Why you should know about private lending…
Who doesn’t love watching the HGTV shows where people transform homes from the ugly duckling to the nicest home on the block? I know I do!
In fact a big reason outside of the potential return on investment that I got into flipping homes was the appeal of improving neighborhoods and taking neglected homes that were run down and bringing them back to life.
There is something nostalgic about being able to drive around town and pass by homes that I renovated and imagining those families enjoying the home that I put so much time, money, and effort into.
Have you ever stopped and asked yourself where house flippers got their money?
Have you ever wondered how some people are able to flip dozens of homes at a time?
Where do they get all of that money?
I can assure you they do not have the money in their bank account to go out and buy all of these with their own cash.
And chances are very low that they went to a traditional bank and asked them for a loan on a home that has dog poop caked all over the carpet and it smells like 20 cats just peed all over the house for the last decade.
Most investors work with private lenders otherwise known as “hard money lenders” to provide short-term capital quickly and oftentimes at a much higher rate than the bank would charge.
My personal favorite lending option is when I get to work with one of my PRIVATE CAPITAL PARTNERS.
Reason being…It is much more personal and it is built off of trust (yet backed and secured by real estate). I would MUCH rather see my partners make a great return on their investment vs a bank receiving that money.
So is private lending right for you? Let’s find out…
The very first question you need to ask yourself before lending or investing your money is what is the WORST thing that can happen…And can I live with it?
In this instance, if an investor stops paying, you are in first position for the home and so you end up taking the property back. You have a real tangible asset that you felt comfortable with.
Do you prefer steady returns with little to no volatility? In other words, do you like the idea of mailbox money?
If you do not feel like this is the right market for you to invest in real estate, becoming the bank is a great alternative. In fact most people prefer to ONLY be the lender and not have to worry about the ups and downs of actively investing in properties. Sure they may not hit a home run with a 6 figure return in a short period of time for example…But they also do not stand to lose 6 figures if the market turns sour.
Interestingly enough, most investors once they have earned enough cash over the years from flipping homes or actively investing in real estate, often graduate to becoming private lenders.
Here is why:
- First, the lender gets to set the rules. The lender can choose how much to charge in interest rates (within state and federal regulations) and the terms and conditions of the loan.
- Private lenders can walk into any deal knowing ahead of time what they will be making, which likely isn’t possible with other methods of investing in real estate.
- Many private lenders choose short-term loans such as 6-9 months offering CD-like liquidity without the ultra-low interest rates!
- Each time the capital is turned over, it is another opportunity to earn origination points and any associated fees with the loan.
- The bank gets paid FIRST. You can hedge your risk in the underwriting process and once a project is under way, if the bank does not get their money first, the investor risks losing all of their capital they invested up front & they would lose the property!
How much capital do I need to be the bank?
This is definitely a barrier to entry for many. I would say if you do not have at least $100,000 sitting on the sidelines that you can invest, private lending may not be right for you.
**Keep in mind you can tap into your home equity line of credit…This is where many investors have found a way to turn their equity into profits while they live in their home.**
What type of returns can I expect to make?
8-12% annualized return is pretty common. Remember…You set the terms so this can definitely range depending on several factors such as the type of risk, how many origination points you would like to charge, time frame, and the market can play a huge part in how much you can charge. When capital is easy to find, the amount you can charge goes down. Vice versa in a recessionary market. When I first started utilizing private lenders in 2008, it was common for them to charge 18%!
If you are looking for ways to put your money to work to at least keep up with inflation which is still hovering around 6-8% each year…Private lending could be a great fit.
We are always looking for and vetting private lenders to see if we would work well together.
Hit the button below if you would like to learn more.