{"id":143781,"date":"2022-07-15T13:26:43","date_gmt":"2022-07-15T19:26:43","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=143781"},"modified":"2024-02-13T16:18:06","modified_gmt":"2024-02-13T23:18:06","slug":"private-money-lending-is-a-perfect-alternative","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/private-money-lending-is-a-perfect-alternative","title":{"rendered":"Private Money Lending: What Investors Need to Know"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC7695357783\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n<p>When you first think of real estate investments, flipping properties, running short-term vacation rentals, or becoming a landlord are the first things that typically come to mind.&nbsp;<\/p>\n\n\n\n<p>Many investors purchase properties and either renovate to resell them or rent them out, but there\u2019s another way to work as a real estate investor without actually needing to be involved in the sales or renting processes.<\/p>\n\n\n\n<p>Private money lending is an alternative to active real estate investing that requires more hands-on involvement\u2014and the potential return on investment (ROI) can be exceptional.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What Is Private Money Lending?<\/h2>\n\n\n\n<p>Private money lending is the process of an individual or a private organization loaning money to a real estate investor in a private money loan. The investor may use that money to purchase or renovate a home for rental or resale purposes.&nbsp;<\/p>\n\n\n\n<p>Private money lending is less regulated (and thus more flexible) than lending from financial and licensed organizations like banks or mortgage brokers. That being said, private lenders do have to follow state usury laws, which limit how much interest a lender charges. Depending on the state, there also may be a limit to how many loans a private lender can create.<\/p>\n\n\n\n<p>Private money loans can be appealing to real estate investors because the qualification process is different. Lenders are more likely to focus on whether the specific deal is a smart financial opportunity, instead of solely focusing on the credit history or debt-to-income ratio of the borrower.&nbsp;<\/p>\n\n\n\n\n\n\n  <div class=\"lg:block\" x-data=\"{ ad_block_block_65206c4e9087c: popAds(1) }\">\n      <template x-for=\"ad in ad_block_block_65206c4e9087c\">\n        <a\n          :href=\"ad.linkURL\"\n          class=\"no-underline text-black\"\n          x-on:click=\"adClicked('https:\/\/www.biggerpockets.com\/blog\/private-money-lending-is-a-perfect-alternative', ad.sponsor, ad.title, ad.id, 'blockAdClicked', 'blockAd', '')\"\n          target=\"_blank\">\n          <div\n            class=\"py-4 border-b flex flex-col flex-nowrap text-sm border-t px-0 rounded-none\"\n            x-init=\"\n              analytics.track('blockAdLoaded', {\n                referrer: 'https:\/\/www.biggerpockets.com\/blog\/private-money-lending-is-a-perfect-alternative',\n                sponsor: ad.sponsor,\n                ad_title: ad.title,\n                ad_page_location: ''\n              })\n            \"\n            x-intersect:enter.once=\"adViewed('https:\/\/www.biggerpockets.com\/blog\/private-money-lending-is-a-perfect-alternative', ad.sponsor, ad.title, ad.id, 'blockAdViewed', 'blockAd', '')\">\n            <div><span class=\"text-xs text-slate-light block bg-slate-50 p-1 inline-block rounded-md\">Sponsored<\/span><\/div>\n            <div class=\"flex items-center text-sm space-x-4\">\n                <img :src=\"ad.imageURL\" :alt=\"ad.imageAlt\" class=\"h-10 w-10 object-cover rounded-full\">\n\n                <div clas=\"text-sm\">\n                    <span class=\"font-bold block\" x-text=\"ad.sponsor\"><\/span>\n                    <span class=\"text-slate\/80\" x-text=\"ad.description\"><\/span>\n                <\/div>\n            <\/div>\n\n            <div>\n                <span class=\"font-bold\" x-text=\"ad.title\"><\/span>\n                <p class=\"mt-2 text-slate\/80\" x-text=\"ad.body\"><\/p>\n                <span class=\"mt-2 text-themeBlue block mt-2 underline\" x-text=\"ad.linkTitle\"><\/span>\n            <\/div>\n          <\/div>\n        <\/a>\n      <\/template>\n  <\/div>\n\n\n\n\n<h2 class=\"wp-block-heading\">Two Private Money Lending Options<\/h2>\n\n\n\n<p>There are two options for real estate investing: becoming a private money lender, or leveraging loans from such a lender to fund your real estate investments.&nbsp;&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">1. Find a private money lender&nbsp;<\/h3>\n\n\n\n<p>If you want to look at unconventional financing so that you can grow your own investments more aggressively, private money lending may be a great option.