Private Lending- Here’s All You Need to Know

What’s a better way to make good use of your money than investing in real estate? This explains why investors and brokers are always looking for the best financing solutions for their clients. 

If you’re looking for an excellent opportunity to put capital to work, try private lending. However, just like any financing solution, pirate lending comes with benefits as well as risks. 

It pays to do some due diligence to understand private lending. This helps minimize risks, allowing you to make consistent returns from private lending. Here’s your guide to private lending.

What is private lending?

Private lending is non-bank lending where an individual lends money to a borrower. This form of lending is an excellent alternative to banks and other traditional lending institutions. Private lending is common in the real estate industry.

Private money lenders earn a considerate passive monthly income with huge interests. They use physical real estate as collateral for their investment to minimize risks while maximizing returns.

Who can Become a Private Lender (and How)? 

Anyone with a significant disposable income can become a private lender. Private lending is a sound investment solution for those wishing to grow their passive income. 

It’s not very demanding once the deal is done.That’s why investors like it, because most don’t have time to manage their investments. However, you should weigh other factors before becoming a private lender. 

Why You Should Consider Private Lending

Private lending, if done right, is an excellent way to maximize your passive income. However, it isn’t for everyone. Sometimes you’ll lose money to borrowers, other times you’ll profit from your investment.

Everyone has a reason (or two) for becoming a private money lender. But the most common reasons include:

  • Need for more passive income ( this is one of the primary reasons)
  • Having a significant disposable income either from your business or employment
  • Diversifying your investment portfolio – perhaps getting out of stocks and shares
  • Invest in real estate without buying, selling, or managing properties
  • Inheritance of a lump sum
  • Need to build your retirement account

You may have other reasons to become a private lender. In any way, it’s a good investment opportunity in the real estate market.

Why real estate investors prefer private money loans

What drives a borrower to get money from a private lender rather than a bank or any other financial institution? 

If borrowers need quick cash, they turn to private lenders because of easy accessibility and fast processing. A bank will take ages to process your loan request, and you’re not even guaranteed the loan in the end. You need to provide proof of income and collateral, and sign a lot of papers which is tiresome. 

But for private loans, you can close the deal and have the cash in the shortest time possible. 

Components of a Private Money Lending Deal

A private lending deal comprises three basic elements;

  • Paperwork – promissory note and lien
  • Property – acts as security for your investment
  • Payor – this is the person borrowing money from a private lender

Lending Ratios

Before you get to the lending ratios,  it’s essential to determine how much you’re willing and able to lend. Of course, this will depend on the amount of disposable income you have and the risks associated with a single deal. For instance, something (like illness) can happen to the borrower, which could limit or prevent them from paying up your loan on time. 

Once you’re sure of how much you can lend, determine your lending parameters. The lending ratio refers to the amount of money you can lend as a percentage of the property value. For instance, most private lenders give out loans at approximately 70 percent below the property value. 

Key Takeaways

If you’re looking for alternative financing options in the real estate industry, you might want to consider private lending. It’s an excellent way to earn passive income without selling, buying, or managing properties. However, you should conduct due diligence before lending money to your borrowers. Contact us to learn more about private lending and how to become a private lender.