The term private money lender is not a usual phrase normally heard by many people unless you are in the real estate investment line of business. A private money lender is a non-institutional (non-bank) individual or potentially a collection of individuals who have formed their own investment pool to loan money to real estate investors. Generally, the loan is secured by a note and deed of trust, for the purpose of funding real estate transactions for home rehabs to resell for a profit. Anyone can be a private money lender for investment purposes that negotiates directly on a personal basis to lend money for real estate investing.
Individuals looking to invest in a short term loan can realize a larger return on their investment. Funding sources for individuals interested in Private Money Lending can utilize their personal investments, such as a 401k, IRA or even money you have stock piled in a savings account. The money can be used to purchase rental real estate investments or to supplement funds borrowed from a bank to cover down payments. Basically, you become the bank for the borrower.
What’s in it for me?
Private money loans typically offer a return on investment of at least 10% or higher per year. For example, if you were to invest in a real estate property as little as 20k per year, you are going to get a return of $2,000 on your original investment which translates into about $167 dollars per month. Compound that into a 100K investment and you could easily be earning $835 dollars per month just for privately loaning your money out.
Is it secure?
All investments have some risk assessment involved, therefore you need to assess your situation to decide if private money lending is right for you. Investing in loans secured by real estate offer a higher rate of return and lower risks compared to the stock market. There are no commissions or upfront fees and the borrower is required to place hazard insurance on the property and you will be named on the insurance policy as the mortgagee.
Many times the borrower is required to cross collateralize an additional piece of property giving them much more motivation to pay back their debt in a timely manner. So basically you are investing in the property without the headaches of being a landlord or contractor.
How do you get started?
The most important step in becoming a private money lender is to make sure you have the money to secure this type of investment. You should have at least 20K to loan out and it shouldn’t be tied to any other purpose other than investing. You must then be able to loan this money out quickly and not have a need for the funds for at least a year. If you have an IRA, you will need to roll it over into a “self-directed” IRA with a 3rd party custodian.
Do a search on Google and ask friends and colleagues about their experiences with professional private money and investment companies. You can get started fairly quickly once you find a reputable real estate investment company and fill out all the necessary paperwork and lender applications.