Private Lending: How it Works for Real Estate Investing

How Does Private Lending Work? This post will be a Q&A format to answer common questions.


First What is Private Lending?
Private money lending serves as an alternative to traditional lending institutions, like big banks.

Private money lending is when individuals lend their own capital to other investors or professionally managed real estate funds, while securing the loan with a mortgage against real estate. 

Why Would Someone be a Private Lender?
Leaving your hard-earned money in a savings account that is earning 10 to 60 basis points is no way to grow your assets. 

Private money lending allows you to earn 8 to 15% interest and be secured by a loan with real estate that is worth much more than the loan. 

It’s important to familiarize yourself with the real estate financing options available to today’s investors.

Why Would Real Estate Investors Use a Private Lender instead of a bank?
It is easier to fund a property using a private lender than applying for a bank loan. Banks have a list of strict requirements and longer timelines. So a need for alternative lending sources quickly developed.

Private money lending is a critical component to the real estate investment industry. Its presence makes it more possible for the average investor to run and maintain a sustainable business.

Who Is a Private Lender?

• You are a real estate investor looking to expand your portfolio.
• You are a doctor, lawyer, CEO, or someone who has great income or a surplus of cash.
• You have a sizable retirement savings account looking for a passive income investment

How Does Private Lending Work?
The concept of a private money loan is relatively simple. You have a borrower, a lender, and paperwork.

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, private lending offers speed that allows an investor to make a strong offer by closing fast. 

How To Become a Private Money Lender?
Networking.  Meet successful real estate agents and investors. Talk to others that do private lending. 

What Type of Properties do I Private Lend?
With private money lending, you will be confronted with several types of real estate investors. Here are a few scenarios you may encounter:

• Transactional:  This type of investor will typically purchase a residential property and quickly resale it as-is. The investor may only need your money for a day or a few weeks.  
• 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. Lending on this type of deal will be 3-9 months on average.
• Rehab/Rent: These investors typically purchase a residential property and complete renovations with the intention of renting the property for cash flow purposes.  Once renovations are completed, the investor will get a loan from the bank (low interest rate) and pay you back.  Lending on this type of deal will be 3-9 months on average.
• Builders/Developers: Builders and developers will purchase vacant land to permit and develop into residential or commercial use. Many banks will not lend on speculative development.  Depending on the type of development, lending on this type of deal will be 1-3 years on average.
• 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.

How Do I Get Paid?
Private lending is very flexible on how you structure your deal. 

• 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 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. 
• Exit Fees and Renewal 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: 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. You can receive monthly or quarterly payments.  Or all your principal and interest at the end.  For example, when a rehabber renovates and resales his property.  
• Points: Points are essentially fees paid by borrowers. 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. 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.

To wrap up this video, Private money lending can represent an attractive opportunity for both parties involved. Real Estate Investors seeking alternative financing sources will find the benefits include a faster approval process, increased access to funding, which will lead to strong offers on properties. 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 money lending is a viable option for expanding your financial portfolio.

For a video on this article visit https://youtu.be/gLMIUHSKF8k