The world of real estate investing is a dynamic, ever-evolving landscape, offering various opportunities for individuals to grow their wealth, even when there is a market downturn. Among the many strategies available, private money lending has emerged as a powerful and advantageous approach, especially in today’s real estate market, yet it’s not often talked about among real estate investors.
While private money lending as an investment strategy may not be as sexy as strategies that are popularized, such as creative financing with sub-tos, short-term and midterm rentals, and syndicated deals, “being the bank” has its privileges that you should consider.
Why Get Into Private Lending?
One of the most significant advantages of private money lending is the opportunity to earn passive income without the headaches and hassles of being a landlord.
When you invest in rental properties, you become responsible for property management, tenant issues, maintenance, and more. Private money lenders, on the other hand, provide the funding and then sit back while borrowers handle the property.
When you originate a private money loan, your role as the lender primarily involves conducting due diligence on potential borrowers, setting the terms of the loan, and periodically monitoring the investment. This minimal hands-on involvement means you can maintain a full-time job or pursue other investment opportunities simultaneously.
Private money lending also allows for diversification of your investment strategy. A lot of volume flippers are having a difficult time finding enough good deals with higher margins. Why not lend out your money in between projects so you can keep your money working for you while you seek out that next unicorn deal of your own?
As a private lender, you enjoy the benefit of predictable fixed returns and consistent cash flow. While the returns may not be as significant as other active investments, your risk is also mitigated with a healthy equity buffer on the property being secured as collateral. This is also known as LTV, or loan-to-value. The lower the LTV, the lower your risk as the lender.
Compared to long-term rentals, private money lending offers a shorter investment horizon. As the lender, you can set the time frame for when your principal loan is due. Most private loans are for less than a year, and many private lenders choose to lend out for six months or less to well-seasoned flippers and investors.
Rental property investments typically require you to hold on to a property for an extended period to maximize profits. In contrast, private money lending allows for shorter loan terms, providing more liquidity and flexibility in your investment strategy.
Private money lending offers a unique set of advantages in today’s real estate market compared to other popular strategies like rentals and property flipping. It provides a way to generate passive income with reduced risk, diversification, fixed returns, minimal involvement, and shorter investment horizons. These advantages make private money lending an appealing choice for investors looking to grow their wealth in the ever-exciting world of real estate.
However, like any investment, it’s crucial to conduct thorough due diligence and seek professional advice to ensure a successful private money lending journey in today’s market.
How to Find and Fund a Loan as a Private Money Lender
While private money is more deregulated than conventional lending, you still need to understand the legal limitations, licensure requirements (if any), and usury implications in the state you reside in, as well as the state a property is in that you intend to collateralize.
Find a real estate attorney who understands private money lending from the lender’s point of view. Not all real estate attorneys are experienced in this area of practice.
In addition to a real estate attorney experienced in private lending law, you will need a team of professionals at your disposal to help you make the transaction run smoothly. Real estate professionals such as valuation experts, title officers, escrow closing agents, and insurance agents can be excellent partners in helping with your due diligence and the transaction itself.
All investments inherently involve risk, and private money lending is not immune. Before becoming a private money lender, you need to understand how to protect your principal investment and set up the loan terms to protect your capital, in case the borrower isn’t able to perform.
BiggerPockets published a comprehensive guidebook called Lend to Live: Earn Hassle-free, Passive Income in Real Estate with Private Money Lending that covers the end-to-end process and key considerations to manage risk effectively. After all, passive investments should allow you to sleep well at night, not lose sleep.
One of the best ways to learn about private money lending is to engage with other private money lenders. Every private lender will have war stories to share about what not to do, as well as best practices to share with you as well. Consider joining the Private Lending community on the BiggerPockets Forum, dedicated to all things private lending from the lender’s point of view.
The Bottom Line
While some real estate strategies, such as volume flipping and BRRRR, are impacted negatively by the current market climate, private money lending, when done safely and legally, can be an excellent alternative investing strategy.
And while high interest rates are not great for active investors, it certainly benefits private lenders, as the delta between conventional lending and hard money has shrunk to all-time lows in the past decade due to the cost of capital. Less competition from hard money lenders and more restrictive lending guidelines are also great reasons it’s an amazing time to be a private money lender.
Private money lending remains a perennial favorite among seasoned real estate investors for its predictable cash flow, reduced risk, and lack of seasonality. There is always a need for private money for creative financing, no matter where we are in a market cycle.
All the cash flow, none of the hassle
Learn how to create financial freedom and passive income in real estate as a private money lender. Lend to Live makes passive income through private lending achievable for anyone.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.