If Private Lending is So Great, Why Isn’t Everyone Doing It?

by | BiggerPockets.com

In every community right now, there are investors finding out the benefits of creating or buying secured real estate notes. There are investors creating safe and secured private loans, which earn them double digit returns and a monthly interest check in their mail box. These investors are not savvy banker tycoons, but they are the everyday average person who knows they need to improve their financial future. But, these everyday investors are not in the habit of telling you about their little GOLD MINE. They would rather keep the masses in the dark and continue to collect their interest check. Ask me how I know this…. I know this because I AM that everyday investor who became a successful private lender.

So, WHY am I Letting the Cat Out of the Bag?

Am I just an overly nice guy – not particularly. Here are two reasons…my ‘hidden agenda’, per se’.

Do I ever run out of money in my private lending business….YES. Therefore, I want to give you my 15+ years banking perspective on how to make a safe and secure private loan. I liken Private Lending to driving a car. You and I know how to drive a car, but if we get into a brand new car, we are unfamiliar with how to turn on the wiper blades, if the radio is XM, or how to adjust the mirrors.

Same thing with Private Lending, we have all made a friend or relative a loan. Anyone can make a loan, but not everyone can make a Good and Profitable loan or buy a profitable cashflow note (buying an existing note or creating one…same thing). I show you how to do just that so you and I can potentially do business one day. One day, I may have a loan request for $75,000 but only have $50,000 to fund it. Occasionally, I also sell a few of my secured cash flow notes that I have in my personal portfolio, not just brokered.

Second reason I am letting you in on the secrets of Private Lending….Tangible Assets. Friends where ever you have your nest egg, where ever you have your family wealth, please ensure you have it in some sort of Tangible Asset. Here’s why….

$100 Trillion Bank Note

Recently, I bought online a $100 TRILLION bank note from the Bank of Zimbabwe. I use it when I do presentations to Real Estate Investment Associations as what NOT to do. I bought it for 56 cents! Can you believe that? It cost more to ship it than it did to buy it. Why…years ago, the Zimbabwe government over inflated its currency to the point of collapse. This is not an isolated case. Study some of the causes of the French Revolution – their currency ended up going away.  Study what caused the currency devaluation in Russia in 1998, Belarus 2002,…remember the Asian Financial crisis in 1997?  I am just saying the U.S. is not immune. Listen to the folks who went through the depression.  They will tell you to have tangible assets. Investments you can taste, feel, and touch. Private Lending is one way to secure your investment with those tangible assets as every loan I make is backed, at a low loan to value, by marketable real estate in my local area which I know very well.

I’m Just Saying…

Friends, we have got a recipe for disaster, in my humble opinion.

  • We purportedly adverted a major financial crisis. (One day we are in financial ruin, next we are fine? That’s suspicious.)
  • Federal Debts and Deficits (They just don’t go away). Go to www.usdebtclock.org. That will scare the bejeebies out of you.
  • Business and Personal loans are at an all time high.
  • Banks lending capacity reduced due to increased regulations.
  • Inflation looming.  (The Federal Reserve cannot continue to print money without repercussions.)
  • Increased taxes.

I am not an economist and I don’t use tarot cards.  I am just pointing to the obvious, saying this is NOT sustainable. I have all my money in private loans backed, at a low loan to value, by marketable real estate in my local area which I know very well. I suggest you find a similar business model and make it successful.

To Your GOOD Wealth…
Photo: Tony Fischer Photography

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. My only thought here is “What if one day I am holding a Trillion dollar US note? Will the value in a private note have any value, when the proceeds of the balloon payment will most likely be equal to a postage stamp?

    Don’t get me wrong I am sure the banking industry will be saved as it was in Argentina, with the government devaluing the Peso but holding the peoples mortgages at their current value.

    If this were to happen in the USA as well, having a note against real property would be a boon to the investor as he would most likely gain title to the collateral insuring his notes value.

    A better trophy for you banknote collection would be a 1946 Hungarian 100 quintillion Pengo, which if I am not mistaken was the largest denomination in the history of the world.

  2. Your article is contradictory in regards to the benefits of private lending. When you reference your Zimbabwe $100 Trillion bank note that seems to devalue the benefits of private lending. You are referencing the impacts of inflation on the $100 Trillion bank note essentially making it worth 56 cents in your example. Understanding how inflation works if we have rampant inflation the last thing you would want to have is a bunch of private mortgage that are being paid back with cheaper and cheaper dollars due to inflation. The person that would make out very well in a period of high inflation is the person that owns the asset (home) and is paying the note holder back with dollars worth much less. Assuming you have a fixed rate mortgage and let’s assume your payment is $500/month and we experience a period of inflation that $500 is buying you less and less each month and the homeowner owns the house which is inflating/appreciating in value.

    I understand private lending but feel your example of inflation being a benefit isn’t the most compelling reason especially if you are doing long term private notes and expect a high level of inflation.

    • Dennis, James, and Tim,

      Good catch guys. That is why a while ago I amended my company’s promissory note to say, “…(repayment) in such coin or currency of the United States of America, or coin or currency deemed by Lender at the time of payment to be legal tender for the payment of public and private debts.” In addition, I don’t prefer long-term notes. I get in and get out with my private cashflow notes.

      I don’t want to get back worthless dollars unless I authorize it. Remember the Golden Rule: “He who has the gold makes the rules”.


