don’t worry; the following will
answer any questions or concerns you may have about pursuing a private money
lending business:
The Anatomy Of A Private Money Loan
The concept of a private money loan is relatively simple,
three elements are required for a loan of this nature to transpire: a borrower,
a lender, and a lot of paperwork.
For all intents and purposes, private money lending
is perhaps your best chance to invest in real estate with no money of your own. If
for nothing else, private money loans can provide for investors in need. While
they seem to serve the same purpose as traditional lending institutions,
there are several key differences. Private money loans typically charge higher
rates than banks, but they are also more available in cases an average bank
would pass on. Additionally, banks and other financial institutions typically
do not provide the same combination of speed and transparency in the
decision-making process.
How To Become a Private Money Lender
As I mentioned above, private money lending can offer several
benefits for everyone involved. It is not uncommon for investors to eventually
expand into private money lending themselves due to these benefits. If you are
interested in private money lending, there are a few steps you can follow:
1.
Establish
your business and obtain the required insurance.
2.
Meet
with a lawyer to create your company structure and review regulations.
3.
Identify
your preferred lending focus.
4.
Join
a peer to peer lending platform or network to find possible investments.
5.
Evaluate
any potential clients by calculating potential returns and risk levels.
6.
Start
your business in private money lending.
Private Money Lending: How To Identify Borrowers
The concept of private money lending is
relatively simple: without money, real estate investing does not exist. Money, like in every
other industry, is the lifeblood of an investor. Real estate investors need to
actively work on securing
private money loans to fund their deals. Often, the average
investor isn’t capable of funding a deal with their own money. Moreover, even
if the funds are readily available, investors will seek the assistance of
private money. Regardless of a investor’s situation, there is a particular
likelihood of them needing private money assistance. Instead of having to pool
money or stretch every dollar, investors are given more options to grow their
business with the use of private money.
Perhaps even more importantly, is the speed and
efficiency in which private money may be obtained. The speed of implementation
is critical to an investor, and it can mean the difference between closing on a
deal and losing one. Having the money in a timely manner can make it that much
easier to close on a deal.
With private money lending, you will be confronted
with several types of borrowers. While each is unique, they are all looking for
the same thing. Here are the four types of borrowers you may encounter:
·
Rehab/Sell: This type of investor will
typically purchase a residential property and complete renovations with the
intention of reselling it once the project is complete. Borrowers in this
sector find private money attractive because conventional banks will often not
lend to properties in poor condition. Perhaps even more importantly, access to
private money is more conducive to a timely and profitable flip.
·
Rehab/Rent: These investors typically purchase
a residential property and complete renovations with the intention of renting
the property for cash flow purposes. These borrowers find private money
attractive for the same reasons as investors in the rehab/sell category.
·
Builders/Developers: Builders and
developers will purchase vacant land to permit and develop into residential or
commercial use. Borrowers in this sector are interested in private money
primarily based on the speed with which the funds can be available. Also, many
banks will not lend on speculative development.
·
Commercial Investors: This population
of investors may seek to use private money as a “bridge loan” for a commercial
property when a conventional bank will not lend on an un-stabilized asset.
Money Lending: How To Get Paid
Private money lending is attractive because of the
flexibility it offers, not only to borrowers but to lenders as well. You see,
with a traditional loan lender will generate income through interest payments
made by the borrower. Private loans, on the other hand,
allow lenders to negotiate exactly how (and when) they will be paid back for
the loan. This opportunity opens several perks not traditionally offered to
investors. Read through the following agreements to learn more about making
money as a private lender.
·
Joint Ventures: As a private money lender, a
profit split can be one of the most attractive options for financing an
investment. Investors can negotiate to a receive a percentage of the final
profits in this type of agreement. The amount will vary based on the contract
and the investment, though it could be quite profitable. In some cases, private
money lenders will even find borrowers who propose this option. Just make sure
you believe in the potential success of the deal and you are all set.
·
Exit Fees: This loan structure requires the
borrower to pay a predetermined amount at the end of the loan term. The exit
fee is often negotiated as a percentage of the overall price of the investment.
In some cases, lenders may even negotiate an increasing exit fee that changes
depending on when the loan is paid in full. For example, if the borrower needed
a few extra months to repay the loan, then they would pay a larger exit fee.
·
Interest Payments: As I mentioned above, interest
payments are one of several ways to generate income from a private money
loan. In fact, this is the most common set up in private money. Lenders can
set an interest rate at the time of the loan approval and sit back and wait for
the money to arrive. Typically, private money loans are associated with higher
interest rates than other loans, making this a particularly attractive
arrangement for lenders.
·
Points: Points are essentially fees paid by
borrowers in exchange for lower interest rates. Points are calculated as
percentages of the overall loan, with one point referring to one percent of the
loan amount. The reason some lenders prefer this system is that points allow
them to be paid in larger sums, with additional interest payments to follow. Often,
points are paid at the beginning of the loan term and are suggested by the
borrower as an incentive for granting the loan.
Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com
Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
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