Private money lending is a type of non-bank lending. We commonly refer to it as hard money lending. Private lending is a professional business in which a lender loans his own funds to people who may not qualify for a conventional bank loan.
Do you want to start out as a private money lender? Several risks can make your journey challenging so you must be cautious.
In this guide, we are going to provide a roadmap for real estate investors or developers who want to explore private money lending. Learn the pros and cons of becoming a private money lender and the steps you must take to work as a professional lender in the industry.
But before that, let’s delve into private money loans.
Table of Contents
- 1. What are Private Money Loans?
- 2. How Does Private Lending Work?
- 3. How to Become an Expert Private Lender
- 4. What are the Pros and Cons of Becoming a Private Lender?
- 5. Is Private Money Lending Right for You?
- 6. How to Become a Professional Money Lender
- 7. Bottom Line
What are Private Money Loans?
Understanding private money loans are the first step to becoming a private lender. The loans offer a quick and hassle-free way for people to acquire funds if they can’t qualify for a traditional bank loan. Although the method of lending funds is the same, the rules are different.
Private money loans are becoming more popular because people are looking for an easy way to acquire personal loans, business loans, or real estate loans, etc. Many times, small business owners and entrepreneurs turn to private money lending because a conventional bank may reject their loan applications.
How Does Private Lending Work?
While the basics remain the same, the rule terms for every type of loan are different.
For example, if these loans involve real estate, there is an arrangement between the lender and the borrower. The lender offers funds to the borrower under a contract or a promissory note. This note defines the loan amount, the interest rate, and the term.
However, the most important part of the loan is the lien against the real estate that serves as security for the loan. Depending on local state rules, this will be either a Deed of Trust or a Mortgage Deed.
Typically, the borrower makes regular payments to the lender to repay the loan or as per the requirements stated in the note. In case the borrower fails to comply with the requirements of the loan, the lender has the right to take ownership of the real estate and foreclose the loan.
How to Become an Expert in Private Money Lending
Here are some helpful tips to help you become a professional and successful private lender.
Take Calculated Risks
Risk-taking is a common part of every business. However, when you want to be a successful private lender, you should never make any investment without prior calculations. Avoid making hasty or uninformed decisions because you may risk a great deal of money.
Many private money lenders consider these loans as ‘parking money.’ That means such a loan is more like a passive investment in big projects like apartment buildings or malls for the lender.
These investments usually require a huge amount of capital. A private lender must ensure that this loan can cover all expenses required to finish the project or recover the cash through court or a settlement.
Toughen Up Your Nerves
When you are in the private lending business, having tough nerves can be your biggest strength. That’s because you have to prepare for every scenario. Gain in-depth knowledge of every project before funding it so you can reduce your chances of suffering a loss.
Seek Expert Advice
Seek financial and expert advice from seasoned private lenders before funding a project. Furthermore, you will also need knowledge of the particular industry you are investing in to avoid any miscalculations. For instance, if an investor or developer requires a loan to invest in the tech industry, you must have at least a basic understanding of how the tech industry works.
That doesn’t mean you should never dip your toes into a new niche. However, seek professional advice from veterans for better decision-making and clarification.
Work with the Best Team
When you want to become a private lender, start your professional journey with a reliable and seasoned private lending company. Dealing with borrowers can sometimes be an unpleasant experience, especially if you are a newbie. When you work with a money lending company, your team can take care of other aspects of the loan, such as collections and paperwork.
An expert team of private money lenders also comes in handy when you have to take the lender to court.
What are the Pros and Cons of Becoming a Private Lender?
Private money lending comes with its own pros and cons, just like any other business.
Let’s explore a few of these to help you determine whether private money lending is for you or not.
- This type of lending business is secure because the lender can hold the borrower’s assets as collateral.
- Another obvious benefit is the returns. Private lenders can enjoy an impressive rate of return on investment of up to 15%. This figure promises a higher return than what you would get from bonds and investments.
- You can secure the collateral if the borrower defaults
- The lender can move in to secure the collateral through foreclosure.
- No need to rent or flip a property to earn profits from real estate investments
- Less paperwork means quicker deals
- These loans have shorter payback periods than conventional mortgages.
- Private lenders can charge a higher interest rate between 7% and 12% or more. In some cases, lenders can charge fees up to 10% for an independent appraisal.
- Although private lending is profitable, its growth is not the same as your own asset.
- Inflation can lead to unpredictable losses.
- Private lenders can bear losses if the borrower defaults.
Is Private Money Lending Right for You?
If you are still confused about whether private money lending is the best choice for you, here are a few things you should know.
You can consider private money lending if:
- You are a lawyer, doctor, or any other professional who needs a surplus of cash or a steady income.
- You are a real estate investor who wants to expand his portfolio.
- You have significant savings in your retirement savings account.
- You are searching for the best passive income investments
- You own a trust fund or a real estate
- You run a successful tech start-up
- You don’t shy away from taking calculated risks
How to Become a Professional Money Lender
There are some requirements and conditions you must meet before you can start out as a professional money lender.
- Establish your business or join a professional money lending company. Obtain the required insurance.
- If you are running your own company, seek advice from a lawyer.
- Create your preferred lending conditions.
- Connect with a peer-to-peer lending network or platform to make possible investments.
- Identify potential clients by calculating risk levels and potential returns.
If you want to start your professional journey in the private money lending industry, the best way to earn profits is to join an already established money lending company.
RTI Bridge Loans is a reliable and credible direct lender operating in California, Nevada, and Colorado. With over three decades of experience, our teams can offer you private money loans, real estate loans, and fix and flip loans, etc. If you want to learn more about us, get in touch with us today or call us at (562) 857-2285.