Becoming a Private lender
Rental Property Investor · Chalfont, PA · Member since 2021 · 189 posts · 90 votes
Becoming a Private lender
Most Popular Reply
Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
4yNope, I’m still here, @Brian Plajer, and my post that @Steve Hiltabiddle referenced is as current now as it was when I wrote it some years ago. Our process for finding and qualifying borrowers (meeting at RE clubs, looking at all properties, going to lunch, getting to know one another, etc.) is completely unchanged from what I wrote, and it continues to serve us well.
This is truly a relationship-based business. Unless you have an extraordinary amount of money to lend, or you want to become a broker, there is no need to lend any further than your backyard to those you’ve personally met and gotten to know, like, and trust.
I saw you PM’d me and I’m always happy to share what I know.
26 Replies
- 4ySteve HiltabiddlePro MemberLender · Pennysylvania · Member since 2018 · 139 posts · 68 votes
@Brian Plajer There are a number of posts on this topic if you search. One I suggest you review, one with the same title as this post
https://www.biggerpockets.com/...
Pay particular attention to Jeff S's response although there are many experienced folks who respond and provide guidance.
Best of luck,Steve
- Rental Property Investor · Chalfont, PA · Member since 2021 · 189 posts · 90 votes4y
thanks Steve! I read through the entire thread, and I plan to message the original poster although it was 5 years ago.
- 4yScott WolfPro MemberLender · Boca Raton, FL · Member since 2014 · 1k+ posts · 956 votes
@Brian Plajer, I recently started private lending and have been following this FB group. It has some good information.
- Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes4y
Nope, I’m still here, @Brian Plajer, and my post that @Steve Hiltabiddle referenced is as current now as it was when I wrote it some years ago. Our process for finding and qualifying borrowers (meeting at RE clubs, looking at all properties, going to lunch, getting to know one another, etc.) is completely unchanged from what I wrote, and it continues to serve us well.
This is truly a relationship-based business. Unless you have an extraordinary amount of money to lend, or you want to become a broker, there is no need to lend any further than your backyard to those you’ve personally met and gotten to know, like, and trust.
I saw you PM’d me and I’m always happy to share what I know.
- 4ySteve HiltabiddlePro MemberLender · Pennysylvania · Member since 2018 · 139 posts · 68 votes
@Jeff S. was someone who's posts I looked for when I was investigating the idea of being a private lender and his comments that this is a relationship business is spot on and meeting folks face to face at networking meetings, over coffee at a property, phone calls are all part of that process. I had an experience where I was getting to know a potential borrower, someone who had lots of experience and could be a good partner. However, during that getting-to-know-you process I felt like I was always on the defensive well before I ever lent money to this person. I knew if things felt tense for me before I lent this person money I envisioned it being awful after we did a deal. That's not a relationship I want as part of my business so I never moved forward.
I started lending as a way to be part of this exciting community. Since I have a choice who I work with, I'm going to look for folks I feel I can trust, do many deals together with and as importantly, handle things together when something goes sideways as they often do.
- Rental Property Investor · Chalfont, PA · Member since 2021 · 189 posts · 90 votes4y
@Scott Wolf Thanks! I just requested to join that group. I hope you are having a positive experience as a private lender.
- 4yBeth JohnsonPro MemberLender · Renton, WA · Member since 2018 · 215 posts · 216 votes
@Brian Plajer
Hey Brian!
I am an admin/moderator for the Lend2Live: Private Lending Lessons Facebook group! I am a private lender and also an originator in WA state who directly places capital for other individual private lenders who use us for deal flow and loan lifecycle support. I'm happy to help answer any questions you might have. We will also have a 100-level book about private lending published by BiggerPockets later this year!
Private lending is not rocket science but there are a lot of moving parts and considerations you need to address throughout the process. In theory it's a fairly simple process but no two deals are the same, making it difficult to get into a groove.
I 100% agree with others that this is a relationship based business but I would caution placing too much emphasis without doing due diligence.