  3. I think the reason allot don’ do it is because it is illegal and may require being bonded and licensed in your state, check your Office of Bankers Commissions.. Here is what my state says if you are caught. A felony and imprisonment .

    Any person who willfully or knowingly violates any of the provisions of this act, any
    rule and regulation adopted or order issued under this act commits a severity level 7
    nonperson felony. A second or subsequent conviction of this act, regardless of its
    location on the sentencing grid block, shall have a presumptive sentence of
    (e) No prosecution for any crime under this act may be commenced more than five
    years after the alleged violation. A prosecution is commenced when a complaint or
    information is filed, or an indictment returned, and a warrant thereon is delivered to the
    sheriff or other officer for execution, except that no prosecution shall be deemed to have
    been commenced if the warrant so issued is not executed without unreasonable delay.
    (f) Nothing in this act limits the power of the state to punish any person for any conduct
    which constitutes a crime by statute

    EG, KS Law: http://www.osbckansas.org/DOCML/DOCMLLaws&Regs/cmlksa2-12.pdf

  4. Hello Terry,

    You are right. At last count, there are 7 States which require private lenders to have some sort of license. In my book, that is the first thing I talk about. I instruct would-be private lenders to consult their legal counsel on local State laws because every State is a little different. In my State, Washington, there are similar statues but they give an exception when using your own funds and when making a loan for business purposes only. Some investors in the 7 states simply buy notes from my company which are secured by collateral in Washington or Idaho and which earn a good return.

    Thank you for bringing this to everyones attention and for the informative link.


  5. Lee you’re welcome. My state requires a surety bond, and from what I read that protects the public from unethical or illegal lending practices knowingly or not. It is not an insurance policy per say, and provides no legal protection to the PML if they are sued. I’m not current on what all state requirements are, but I can imagine you need to look at your “current” states exemptions and regulations, and keep up on them. Seems to reason the ones that are not regulating PMLs are putting them and the public at risk, perhaps to promote their legal systems, as are the ones that make this sound so simple.

    I suggest before anyone purchases any educational material on the subject to first consult your states Office of Bankers Commissions Office and make sure what they point to as state laws has the latest Federal SAFE act updated, and a private attorney.

    IMHO Lee, despite a select few such as yourself perhaps that may have not been sued legal conclusions cannot be drawn. Your future blogs on this subject should include disclosures to the above in the opening narrative and not make it look so simple. We all know the old adage, “if it looks to good to be true it probably is” . We would not want BP readers being imprisoned. I’m sure you agree with me on that. 🙂

  6. Thanks for the counsel Terry. Nothing worth doing is ever easy. I may make it look easy because of my multiple years in the business, but rarely is there ‘easy money’. Regarding regulations, the SAFE Act and Dodd Frank act has not put the private lender out of business in my State yet. My company is regulated by the DFI, Department of Financial Institutions and the SEC. I have spoke to them several times and the DFI has done two brief reviews and then went away.

    I should do a blog about this later, but, if I cannot make a borrower a loan because of blemishes like a bankruptcy or tax liens or if someone is in one of the 7 States which require a license to be a private lender, I use what I call my financial combination product. In a nut shell, the borrower assigns his Purchase and Sale to my company at the closing table. I then immediately sell the property back to the borrower with my interest and fees added back in. I have done this a hand full of times and it has worked well with no push back from the closer, seller, or regulator.

    Again, thank you for adding your insight. You are obviously experienced. I hope you would continue to ask the hard questions.


  7. Lee, I’m not experienced as a PML or banker. I just do my homework before I engage in questionable activity, and rarely believe making money is a simple task. I was looking for ways to bring a PML into partnership and stumbled across OBCO and state law. As with my research on LLC’s, all I get from state offices is “talk to a private attorney” I’d go broke doing that so I dig in. I am fortunate in this case, they pointed me to the legal state guidelines and at the same time all law in my state has the disclaimer that what is posted on the website may not be current, go figure!. I think they make it impossible to understand, also in the vagueness the law is written in, to feed their court legal systems.
    In reading my states guidelines, I don’t think there is any skating around law with the tactics you mentioned. In an evidentiary hearing the court would probably see right through it. An analogy would people that create LLC’s only to run them as individuals and they are pierced in court.
    The more I look into Real Estate as a newcomer, the more I am seeing that there is a lot of hype and people do not have their legal basis covered.
    Next thing I want to try and figure out is if this is possible in a LLP or trust like land of family, where one member is putting money in it, and the others are offering rahab experience. From what I read again that would questionable and skating around law too.
    Thanks for disclosing the other legal regulation’s PLMs are bonded to, demonstrates my points.

  8. Combined my wife and I make good money but I want to consolidate all our bills and our children’s tuition costs all into one easy monthly payment and we need an unsecured personal loan for $50,000 and in return I would pay back $75,000 over 60 months. You aren’t getting 50% on your money anywhere. Is it worth the risk to an investor to do this deal seeing that it is an unsecured loan.?

  9. Andrew Ziebro

    Hi Lee, do you recommend a book or resource on how to go about securing private lenders to help fund real estate deals? I have a year in the business as an investor and have used hard money for rehabs and private money on smaller deals and as secondary funding but I would like to start using more private lenders for my deals.

    What do you recommend?

Leave A Reply

Pair a profile with your post!

Create a Free Account


Log In Here