Private Money Lending: Advice from a Seasoned Real Estate InvestorMay 18, 2023
From a real estate investor’s point of view the hardest part about working with private money lenders is the education process if they have never loaned on a real estate deal. Most private money lender transactions are based on relationship networking – people have to know who you are, what you have done, and if you are someone that does what you say they will do – mainly – do you pay back previous money lenders!
Once you have established a base of private money lenders, you are on your way to scaling your business, increasing the number of properties you can purchase, and building a reputation in the real estate investing arena.
Private money lenders need to be aware of timelines that investors have to work with, time is of the essence when you are trying to close a deal. Most real estate investors advertise a quick close, so private money lenders need to be aware of the timeline, ease of transaction that can provide a real estate investor.
Over the course of investing, you will find that not all lenders are created equal, and that fees for their service can range widely. Prior to locking that deal down, you should first start looking at how you are going to fund the deal, what is going to be the cost of the money you are borrowing, including points, and “additional fees” a lender has.
One trend that you will see over the next several years is real estate investors who are looking to “wrap” a loan. As affordable housing becomes unavailable for many homeowners, one solution to homeownership is owner financing. As traditional banks tighten their qualifications, it will be harder for the average joe to qualify for a mortgage. What if you as a lender could offer a program for real estate investors, that allows the underlying mortgage to be wrapped, with a solid buyer vetted through the RMLO process.
In this article How The Rise of Private Lending is Reshaphing The Mortgage Market it gives the investor an idea of why they should learn more about privaate money lenders, and benefits of growing your portfolio of investing properties.
As the market corrects, private money lenders should be flexible in the terms and offerings of their services. As a real estate investor, one trend you will see develop is the private money lender offering longer terms loans. Those lenders that normally offer short term, high interest loans, should look to longer term loans that are attractive to buy and hold investors, or investors that are looking to make a difference in communities by offering owner financing.
You also need to understand the real estate cycle, and how it affects lending in your specific real estate market. In competitive markets, you will find an overabundance of inexperienced real estate investors – what parameters have you put in place to protect the lending opportunity. Many private money lenders who have had success with lending but have not faced the problematic situation of a foreclosure could find themselves in a situation having to take back property.
As a private money lender, you may well be versed on making money through interest charged, points, and additional fees, but are you prepared to tackle the foreclosure process, and what is your plan if you do foreclose on a property, how will you recoup your losses of revenue, and if it is another state.
Changing trends are an ideal time to capitalize on the market by updating loan products. When the real estate market is soft, more sellers than buyers, private money lenders should offer real estate investors competitive rates with longer terms. Private money lenders to offer these types of products may need to consider the valuation of not only the property, but the real estate investor’s history of performance. This may seem counterintuitive to a private money lender, and more aligned with traditional lending, but private money lenders can grow their business, increase their overall income by staying current with real estate trends in your area.
Collaboration is another avenue for you as a private money lender. What has worked with great success as a real estate investor is to offer a “piece” of the pie to interested private money lenders. In my business, I am looking to forge relationships with private money lenders, but also looking for terms that not all private money lenders are accustomed to – thinking outside of the 2/10 box, I have offered my private money lenders a share of the profit or sell them an interest in the project I am working on.
As an investor, I am paying about the same amount to borrow the money but focused on developing on going relationships with private money lenders. An added bonus is this partnership continues the education of both parties on the private money lending side and the real estate investing.
As a private money lender, or someone who is thinking about becoming a private money lender, you should be asking yourself three questions:
- What is the source of your funding?
- What terms are you satisfied with lending?
- What is your process of vetting potential real estate investors who present a lending opportunity?
Source of funding:
If you are a sole lender, you may be missing larger opportunities, and tying up your money, not making enough spread through your origination fees, and you may be a new lender who just wants to get in the game of real estate investing. Have you considered joining forces with other like minded individuals so that your offering of money can reach multiple real estate investors, or a real estate investor that has multiple deals?
Terms of your lending:
Are you stuck in the 2 points, 10 percent? Have you considered longer terms with lower rates? Private money lenders using their self-directed IRA’s need to consider the cost of withdrawing and replacing their funds. An education point for private money lenders, leaving their money in place for longer periods of time will have a greater net growth rate than rotating the funds every six to 12 months. If your IRA is not paying anything into your account, it makes financial sense to loan your money at a lower interest rate for a longer period of time.
Partnering with a savvy real estate investor who offers private money lenders a share of the profit can garner more income and serve to educate the private money lender about the real estate cycle. If the market has turned, and flipping is a short lived real estate strategy in your market, then consider partnering with a real estate investor who can educate you on different exit strategies during changing real estate cycles and earn you a great return over a longer period of time.
Vetting your potential borrower:
Private money lending in real estate investing is a constant learning cycle, and if you don’t keep up with the trends in your market, you could see a loss of potential lending opportunities. As more private money lenders become educated about lending opportunities in the real estate arena, competition for opportunities will increase, forcing lenders to be more competitive in their pricing, application process and turn around time.
Private money lenders who are tuned into the market cycles, observes the real estate investors choice of exit strategies will be able to offer loan products and capture a bigger share of the market than those lenders who remain steadfast in their lending products.
Originally published in the 2020 Winter edition of the American Association of Private Money Lenders magazine, this article remains just as relevant today. In fact, private money lenders are now more in demand than ever among real estate investors. With traditional lenders offering loans with stricter restrictions and higher interest rates, banks are increasingly viewed as an unreliable option. This presents a unique opportunity for those interested in becoming private money lenders.
Real estate investors seeking funding under $100,000 can be a goldmine for private money lenders, as many lenders, including hard money lenders, have limits on the amount of funding they can allocate to investors. Through extensive research on lenders, I have found that very few are willing to consider lending on properties with smaller loan amounts. This creates a significant opportunity for private money lenders to collaborate with investors who are looking to purchase properties in secondary markets or acquire lower-priced properties but struggle to find the means to do so.
By building relationships and networking with each other, investors and private money lenders can mutually benefit. Private money lenders gain more options to earn passive income, while investors can purchase more properties and expand their portfolios. This collaboration allows for more flexibility and creativity in financing options, as private money lenders can develop financing strategies tailored to individual investors' needs.
Here is the link to the original article that was published in the American Association of Private Money Lenders magazine: Private Lenders: Will Your Products Get the Job Done During a Market Downturn?
P.S. If you ever have questions on where you should start schedule a call with me.