<\/p>\n\n\n\n<p>It\u2019s not uncommon for real estate investors to build strong relationships with private money lenders who they work closely with for multiple projects. The flexible terms and unique qualification processes may make it easier for you to find a perfect fit to help you flip a house or snag the perfect rental property\u2014even if the interest rate is on the high side.&nbsp;&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">2. Become a private money lender&nbsp;<\/h3>\n\n\n\n<p>If you have capital and want to put it to work, you can consider becoming a private money lender.<\/p>\n\n\n\n<p>The high interest rate and the typically short loan duration periods can work to your advantage, netting you a solid return on investment in a relatively short period of time.<\/p>\n\n\n\n<p>While there is some risk involved, a lawyer can help you protect your financial investment, and the potential rate of return can be significant.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Pros &amp; Cons of Private Money Lending<\/h2>\n\n\n\n<p>If you\u2019re considering real estate investing, you may be interested in either becoming a private money lender or getting a loan from one. We\u2019ll look at the pros and cons for both.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Pros<\/h3>\n\n\n\n<p>The pros of private money lending will vary depending on whether you\u2019re the lender or the borrower.<\/p>\n\n\n\n<p>For the lender, these are the pros to keep in mind:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>It\u2019s more hands-off than active investing.<\/strong> You don\u2019t need to deal with tenants, renters, general contractors, or real estate agents. You\u2019re just dealing with the borrower directly.&nbsp;<\/li>\n\n\n\n<li><strong>You don\u2019t have the direct risks of property ownership. <\/strong>If a property floods or you\u2019ve got a squatter trashing your home, it can be financially devastating. Private money lending separates you from those <a href=\"https:\/\/www.biggerpockets.com\/blog\/what-are-investors-ignoring\" target=\"_blank\" rel=\"noreferrer noopener\">risks<\/a>.&nbsp;<\/li>\n\n\n\n<li><strong>You can charge more than standard interest rates. <\/strong>Private money lending allows you to set the terms of the loans (within legal parameters), and you can charge high interest rates than traditional lenders do with a traditional loan. It\u2019s standard to charge 15% to 20% interest, and balloon loans are also common. This means more profit for you.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>For the borrower, these pros are most significant:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Funding is flexible. <\/strong>If you see a great investment opportunity but your debt-to-income ratio is a bit high or your credit is still a work in progress, you may have better luck with private money lending than traditional lending.&nbsp;<\/li>\n\n\n\n<li><strong>The money may be available faster. <\/strong>While there is still a vetting process for private money lending, it\u2019s possible that the loan closing process can be completed much quicker than traditional loans. Going with private lending can be a huge asset if you\u2019re trying to move fast on an investment.&nbsp;<\/li>\n\n\n\n<li><strong>The terms may be better for your needs. <\/strong>Sometimes unconventional lending works better for investment opportunities. Balloon payments may not be ideal for a personal home purchase in many situations, but can work well for investors who are flipping homes and just need the initial capital to get started.&nbsp;<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">Cons<\/h3>\n\n\n\n<p>Just as there are pros to private money lending for both lenders and borrowers, there are also cons to consider.<\/p>\n\n\n\n<p>The cons for private money lenders include:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>It\u2019s a risk. <\/strong>Unlike a traditional loan, you\u2019re using your personal or business capital to fund someone else\u2019s real estate investment opportunity. If they default on the loan, you can take a significant hit, even if your <a href=\"https:\/\/www.biggerpockets.com\/blog\/why-you-need-a-real-estate-attorney\" target=\"_blank\" rel=\"noreferrer noopener\">lawyer<\/a> put protections in place through your contract.&nbsp;<\/li>\n\n\n\n<li><strong>You tie up more of your own funds. <\/strong>Your own capital will be restricted through the life of the loan, limiting other opportunities you can invest in.&nbsp;<\/li>\n\n\n\n<li><strong>Qualifying borrowers can be tricky. <\/strong>It\u2019s a lot of pressure to ensure you\u2019re betting on the right horse, and that the horse in question has done their own homework. This can be time-consuming and nerve-racking.