Here's an article I wrote about the subject for the American Association of Private Lending last year: https://aaplonline.com/articles/strategy/dont-let-relationships-fool-you/?fbclid=IwAR3k8vV3vLmgX1WpDZ-_Vh9BLa5meen2sJJZbBI1EUfhEOIsceo4fEL4OjY
- Rental Property Investor · Chalfont, PA · Member since 2021 · 189 posts · 90 votes4y
@Beth Johnson Thanks for the info and the link to your article. I'll go read it right now!
- 4yRob PattisonPro MemberSpecialist · Hermosa Beach, CA · Member since 2016 · 94 posts · 55 votes
Hey Brian, another way to become a lender is by buying the note. I've bought performing notes and non-performing notes.
I've foreclosed on one note in MO because of non-payment of the note and now own a house which I may sell for cash, or take back a note. I'm in the process of foreclosing on another note in IA for non-payment.
- Rental Property Investor · Chalfont, PA · Member since 2021 · 189 posts · 90 votes4y
@Beth Johnson the article has some great advice. a few general questions if I might:
What amount of capital is required when starting out as a private lender?
In the book "The Bankers Code" it recommends keeping funds in a tax advantaged insurance type fund. Is that a customary practice for private lender and is the money easily accessible for lending?
I joined a local real estate group, and I am aware of a hard money lender. I was hesitant to speak with him about my interest in lending for fear that I'd be viewed as competition although your article suggests working with another lender in the beginning.
Thanks again for taking the time to respond and provide the link. My access to Lend2Live FB group is pending!
- Rental Property Investor · Chalfont, PA · Member since 2021 · 189 posts · 90 votes4y
@Rob Pattison I have heard a few people mention that option and have heard the topic on a few podcasts. It's definitely something I want to learn more about. If you'd be willing to share your experience I'd love to know how you got started, requirements to get started, etc.
- 4yBeth JohnsonPro MemberLender · Renton, WA · Member since 2018 · 215 posts · 216 votes
@Brian Plajer The amount of capital would depend on the market. In my market of WA state, the median home prices around Greater Seattle hover in the 500K-1M range depending on the location. So, if you "only" had 50K for example, that may be difficult to lend out and place it into a safe and secure note. But 50K in the Midwest or other less expensive markets would be a decent loan amount in 1st position with some equity buffer protection. I know quite a few private lenders with "smaller" amounts in my market tend to lend out in 2nd position and typically for earnest money deposit or rehab funds. This can be a precarious place to put your money because the loan-to-value (LTV) would be too high.
WRT tax advantaged insurance funds, known as Indexed Universal Life Insurance or IUL, I don't have personal experience with it, though I know it's used by other savvy private lenders and real estate investors. I would say most people start out with the basics - personal savings, self-directed retirement plans (I got started this way by moving a legacy 401k to a SDIRA after I quit my W2), and then possibly graduate into more sophisticated sources of capital such as using a HELOC against one's real estate portfolio - either a primary or investment property - to earn an interest spread on the loan known as arbitrage. For example, you would obtain a HELOC at a rate of Prime + .75% so your rate would be somewhere in the low 4s currently and then you lend that money out at 10%. Other investments can be leveraged as well including large trade and depository accounts. I have some clients who we place funds for using HELOCs and the latter but none that utilize insurance funds.
I would definitely reach out to a local lender and connect, if they are willing. It'd potentially be a great information share and resource for the future. We have lenders send us deals they can't fund but, most importantly, if you come across a deal that you can't or don't want to fund yourself, you can always broker it to your local HML contact and add a referral fee for yourself. This way you can help your prospect and earn a little $$ on deals that do not fit your lending criteria but may be a good fit for a larger lender with higher risk tolerance than you.
Look forward to connecting with you in our Facebook group. It's a great place to network and share best practices with other new, aspiring, and experienced private lenders of all size and scale! - Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes4y
There are 7532 ways into the business, @Brian Plajer, and these depend on the amount of money that you have, the risks you want to take, and the amount of time you want to spend.
The two broadest categories are performing and non-performing notes.
If you have enough cash to purchase a home in your area, you can originate performing 1st position loans to local, experienced (sorry Beth. Ha.), full-time house flippers, and hold them yourself. As you might have read in my post referenced above, this is exactly what we do. State law will dictate licensing, usury, and other restrictions which is why you must speak to a lending attorney first to get educated. Note, lending attorneys are not the same as real estate attorneys, many of whom are only versed in conventional loan closings.
