So You Want to be Private Lender…Good Idea!

by |

“There’s Gold in Them Thar Hills!” – Mark Twain

In January of 1848, a small nugget of gold was found at John Sutter’s sawmill in Northern California. Sutter was afraid that the discovery of gold would take his workers away from the mill. He was also concerned that gold would bring prospectors onto his land. He asked his workers at the mill to keep the gold a secret, but it did not stay a secret. By late 1848, gold fever started to spread across the country making national news. In droves, people flooded the State of California seeking their fortune in gold!

However, while a minority of miners made money during the Californian gold rush, the majority of miners did not. Actually, out of every 1000 miners, 3 got rich.

So Who Made the Money?

The merchants made the money! It was very common for people to become wealthy by providing the miners with food, loans, supplies, and services. Many people who became wealthy ran the boarding houses, the banks, the livery stables, and supply stores.

A True Story

There was an entrepreneurial gentleman, who found out about the gold at Sutter’s mill while in Northern California. He immediately headed South to San Francisco and bought every pickaxe and gold pan from all the supply stores in town. He then established his own supply store and spread the word about the gold rush! (by the way, a private lender gave him the cash for his inventory.) When buyers of pickaxes and gold pans came to his store, his inventory was priced considerably higher than his original cost as he had a virtual monopoly for gold mining supplies.

The Takeaway

Just like in 1848, the entrepreneur who thinks out of the box will be successful and profitable.

The parallelism between private lending and the gold rush is uncanny. Today, all real estate investors want to get rich building homes, flipping properties, or managing large apartment complexes or commercial properties. However, only a minority of the participants in this market will get rich. Much like the mass of miners in 1848, the participants of this market work too hard, take too many risks, and are always looking for the next dollar.

The way to make money in the real estate market is by providing the capital or the “tools” to the “miners” through private lending and the buying of private, real estate-secured notes.

You can do this with other people’s money, through a self-formed lending club, your self-directed IRA, a line of credit, or your own funds and make double-digit secured returns where your borrower takes the risk and you collect your check!

Do you do any private lending? Why or why not?
Photo: Wikipedia Commons

About Author

Lee is a private lender with over 15 years of personal experience in the real estate industry. He teaches the everyday investor how to stop thinking like an investor and how to start thinking like a Banker by reviewing and creating cashflow-secured promissory notes that create double-digit returns.


  1. Lee, a very good post! Personally I buy, rehab and take care of my properties. The smarter way is the one in which you described, a lot less work. No tenants, late night phone calls or as in my case that just happen, rented a place out and found out all the copper pipes are gone. This happen on a Friday and hopefully fixed on Monday, great hun?

    Now if I was the Banker, wouldn’t bother me as long as the checks keep coming in.

    • Hey Jim,
      Thx for sharing. The copper pipes went missing on one of my borrower properties about two years ago. It was quite a pain for him. Since buying, fixing up and holding works for you, please continue. I like that strategy as well, however, I do think it is easy to become the bank.

      Lee Carney

  2. Lee, I have not started private lending yet, mostly due to trying to find the right deal with the amount of capital I have and wanting to make sure I do not get scammed by the many people that are out there that do not have a successful plan and will leave a wake of debt in their path. What tips have you found to networking for people that are looking for private funding and protecting your assets when you do loan the funds?

    • Hello Jim,

      There are many deals out there for private lenders but you do have to watch out for scammers – you are correct. I reduce my lending risk by taking marketable real estate(or some other tangible asset) as collateral. There is well over $1 trillion sitting in investor’0s bank accounts, CDs, money market accounts and mutual funds just looking for the right and safe opportunity to invest. How you find them is have a successful business.

      In my case, since I have proven myself as a successful private lender, investors now approach me from my local contacts wanting to get involved. I used to enter into Joint Ventures with them, now I simply sell them my secured cash flow note I created and the earn they 10% to 12% return – and they are secured by the same collateral I was.

      That is the system which has worked for me.

      Many happy returns my friend….
      Lee Carney

  3. .lee,
    Great intro into private lending!
    My experiences are from a fairly passive side of investing in realestate. I have a day job, own six rentals and try to keep some dollars invested in private financing. Buy and hold as well as private financing have their advantages and disadvantages. For example and as you have pointed out, owning rentals requires working with tenants and toilets. For the passive investor much of this is passed on to the property management company. However, there is still managing the management companies and keeping up with tracking the expenses and sometimes overseeing more complex repairs.

    My ROI on on most of the properties ranges from 10percent in bad years to over 30 percent in a good year putting 25% down. One is paid off, generates 80 percent based on original down payment and is not included in the other ROIs.e

    The private financing side requires much more capitol, but still very lucrative as pointed out by the article. The maintenance requirements are minimal on this investment type for most transactions. Out of the three years and 30 or so transactions, I have only had one go sour that I have had to push the lender. This was new construction and a modification on my standard model, which, I should have structured differently. My return on this investment is closer to 13 percent when considering the times when the money is inactive. In, general, however, for a passive investor much easier to manage than the rentals.

    Thank you for bringing this investment type to the forefront for other investors.


    • Hey Kevin, sounds like you have created a profitable business model – good job.

      To clarify, private lending does not take a considerable amount of capital. I started my business on credit cards while I still worked at my bank. Once I got it off the ground, I used lines of credit and OPM. Now I use my own funds as well. I also talk about additional sources of cash to be used for lending in my best selling book.

      “But whatever you do, do something to be profitable”. That is a quote from one of my college business professors – glad to see you are in the game.