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>The cons for private money borrowers include:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>The interest is high. <\/strong>This is a pro for lenders and a significant con for borrowers. The interest rate is much higher than most conventional lending options, which can eat into your profit significantly.<\/li>\n\n\n\n<li><strong>The loans are often short term. <\/strong>Short-term loans put more pressure on borrowers because you need to be ready to repay them quickly. If a project drags on longer than expected\u2014or if surprise costs pop up\u2014this can be difficult.&nbsp;<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">Is Private Money Lending Risky?<\/h2>\n\n\n\n<p>Private money lending is definitely risky for private lenders. They\u2019re using capital from their own personal accounts or their business accounts.&nbsp;<\/p>\n\n\n\n<p>And while you can put protections in place to hopefully recoup payment even if the borrower defaults on the loan, they aren\u2019t ever truly guaranteed, and it may take time to get that money back.<\/p>\n\n\n\n<p>Private money lending can also be riskier for borrowers, typically due to the short duration of the loans. It\u2019s not uncommon for real estate investment costs to exceed initial expectations while dragging out longer than expected, or for there to be unexpected costs or damage to a property. This can make short loan terms more risky because there\u2019s less wiggle room involved.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">How Does Private Money Lending Work\u2014The Process<\/h2>\n\n\n\n<p>Private money lending is a fairly straightforward process.<\/p>\n\n\n\n<p>A borrower contacts a private money lender and asks if they have funding available.<\/p>\n\n\n\n<p>In many cases, the lender will review the following:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The specific investment opportunity, including the financial and logistical plans for the investment; a detailed, written plan is expected<\/li>\n\n\n\n<li>The investor\u2019s own professional background, including reviewing licenses and checking for lawsuits against their building company<\/li>\n\n\n\n<li>The investor\u2019s personal or business finances<\/li>\n\n\n\n<li>Proof of identity&nbsp;<\/li>\n\n\n\n<li>Proof that the business is in good standing&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>If the lender is interested, they\u2019ll create a loan offer. This offer will detail the terms of the loan, which will include the interest rate, repayment period, and protections for the lender.&nbsp;<\/p>\n\n\n\n<p>The borrower can negotiate the terms of the loan, potentially asking for a lower interest rate, a longer repayment time, or a different loan structure.&nbsp;<\/p>\n\n\n\n<p>If the lender and borrower come to an agreement, the lender will provide the funds to the borrower, who will make regular payments at an agreed-upon schedule.<\/p>\n\n\n\n<p>In many cases, private money lending may involve balloon payments. In this situation, borrowers make interest-only payments for the duration of the loan. At the end of the loan, they pay the full loan balance in a lump-sum payment.<\/p>\n\n\n\n<p>For even more information, check out our video on private money lending below!<\/p>\n\n\n\n<figure class=\"wp-block-embed is-type-video is-provider-youtube wp-block-embed-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\n<iframe loading=\"lazy\" title=\"How to Make \u201cBulletproof\u201d Passive Income by Lending Private Money\" width=\"640\" height=\"360\" src=\"https:\/\/www.youtube.com\/embed\/dIoeSo5KOVE?feature=oembed\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n<\/div><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">Private Money Lending FAQ<\/h2>\n\n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\"><div id=\"rank-math-faq\" class=\"rank-math-block\">\n<div class=\"rank-math-list \">\n<div id=\"faq-question-1696621389468\" class=\"rank-math-list-item\">\n<h3 class=\"rank-math-question \">What are the requirements for securing a private loan?<\/h3>\n<div class=\"rank-math-answer \">\n\n<p>Each private lender will have their own specific qualification process, but you can typically expect that they\u2019ll want to review the following for a private loan:<\/p>\n<p>The written financial and logistical plan for your planned investment<br \/>Your professional background<br \/>Your professional licenses and business licenses\u00a0<br \/>Your personal and business finances\u00a0<\/p>\n<p>They want to ensure that the investment opportunity is likely to work in their favor, so they\u2019ll review both you as a borrower and the potential opportunity. They may or may not review your credit history, depending on the lender.