Compared to other loans you could make, your risk here is relatively low and after a short learning curve, your time commitment will be minimal. Depending upon how fast you get repaid, your annualized percent return should be in the low to mid-teens. For me, time is important. From the first phone call to getting repaid, I estimate we spend perhaps 6 hours total on any one loan. That includes our financial evaluation of the property and also visiting it – which we require.
If you only have enough money to lend on the rehab, DON’T, (and never loan earnest money). Yes, I know the Bankers Code, partnering, gap funding, yada yada, and all that, but these are generally 2nd position loans or lower and easily wiped out in foreclosure or bankruptcy. I know several who specialize in lending in second position, some consistently behind us, and their returns are great. One sold a computer company and wouldn’t blink at losing $50k or $100k if it happened. Could you withstand that? Would you mind lending to a stranger, in second position, out-of-state, on a house you never saw? There are some who actually advocate this.
Alternately, if you don’t have a lot of money, and it’s legal in your state, you might consider participating in a fractionalized loan. These are perhaps the greatest idea in lending since compound interest and there are licensed brokers who specialize in arranging them. Your name would appear on the note and deed-of-trust or mortgage as the lender beside several others (ten max in CA), along with your pro-rata ownership. This could be recorded in first position like any other purchase money loan. Much safer than doing seconds but of course the returns will be lower. Here, in addition to the house and borrower, you must also check out the broker.
Similarly, I’m on the email list of a handful of brokers and I get offers every day to lend on all type of properties, in various lending positions, terms, and interest rates. Here, these brokers find the borrowers, do their own due diligence, and would arrange the loan in my name. It’s pretty much one-stop-shopping but clearly requires a lot of due diligence on my part.
Alternately, you could buy non-performing notes. These are a world of their own and can be quite rewarding. Those I know who work these generally buy a portfolio of notes at a time for relatively low dollars each. Some percent of these loans will be total losers, some will provide modest returns, and others will be grand slam home runs. Annualized returns can range from zero into the many tens to hundreds of percent or more. I’ve observed that those who buy these work hard and they tend to do this full time. Could be for you if you’re willing to put in the effort.
Then, like everything else in real estate, you can lend with OPM and take a cut. That’s what many licensed brokers do. There are also affiliates. Go to the website of many larger lenders and there will often be a tab leading you to their affiliate program where they train you in their processes. Here, you’re basically a commissioned salesperson. I suspect many who call themselves lenders on this board are actually affiliates representing multiple lenders.
Hope this was actionable and sorry it was so long.
- Rental Property Investor · Chalfont, PA · Member since 2021 · 189 posts · 90 votes4y
thank you @Beth Johnson and @Jeff S. for the wealth of info. It really helpful and much appreciated.
- 4yRob PattisonPro MemberSpecialist · Hermosa Beach, CA · Member since 2016 · 94 posts · 55 votes
Hi Brian,
I learned about investing in notes by going to REIAs in my area of the south bay in Los Angeles and talking to people, studying online courses, and there was a sub-group of one REIA where I learned a wealth of knowledge.
I bought my first non-performing note for $10k about 2 years ago, a 7 year note, (first position lien) the principle was $16k plus the interest. They hadn't paid in 90 days and were just coming out of bankruptcy. So far they've paid me $9k. They tried to go into bankruptcy a second time to discharge my lien and I had to hire an attorney to beat it back, cost me about $1.5k, and I was able to stick the borrower with $750 of that cost. This house is worth around $40k as is.
I bought a second note for $7k, that borrower has paid me $4k, then stopped paying. I'm first position lien on the house, which is worth approx $40k as is, in the state of IA and am in the process of foreclosing, about a 3 to 6 month process.
The last note I bought was for a principle amount of $26k, but because the borrower had not paid in over 4 years, the seller sold me the note for $10k. Some of the paperwork was missing which took me about a year to put together, with the help of an attorney, which cost me about $1,250. Once I had all the paperwork in order, I foreclosed in June last year, received $12k, the borrower brought the loan current. I receive no further communication from the borrower, or payments, and so foreclosed again in December for the remaining approximate $22k in principle, interest and late fees. No one bought at the auction, so now I own a house in St. Louis. I'm 30 days into a 90 day eviction process, and am looking to sell this house, as is value approximately $40k.
