Get Guaranteed Income by Becoming a Private Money Lender
It is probably common knowledge for everyone that real estate investing is one of the most effective and safest ways to build wealth. There are several ways of investing in real estate. The common ways are by single-family homes, multi-family, office spaces, and others. But most investors do not realize that becoming a private money lender can get them guaranteed income. It is natural for investors to be smart in their investment money. Which is why most of them diversify their investment to mitigate risks. Today, we will help you understand how private money lending works and provide tips on becoming a private money lender.
Becoming a Private Money Lender: What is Private Money Lending?
Before we discuss becoming a private money lender, you need to understand first how it works. Private money lending is when a private individual or small investment company lend their funds to other investors for investment purposes. It is an alternative option to traditional lending. Typically, investors use big banks, government agencies, an insurance company, or other lending institutions for real estate financing. But they require strict requirements and documents. As a result, it becomes hard for some real estate investors especially newbies to qualify. With the presence of private money lenders, they help average investors create and run a sustainable career.
How to lenders and borrowers set loan terms?
Private lenders use a note, mortgage, or other types of security instruments to secure their investment. Some of them are in the form of receiving a return on investment, equity split, or sometimes a combination of both. However, in most cases, it is up to the lender and borrower to set the terms of the loan. They are free to do this since the private money lending is private. Besides, they can also determine the interest rates of the loan. Typically, they are a few percentages higher than traditional mortgages.
Who Can be Private Money Lenders?
Private money loans are usually given by the lender to a borrower that she/he knows personally. It can be a family member, colleague, friend, neighbor, to name a few. However, doing this does not guarantee the safety of the lender’s money. There are also potential risks of money loss in private money lending. If you can afford to calculate risks or fully equipped to mitigate the risks, then private money lending may fit you. Ideally, you need to:
- Have idle money in your savings account
- Must have substantial retirement savings account that you intend to grow
- Wants to have a passive income or invest in real estate without actively participating in it
Tips on Becoming a Private Money Lender
If you are thinking of becoming a private money lender, here are the tips and steps you can keep in mind.
Calculate Risk Levels and Potential Returns
Taking risks is common in any business. But it does not mean you will not make calculations anymore. Without doing calculations, you will not understand the risks. Since this type of real estate investment requires large capital, you want to make sure you can cover the expenses and losses in case the borrower runs from his/her responsibility. If not, you might end up with huge debt and damage your credit.
Educate Yourself
At the end of the day, education is still the key. This is the best investment you can do for yourself and your business. If you want to become a successful private lender, you should fully know the investment offered to you. Thus, knowing the industry is a must. Or at least, have an expert beside you that can guide you along the process.
For instance, a borrower presented an offer for investing in mobile home parks. If you do not have enough knowledge of how it works, you will be clueless about the investment. You will not know the right questions to ask. As mentioned above, if you are not knowledgeable, then seek some advice from the experts in the field. Doing this will help you clear your concerns and decide better. It is also better to physically visit the property/investment.
Create the Best Team
There are some aspects of the investment where you will be needing a hand. You will need an accountant to handle finances and tax details, a lawyer to handle legal concerns, and others. In order to become successful in private money lending, you need to hire and create the best team. They will take care of the other aspects of your business. It is only right to get experts and professionals to assist you in running the business
Focus Locally
Most successful private lending business models are local (within 300 miles radius). If you are not able to find deals locally, you can expand in other markets. But make sure to perform enough due diligence.
Real Estate
If you lend on a real estate flipping or new construction, make sure to get a promissory note and contractual agreement.
Advantages of Private Money Lending
- Guaranteed Passive Income – Probably the biggest benefit of becoming a private money lender is that the lender can passively participate in the real estate market while getting a return on investment. The investor will be responsible for managing the property while the lender collects the check.
- Higher Return Rate – Private money lenders typically get 6% to 15% rate of return. It sometimes varies depending on the terms agreed between the lender and the borrower. But the rate is quite high compared to bank investments or bonds. If you can perform private money lending correctly, you can even grow a retirement account.
- Security Investment Options – We cannot neglect the fact that some borrowers might default. Of course, in any lenders, this sounds scary. But one of the good things in private money lending is that they have different options to secure their money. For example, the lender can move in to secure the collateral through foreclosure.
DISCLAIMER:
DUE TO THE FINANCIAL SOPHISTICATION OF THE PERSONS TO WHOM THIS OFFERING CIRCULAR IS DIRECTED, THIS OFFERING CIRCULAR SETS FORTH LIMITED INFORMATION MATERIAL TO EVALUATING THE MERITS OF AN INVESTMENT. PROSPECTIVE INVESTORS ARE STRONGLY URGED TO CONSULT WITH THEIR OWN ADVISORS PRIOR TO DECIDING WHETHER TO INVEST.
Neither Alpesh Parmar nor Wealth Matters associated claim to be an expert in tax, legal, or insurance strategies. Please consult an expert or advisor.