      Lee Carney

  4. The parallels are very similar – although the lenders can make good money, the miners can make money as well – just as long as they know what theyre doing. Making money in real estate is not just for lenders, but with a solid system for sourcing and then buying, the average real estate investor can have percentages higher than 0.3%. “Getting rich” is the question – you can certainly do all that and make a full time living – as for “getting rich”, youll have to really work at that and have a very good knowledge of where to pan for the gold.

    • You are right Mike. Several of my borrowers make much more than I do. Why? They have a system and they stick with it. Once they perfect their system, I would submit they still work harder than I, but not much.

      Happy Investing.

      Lee Carney

  5. Our construction company’s main client is management company’s. We have a $50,000 bid in right now for a home that the tenant left many pit bulls in the house locked for a long time. They had plenty of food just no way out to go potty so they destroyed the place, others have bids in @ $90,000. and the owner is having to dish out alot to sue the management company. Guess the management company will sue the tenant if they can. I think it would be an interesting law suit, since so many assume the management co.assumes all liability in these cases. I’d like to see IF the contract signed by the owner and management company holds up in court.

    Seems these days the SAFE and JOBs act makes it more difficult for private lenders to lend and be “non-credited” lenders exempt to all the security laws, and the ones that are not cost a fortune!

    • What is it with tenants and pit bulls…making an observation, they seem to go hand and hand.

      Regarding the court case Terry, you may end up spending a good deal of hard-earned $$$ seeing it to fruition.

      You are right about the increased regulation. To mitigate its affect, educate yourself in the law and have a good securities attorney at your side. I could recommend the guy I use, but he only practises in Washington State. I always counsel my consulting clients to have a good lawyer on their team.

      I think because of the increased regulation, private lenders have been busier. I know I have received quality bank borrowers in my portfolio because their existing bank can no longer lend to them because regulations have changed or became tougher.

      Lee Carney

  6. Great Post Lee!..and timely too I might add.
    I am just getting started in real estate, I have a business plan that guides me through wholesaling, dips my toes in flipping rehabs, and then…what? Well, I have been thinking about it; I don’t want to wholesale and flip houses my whole life, nor do I fancy myself as a landlord. It only makes sense to become a pml. I saw your post and it only reiterated what a good idea it is…”common sense stuff” as Jeff says..

    I’ll be following you and reading your other posts.

    • Thx for your comment Melinda.

      I know, I have searched for some time for other investments which could give me more return for the same security and I simply have not found it. Keep learning and investing. Remember, you only fail if you don’t get up after you fall.


  7. Lee, I never thought of getting tangled up in a lawsuit from a job your correct

    I hope ppl are not thinking that PML has no risk, in comparison to land lording. Correct me if I am wrong, but I don’ see it as “common sense”. You are the owner and maintainer of a note that can lose money to foreclosure, and in some states more than others. If you don’t lend according to state law, in my case under a broker and their fees, and the SAFE act now JOBs whatever that means, you can be subjected to criminal litigation I believe. I would think just like a landlord-tenant needs good insurance, and a good attorney (maybe more than one) will cost and take away from ROI. Here foreclosures are as active has home sales many lenders are getting back properties that sit on their books a long time.

    One way around lending laws I am thinking is in a LLP, but I am not sure. I think if a PML (non broker) were to just issue a loan via promissory note in my state it is illegal. The office of the State Bank Commissions said I’d need to run it by them to find out if my PML needs a broker.

    • Terry,

      It is good to be cautious. Regarding foreclosure, if a private lender has made the loan right, foreclosure is a positive thing! MIND YOU, and I talk at length about this in my best-selling book, NEVER loan to own. It is unethical and the lender gets a local bad reputation.

      That said, private lenders are secured by business assets(SAFE act is less important with business assets). If a private lending has to foreclosure, the borrower has already improved the collateral and the lender made a loan against the collateral at a very low loan to value.

      Regarding law suits, I was told by my boss and mentor while at my corporate banking job as a commercial bank examiner, “You will be sued by the borrower you do not help and empathize with”. Again, keep in mind lender liability, but using the real golden rule…”do onto others, as you would have done onto you”. Translation, even though your borrower maybe having a difficult time, he/she is a person with dignity and self worth and should be treated as such. I have always ran my business with that philosophy and I have never been sued.

      Lee Carney

  8. Be nice Lee if the world responded in kind to kindness, but in many cases that is simply not the case. Most REO’s around here did not build assets, no matter how kind you treat the owner they blame the loss of their jobs and hardships on the world, hence banks/PML’s and trash the property taking anything of value including cabinets, plumbing, materials since they cost so much these days and have good resale value. Your fortunate to not have been sued, I have read the testimony of ones that have here on BP, and see so many others that are a legal ticking time bomb waiting to explode into huge legal losses since they don’t understand the law and/or cannot afford a good attorney(s).

    Again, I fail to see the “common sense” in all this but what do I know.

    • Yes, you may be right Terry. However, all I can do is control how I respond to people who have negative intentions.

      I encourage you to continue to be a student of private lending. 200 hundred years of bankers have been turning a nickel successfully. Let’s you and I see study how they do it.

      Lee Carney

  9. Hi Lee,
    My name is Dilshad and the article was a interesting read. I sometimes get very confused and I was wondering if you can help me. If a private lender, lends “secured funds”, then how in the world can there be such a thing called “risk”? I mean I know already how to be safe from scammers, by checking their credit score, having a advance commitment of an asset, etc. So if a person already knows that part, can a private lender, lend to businesses such as commercial businesses, medical centers, real estate, etc? If official documents are made through attorneys which backup in all four ways to secure your funds, then how is there still a risk involved? Please clarify and give me some scenarios so I can understand on my part that what am I missing here? Also I am a beginner so I will need help….thanks

Leave A Reply

Pair a profile with your post!

Create a Free Account


Log In Here