This business can be tricky and it's easy to lose all your money if you're not aware of lending laws and other rules, as well as tax liens, which can trump your first position lien on the property, and code violations where a city may condemn your property as uninhabitable and there went all your hard-earned money. If the borrower declares bankruptcy, there's another set of challenges where you, and your attorney need to be on top of your game, or you'll have your lien reduced, severely reduced, or wiped out.
Probably best to partner with an experienced investor with a proven track record of making money before venturing down this potentially lucrative and hazardous path on your own.
- 4yJohn UnderwoodPro MemberInvestor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
It's easy. I just have my attorney create a 1st position mortgage. I typically charge 12% and 2 points.
- 4yRob PattisonPro MemberSpecialist · Hermosa Beach, CA · Member since 2016 · 94 posts · 55 votes
Hey John, I'm buying an existing contract for deed or sometimes buying a mortgage. In my case, I can't buy either of these notes, then change the terms of the contract without the consent of the other party.
- 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Jeff S.:
There are 7532 ways into the business, @Brian Plajer, and these depend on the amount of money that you have, the risks you want to take, and the amount of time you want to spend.
The two broadest categories are performing and non-performing notes.
If you have enough cash to purchase a home in your area, you can originate performing 1st position loans to local, experienced (sorry Beth. Ha.), full-time house flippers, and hold them yourself. As you might have read in my post referenced above, this is exactly what we do. State law will dictate licensing, usury, and other restrictions which is why you must speak to a lending attorney first to get educated. Note, lending attorneys are not the same as real estate attorneys, many of whom are only versed in conventional loan closings.
Compared to other loans you could make, your risk here is relatively low and after a short learning curve, your time commitment will be minimal. Depending upon how fast you get repaid, your annualized percent return should be in the low to mid-teens. For me, time is important. From the first phone call to getting repaid, I estimate we spend perhaps 6 hours total on any one loan. That includes our financial evaluation of the property and also visiting it – which we require.
If you only have enough money to lend on the rehab, DON’T, (and never loan earnest money). Yes, I know the Bankers Code, partnering, gap funding, yada yada, and all that, but these are generally 2nd position loans or lower and easily wiped out in foreclosure or bankruptcy. I know several who specialize in lending in second position, some consistently behind us, and their returns are great. One sold a computer company and wouldn’t blink at losing $50k or $100k if it happened. Could you withstand that? Would you mind lending to a stranger, in second position, out-of-state, on a house you never saw? There are some who actually advocate this.
Alternately, if you don’t have a lot of money, and it’s legal in your state, you might consider participating in a fractionalized loan. These are perhaps the greatest idea in lending since compound interest and there are licensed brokers who specialize in arranging them. Your name would appear on the note and deed-of-trust or mortgage as the lender beside several others (ten max in CA), along with your pro-rata ownership. This could be recorded in first position like any other purchase money loan. Much safer than doing seconds but of course the returns will be lower. Here, in addition to the house and borrower, you must also check out the broker.
Similarly, I’m on the email list of a handful of brokers and I get offers every day to lend on all type of properties, in various lending positions, terms, and interest rates. Here, these brokers find the borrowers, do their own due diligence, and would arrange the loan in my name. It’s pretty much one-stop-shopping but clearly requires a lot of due diligence on my part.
Alternately, you could buy non-performing notes. These are a world of their own and can be quite rewarding. Those I know who work these generally buy a portfolio of notes at a time for relatively low dollars each. Some percent of these loans will be total losers, some will provide modest returns, and others will be grand slam home runs. Annualized returns can range from zero into the many tens to hundreds of percent or more. I’ve observed that those who buy these work hard and they tend to do this full time. Could be for you if you’re willing to put in the effort.