<\/p>\n\n<\/div>\n<\/div>\n<div id=\"faq-question-1696621418994\" class=\"rank-math-list-item\">\n<h3 class=\"rank-math-question \">What\u2019s the difference between hard money lenders vs. private money lenders?<\/h3>\n<div class=\"rank-math-answer \">\n\n<p><a href=\"https:\/\/www.biggerpockets.com\/blog\/hard-money-vs-private-money\" target=\"_blank\" rel=\"noreferrer noopener\">Hard money lenders and private money lenders<\/a> are similar, but hard money loans focus almost exclusively on the \u201chard\u201d asset of the actual real estate, while private money lenders look at both the property and the borrower.\u00a0<br \/>A hard money loan may have higher interest rates than private money loans, but both may involve <a href=\"https:\/\/www.biggerpockets.com\/blog\/bridge-loan\" target=\"_blank\" rel=\"noreferrer noopener\">bridge loans<\/a> or balloon payments.<\/p>\n\n<\/div>\n<\/div>\n<div id=\"faq-question-1696621448221\" class=\"rank-math-list-item\">\n<h3 class=\"rank-math-question \">What\u2019s the average return on private money lending?<\/h3>\n<div class=\"rank-math-answer \">\n\n<p>There\u2019s never a guarantee on the return you\u2019ll get, but on average, the return of private money lending is around 8% to 10%.<\/p>\n\n<\/div>\n<\/div>\n<\/div>\n<\/div><\/div><\/div>\n\n\n\n<h2 class=\"wp-block-heading\">Final Thoughts<\/h2>\n\n\n\n<p>Real estate investors should always be keeping an eye out for alternative ways to make more money or improve returns on their investments. A private money loan may open new doors for profit for both lenders and borrowers, and should be considered when you\u2019re looking for less-traditional financing opportunities, or when traditional lenders aren&#8217;t willing to play ball.<\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_34d866916b291169ed05b43ee9bb37ce\" class=\"visibility-group  hidden\">\n        \n\n<div id=\"hero-block_92475bba54e3e0ade3b54ac0ac8b9aa2\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-theme-gold-light-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-theme-gold-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Get the Best Loan Today<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:16px\">Find trusted, <em><strong>investor-friendly<\/strong><\/em> lenders who specialize in your strategy. <\/p>\n\n\n\n<p><\/p>\n\n\n\n<div id=button-custom-event-block_13189a3cdede444143dd7b1fa14a62c5 class='button-custom-event'>\n      <a\n    href=\"https:\/\/www.biggerpockets.com\/business\/finder\/lenders\"\n        x-on:click=\"window.analytics.track('Blog Block | B2C Marketplace Lender Finder', {\n      referrer: 'https:\/\/www.biggerpockets.com\/blog\/private-money-lending-is-a-perfect-alternative',\n    });\"\n    class=\" btn-shape inline-block no-underline has-background has-theme-gold-background-color has-text-color has-white-color\" target=\"_blank\">Find a Lender<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\" first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/Marketplace-Blog-Blocks-Lender-v3.png\" alt=\"investor friendly lender, investor friendly real estate loans\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a\n    href=\"https:\/\/www.biggerpockets.com\/signup\"\n        x-on:click=\"window.analytics.track('Blog Block | Acquisition | Free Membership Signup', {\n      referrer: 'https:\/\/www.biggerpockets.com\/blog\/private-money-lending-is-a-perfect-alternative',\n    });\"\n    class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Private money lending is an alternative to active real estate investing that requires more hands-on involvement\u2014and the potential return on investment (ROI) can be exceptional.<\/p>\n","protected":false},"author":613616,"featured_media":143785,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7403,7119],"tags":[1907],"class_list":["post-143781","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-private-money","category-biggerpockets-daily","tag-private-lending"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/143781","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613616"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=143781"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/143781\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/143785"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=143781"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=143781"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=143781"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}