Investing in real estate is essentially one of the smartest and safest strategies to promote wealth building.

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:

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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.