There has been a rapid growth of the real estate market across the globe today since many investors have the chance to be financed by private money lenders. Investing in real estate and rental property is an effective form of wealth building. What is a private money lender?
Private money lending is when individuals hand out their own cash to finance investors in their investments and forthcoming projects. The private lenders professionally offer the capital while holding the borrower’s real estate property as loan security until the investor gets to repay the outstanding loan. Note that late payments or loan defaults lead to loss of property by the investors.
What Is a Private Money Lender? – What Do They Do?
Most private loan lenders charge high-interest rates compared to other traditional loan lenders. This is due to the high risks one can come across in this course. The private lenders may adjust their loan interests anytime depending on the risk level. If the risk level of the forthcoming project or investment is high, the interest rates charged will be high and vice versa.
Private money loans regulations
All private loan lenders are subjected to the set bank rules and regulations and they must follow and abide by them. However, these regulations limit the lending capability of private lenders especially if one doesn’t have a banking license. Many lenders do not see the need of having a banking license since they are doing the lending on a personal basis. Some countries and states have limited their lenders on the number of loans they can offer before owning a banking license.
Risks faced in private money lending
There are quite a number of risks one can face during private money lending both with the borrower’s side and the lender’s side as well.
Sometimes the borrower might fail to do research about their private lender thus not knowing where the capital granted might have come from. Normally, the capital is obtained from other borrowers who are investing in something in return. The borrower should fully check their lender just to make sure their reputation is clean and the money offered is from a good source.
This will give you an assurance that the loan won’t get to fall apart later on. The borrower should read and understand the loan agreement well to avoid facing financial conflicts with your private money lender.
Private money lenders are supposed to do due diligence to make sure that their borrower is trustworthy enough to be offered the loan. If the loan is granted and the borrower uses it to fund a risky investment, the borrower defaults the loan terms and they may get to lose their property or face the wrath of the law.
Pros and Cons of Being a Private Money Lender
Pros
- One gets to earn passive revenue and real estate property
- It is an easy-to-handle type of investment since it requires minimum handling after the lender is done vetting the borrower.
- A high return rate for one’s savings account as well as retirement.
Cons
- The private money lender is at risk of the borrower getting to default the loan terms or even fail to repay the loan thus having to take a legal step against the borrower.
- Vetting the borrower and the investment property as well to get rid of any surprises
- How to become a private money lender
- Decide your fund’s source
- Seek an investment opportunity to venture
- Make sure you do your due diligence both on the borrower and the investment as well.
- Set your loan terms
- Complete your paperwork
- Begin your collection
- Deciding your fund’s source
If you are a beginner private money lender, you have to decide where your funds will be coming from, do your budget, and get to determine how much you’re willing to lend. You can have some readily available cash stored in your savings account that you may get to the wire when the appropriate time comes.
Moreover, you can convert a 401k plan or traditional to a self-run IRA plan which authorizes individuals to take part in private money lending, for Real estate.
As soon as your capital is in the right account and readily available for lending, calculate and determine the amount of cash that you’re going to use for the course and leave your savings intact to curb any emergencies or risks that may be forthcoming.
Seeking an investment property
Once you have determined your financial source, put your funds in place, and determine the amount you are willing to lend; you will have to look for an investment opportunity to venture. Attend major local events and join local investment associations to grasp investment ideas or hot deals that may seem potentially profitable.
Talk to your friends, colleagues, and any family members who are interested in real estate and brainstorm your private money lending offer when the time is right.
Many investors tend to keep their financial relationship private with the other party thus keeping their deals and offers undisclosed until the appropriate time comes unless one has a PPM (Private placement memorandum) and they’ve filed for the appropriate regulations. Some investors go contrary to the set regulations and guidelines for private money lending.
Therefore, rookie investors should work with individuals they know and trust or make sure the individuals you are working with are familiar with the regulations to create fruitful connections with other experienced real estate investors.
Conducting due diligence
Every private money lender should conduct their due diligence both on the borrower and the investment to make sure that the borrower is to be trusted for the period you’re going to be in business with them. Investors should all master how to analyze a borrower and review their real estate investment even if the lender is working solely.
Many borrowers might have a clean record but it’s always the private money lender’s task to both the borrower and the real estate or investment property. The private money lender should go through and confirm the presented information to make sure it’s accurate. Furthermore, the lender should interview the borrower upfront and deeply review their financial record.
The private lender should look-see that the investor doesn’t get to use the cash granted to fund harmful investments. However, the lenders concentrate more on the borrower and the investment as well to make sure they are both worthwhile.
Determining your loan terms
After doing your due diligence, set and determine your loan terms keenly. Who is a private money lender? This is a semi-institutional money lender who can decide to offer the same terms and conditions for every loan or consider adjusting some terms from one investment to another; depending on the investment’s profitability potential.
Similar to traditional lenders, few private money lenders require their borrowers to pay down payment fees which is a certain percentage of the property’s overall price. While a vast proportion doesn’t. It’s always up to the private lender to set and establish the terms stated below for their loans:
- Loan interest rates
- Loan interest types
- Repayment period
- Closing costs e.g. points
- Additional balloon payment
- Finalizing your paperwork
While not so essential, it is advisable that a lender should have licensed attorney paperwork relative to private loans. This act makes sure that both the lender and the investor are protected and the proper federal terms are followed in case of default in the future.
The private money lenders should store the property’s possession documents safely and provide a copy to the borrower. Depending on the state one comes from if the borrower default action is followed appropriately. The mortgage ownership documents should also be presented before the court of law for foreclosure.
Begin your collection
After completing their paperwork, the lender should start collecting. Keep the borrower’s record of payments including bank statements, bank checks, and even excel spreadsheets to make sure all the payments were done fully by the borrower. It reduces the risk just in case your borrower defaults and to market your loan as well.
Becoming a hard money lender can be your breakthrough financially if you have idle money readily available for lending out or if you want to grow your portfolio in real estate. All you need to do is attend real estate local events to keep up with the trends and updates about real estate activities in your area.
By attending these events you’ll get to meet up with your fellow investors and other traditional hard money lenders from whom you can gain more insight into real estate investment.
Conclusion – What Is a Private Money Lender?
By reading keenly through this piece of text, I believe you have gotten to understand ‘what is a private money lender?’ Read and follow the guidelines above to learn how to become a private money lender and set up your real estate investments today.
However, make sure you abide by all the set rules and regulations concerning private money lending to avoid having financial conflicts with other investors in your area. This can make your investments fall apart due to the legal dissolution of a poor reputation.
