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 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,
Arizona private hard 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 is 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 of the real
estate investment industry. In fact, its presence makes it more possible for
the average investor to run and maintain a sustainable career.
If you were
unaware, there are several benefits involved for those who choose to lend
private money. 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 hard 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 passive income investment.
- You are the owner of an estate or other trust fund.
- You are a tech entrepreneur who owns a successful start-up.
- You are a lottery winner.
- You want to and can help out a friend or family member.
Still on the
fence? Do not 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:
- Establish your business and obtain the required insurance.
- Meet with a lawyer to create your company structure.
- Identify your preferred lending focus.
- Join a peer-to-peer lending platform or network to find possible investments.
- Evaluate any potential clients by calculating potential returns and risk levels.
- Start your business in private money lending.
Private Money Lending: How To Identify Borrowers
The concept of private money lending Arizona
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 cannot fund 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 particular 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 businesses using private money.
Perhaps even
more important 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
promptly can make it that much easier to close a deal.
With Arizona private hard 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 commercial property when a conventional bank will not lend
on an un-stabilized asset.
Money Lending: How To Get Paid
Private money lending in Arizona is attractive because of the flexibility
it offers, not only to borrowers but also to lenders. You see, with a
traditional loan, lenders will generate income through interest payments made
by the borrower. On the other hand, private loans 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 hard money lender near
me, a profit split can be one of the most attractive options
for financing investment. Investors can negotiate to 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
setup 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. Some lenders prefer this system
because points allow them to be paid in larger sums, with additional interest
payments to follow. More often than not, points are paid at the beginning of
the loan term and are suggested by the borrower as an incentive for granting
the loan.
Become A Private Money Lender: Tips From The Pros
Simply put: private money lending in Arizona allows
you to act as the bank for other investors. Rather than directly purchasing
assets, you get the opportunity to fund those owned by colleagues and partners.
By now, you likely realize how beneficial this setup can be. However, there are
a few more things you should know before getting started. Read through the
following tips before taking on your first deal as a private money lender:
Start Out Small: Identify
a range you are comfortable working with and stick to it. The number one
mistake private money lenders make when starting out is spreading themselves
too thin. Assess your finances and your preferred level of risk and create
clear guidelines for potential projects. If someone approaches you searching
for more than you want to offer, do not be afraid to refer them elsewhere.
Find A Good
Attorney: Becoming an Arizona
private money lender does not make you a lawyer. You will still
need help when it comes to negotiating and reviewing contracts. Additionally,
if you start a private money lending business, there are several legal
protections you need to have in place before getting started. Find a qualified
real estate attorney in your area and bring them on to your team. Their role in
your company will be invaluable over time.
Work Locally: There
are profitable real estate deals all over the country; however, there are also
deals right under your nose. If you decide to start your private money lending
business locally, you can meet face to face with investors. Additionally, you
will likely be more available for communications and future investment options.
Do not underestimate the potential of your own market; you never know what kind
of deals may come your way. You can always expand in the future.
Be Transparent: Avoid
inflating your portfolio or background to attract potential investments. No
matter what point you are at in your investing career, let your work speak for
itself. You do not want to misrepresent yourself or your lending business.
Always maintain transparency and stay true to your mission and values.
Do not Forget
About Yourself: Remember, just because you aren’t purchasing assets
directly does not mean you aren’t an investor. Continue your professional and financial
education even if you opt for the role of lender. You still need to stay on top
of market trends, financial news, and other factors impacting the real estate
world. While you do not have a hands-on role in the investments you finance,
you still need to have strong business acumen.
Learn The
Subject Matter: Review the types of borrowers listed above and familiarize
yourself with the different deal types. Learn what factors go into a successful
rehab, buy and hold, or rental property. That way, when a borrower pitches a
deal, you know how to evaluate it for yourself. Obviously, they will paint the
investment in a good light, but is it profitable? To be a successful private
money lender, it is crucial to understand exactly what goes on in the niche you
choose to invest in.
What Is Hard Money Lending
An Arizona hard money lending is another
alternative to traditional lending sources and allows borrowers to use the
investment (in many cases, a property) as collateral on the loan. While many
lending sources rely on a borrower’s credit history, hard money lending relies
on the asset in question. Hard money lending will typically require higher
interest fees than traditional loans but can provide borrowers with increased
access to capital and a more lenient approval process. Investors with low
credit and high equity in a property will often turn to hard money for funding.
Additionally, property owners at risk of foreclosure may also utilize hard
money loans.
How To Become An Arizona Hard Money Lender
Hard money lending
can represent a unique opportunity for investors with extra capital on their
hands. Though, with any financial decision, it is important to mind due to diligence and premeditates any potential risks. If you are interested in
becoming a hard money lender, here are a few steps you can follow:
Name your
business and create your company structure.
Set up an online
presence for your business.
Seek legal
counseling on the creation of a limited liability company.
Investigate
potential investment opportunities.
Make a business
plan and draft the criteria of future loans.
Project the
future financial outcome of any potential loans.
Launch your hard
money lending business.
Pros Of Hard Money Lending
Hard money
lending gives investors the chance to stay active in real estate without
necessarily adding a property to their portfolios. Some hard money lenders may
never purchase a property themselves at all. This can be a huge perk for anyone
without the time and resources to acquire a real estate deal, as it allows
lenders to tap into the lucrative potential of real estate without “getting
their hands dirty,” so to speak.
Another major benefit of hard money lending is the degree of control it offers. Hard money
lenders get the final say in who they work with and on what terms. Anyone who
has purchased a piece of real estate likely remembers the process of applying
for funds, waiting on application approvals, and going through negotiations.
Being a hard money lender puts you in the driver’s seat—and that is quite an attractive
perk for many.
Cons Of Hard Money Lending
With any
financial opportunity, there are going to be cons involved. For those
interested in hard money lending, the most obvious challenge is coming up with
enough capital to get started. The number of funds required can serve as a
steep barrier to entry, but it’s important to remember that real estate offers
a great way in. Investors can work their way up by managing successful real
estate deals themselves; over time, they can generate the funds necessary to
start lending.
Hard money
lending also has an inherent degree of risk for the lender. By operating
outside of the traditional loan application process that big banks use, hard
money lenders can truly choose who they work with. This means taking a risk on
an investor who may not be approved by some standards. To counteract this risk,
hard money lenders must come up with standards of their own. Lenders should be
prepared to research investors, properties and ultimately trust their gut
feeling about a potential candidate.
involve anyone
with a little extra cash they want to invest. Hard money lenders are
similar; however, they are typically more organized and semi-institutional.
Decide which is best for you and your deal by reviewing the last
part of our series.
Summary
Private money
lending can represent an attractive opportunity for both parties involved.
Investors seeking alternative financing sources will find the benefits include
a faster approval process and increased access to funding. On the other hand,
those lending may find they have unique access to potential investments and
deals. No matter which side of the transaction you are on, private lending is
a viable option for expanding your financial portfolio and wealth building.
Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Tel: 623-582-4444
Level4Funding.com
Private Hard
Money Lender
Dennis@Level4Funding.com
Who is this Dude? Dennis
brings with him substantial experience in residential real estate. Dennis has
extensive experience purchasing, renting, and selling numerous homes over the
past 45 years. His first purchase was a property in California when he was 18
years old. Dennis graduated from California State University Pomona with
majors in Computer Science and Business Management. He is a Licensed Mortgage
Broker, Licensed Mortgage Originator, Licensed Real Estate Agent, Licensed
Insurance Agent Certified Sort Sales Specialist (CSS), Certified Negotiator
(CNE), and FAA Licensed Private Pilot.
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