So, are you wholesaler<\/a>, rehabber, or landlord<\/a> now? Then, my advice to you is to understand the lending and finance side of the business as if you were a banker.<\/em><\/p>\n Why learn to think like a lender?<\/p>\n Because eventually you\u2019ll want to scale and scaling takes capital, and one day, you\u2019ll run out of your own money. That\u2019s when lenders become very important players on your team.<\/p>\n Plus, I\u2019ll lay odds that once you \u201cget\u201d how real estate works for the lender, the \u201ca-ha!\u201d light will turn on, and it won\u2019t be long before you switch seats at the closing table.<\/p>\n Here\u2019s how that evolution in roles played out for me.<\/p>\n Back when I first started out in real estate investing, I didn\u2019t know that borrowing or lending private money<\/a> for rehab projects was even an option. Like many investors, I was focused on finding my next deal and trying to convince the bank to help me pay for it.<\/p>\n In my early days as an agent working with investor-buyers, though, I learned fast that if my investor clients didn\u2019t work out the financing side of the transactions I was brokering for them, I didn\u2019t get paid my commission. Nothing happens until the money changes hands, and \u201cthe bank\u201d seemed in control of that part of things.<\/p>\n When I started networking with other real estate investors and attending local real estate club meetings<\/a>, I learned about \u201cbeing the bank\u201d and other alternative investments\u2014and ways to create multiple streams of income (see the article, \u201cHow to Create Multiple Streams of Income in Real Estate<\/a>\u201d).<\/p>\n My first encounter with non-bank lenders came when I was looking for capital as I grew my rental property portfolio<\/a>. At real estate club meetings, I met several \u201cprofessional\u201d hard money lenders who did lending as a business, and I saw how much yield they were bringing in while taking on very little risk. But it just seemed so expensive to me (as a borrower).<\/p>\n The next thing I discovered was that hard money rates<\/a> were typically higher than with private money<\/a>, which tends to come from people who don\u2019t lend as their primary business but do it more \u201con the side.\u201d Borrowing private money was more appealing to me as a borrower, but I could see that the lender was also doing very well on his side of the transaction. And soon enough, after working with private lenders on my projects, I started tapping into the equity from my rental properties and doing some lending myself. Now, I run a fund that manages mortgage loans as investments (although to this day I still buy, borrow, broker, and lend on real estate).<\/p>\n So, that\u2019s how I \u201cbecame the bank.\u201d<\/p>\n Whether you aspire to be a lender or you want to understand their side of things better, here\u2019s a quick summary of how to think \u201clike a bank\u201d when dealing with real estate.<\/p>\n 1. Less Risk<\/strong><\/em><\/p>\n As the lender, you can structure the deal in ways that protect you (i.e., short-term, points, etc.). Another good way to limit your exposure or risk is to release the capital on a draw schedule, meaning that you lend portions of the total amount as work is being completed.<\/p>\n 2. More Passive<\/strong><\/em><\/p>\n Lending private money is obviously more passive than being on the other side of the transaction, as the borrower. After all, you\u2019re not the one rehabbing the property. However, it\u2019s still wise to be involved. You\u2019ll want to know things like the after repair value (ARV) of the property and the track record of the borrower before agreeing to fund the deal.<\/p>\n If you\u2019re releasing the capital on a draw schedule, maybe you even want to go down to the work site and confirm that the agreed upon work is completed.<\/p>\n 3. Short Term <\/strong><\/em><\/p>\n The term of a private money loan could be anywhere from a few months to a few years. It\u2019s ultimately up to you, as the lender. Many lenders opt for a short-term loan, though, as this keeps their capital more liquid, allowing them to pursue other investments in a shorter period of time.<\/p>\n For example, if an investor lends on a deal at 15 percent for a six-month term and that deal is completed on time with the expected outcome, the lender could then \u201crinse and repeat\u201d within that same tax year. He\/she could redeploy the capital in a similar deal for another six months.<\/p>\n 4. Collateral<\/strong><\/em><\/p>\n Another advantage of lending private money is that, in the event of default or breach of contract, you can take over ownership of the property pretty easily. Also, if the borrower is an entity, such as an LLC, the loan isn\u2019t subject to the lengthy foreclosure<\/a> timelines that residential mortgages are by having the deed held in escrow. If the borrower were to default, you can just record the deed, and then you have control of the property.<\/p>\n That said, when you\u2019re lending private money to rehabbers, there are also a few things to look out for.<\/p>\n 1. Qualifying the Borrower<\/strong><\/em><\/p>\n What\u2019s the borrower\u2019s track record look like? Who are their mentors<\/a>? Do they have integrity? These are all very important questions. You have to make sure the borrower is going to honor his\/her side of the bargain.<\/p>\n Personally, I\u2019ve only lent private money to borrowers whom I knew, and I was always familiar with their work, whether that was through referrals or from working with them before.<\/p>\n Still, I\u2019ve run into issues. For example, I once lent money to a rehabber who notified me that he was ready to receive the next draw of capital, but when I went to check out the property, the work he outlined in the contract was not completed.<\/p>\n Also, beware of investors who are working on multiple rehab projects at once. You want to make sure your money is really going toward this project and isn\u2019t being used to buy supplies or pay vendors for another. This goes back to having a system of \u201ctrust but verify\u201d when it comes to releasing money on a draw schedule.<\/p>\nFrom Bank Borrower to Private Money Borrower to Private Lender<\/h2>\n
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<\/p>\nLending Opens Up a Whole New Profit Stream in Real Estate<\/h2>\n
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\nRelated:<\/strong> 7 Truths About Private Money That Will Help You Raise Capital<\/a><\/em><\/p>\nThink Like a Bank: Pros and Cons of Private Lending<\/h2>\n
Pros<\/h3>\n
Cons<\/h3>\n
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