Then, like everything else in real estate, you can lend with OPM and take a cut. That’s what many licensed brokers do. There are also affiliates. Go to the website of many larger lenders and there will often be a tab leading you to their affiliate program where they train you in their processes. Here, you’re basically a commissioned salesperson. I suspect many who call themselves lenders on this board are actually affiliates representing multiple lenders.
Hope this was actionable and sorry it was so long.
AS a CA real estate broker I can do fractionlized DT Notes legally .. and thats how I ran my company in Oakland. The main reason in CA is the loan sizes even when I was active in Oakland / SF in the 80s were already 250 to 750k.. so very hard to find one lender for those large of transactions. in other markets were the loans tend to be 50 to 150k its much easier to match one for one.. When i started my HML company in Oregon they do not allow fractionalized DT without a security offering so in this market we use bank guidance lines and did not use investors.. Although there are Oregon lenders that have put together larger funds to do these loans.
As long as you have clear direction with the investor in the note on how to prosecute a foreclosure these deals ( generally 10 lenders on one note is the limit before you have to do any security offering) arranged by a competent qualified CA RE Broker is a very nice way to get smaller dollars out and spread risk with fellow investors.
- 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @John Underwood:
It's easy. I just have my attorney create a 1st position mortgage. I typically charge 12% and 2 points.
John your killing all those who have been told that private lenders are cheaper money than HML ers LOL
its true if its your parents or grandparents or uncle.. but usually actual private lenders understand their value and charge for it.
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes4yAlmost every single flip deal I have done to date used private money and many of them were fractionalized notes which I have been doing since 2009. Loans before that also included conventional financing combined with partnership funds for buy and hold. I have also done many second trust deed notes which Jeff S warned you not to do above but that warning really means you really need to know and trust the borrower and have confidence they can complete the deal and safeguard your funds. Never once in all my years did any private lender of mine ever lose a penny of principle, EVER. This is not to say none of my deals lost money, I have documented the good, the bad and the extremely ugly - a $250k+ principle loss on a deal in which the lenders in second position could not be paid but I signed a personal guarantee and I hold that sacred as my word/reputation is everything in this business. So I flipped several other homes and used the profits on those to pay back each investor, every penny! This is the kind of example and performance history you want to look into to ensure you have someone looking out for your cash, not just their own.
This is a people business so meeting others and making connections is key to being successful no matter which strategy you employ.
As a private lender, you are typically not licensed so it is also imperative that you pay attention to which state you are loaning in (where the property is located, not where you live or work) and note that state's usury laws, every state has their own and in the case of CA, 10% is the maximum interest you can charge (including interest, fees, points, etc. combined). If you were to loan at 12% and the borrower ran into trouble and could not pay you back, when you went to court, it is quite probable that your usurious loan would not hold up.
Loaning on EMD's or rehab funds is possible but you need to make sure you are protected and there are many avenues to do so. This is not a simple Never do it, but do take extreme caution as your funds may be at higher risks without proper protection/security.
I started off using family/friends and once I got a few deals under my belt, as well as an online presence (website, Biggerpockets, etc.) and networking at live meet ups/REI events, others started investing with me until at one point, members from BP from all across the country (some of which had never met me in person) became private lenders of mine. This did not happen over night, it took years but the effort is what gets you there along with doing deals and showing an enviable performance history. Search for borrowers with such track records and you will find that you will increase the odds of the safety of your capital.
Higher interest rate returns do not always equate to the better deal to invest in, the borrower is the prime factor in your decision making and the property itself the second factor. - 4yJohn UnderwoodPro MemberInvestor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
Originally posted by @Jay Hinrichs:
Originally posted by @John Underwood:
It's easy. I just have my attorney create a 1st position mortgage. I typically charge 12% and 2 points.
John your killing all those who have been told that private lenders are cheaper money than HML ers LOL
its true if its your parents or grandparents or uncle.. but usually actual private lenders understand their value and charge for it.
I can move fast for people I trust. But I still have criteria that has to be met, but I make the rules.
- St. Louis, MO · Member since 2018 · 49 posts · 19 votes4y
@Brian Plajer, I would happily reach out to a private money lender I have spoken with in my local market to see if he would be interested in chatting with you about his process and experience. He's funded ~130 deals now and has a process pretty similar to what others here have described. Meet folks at local investing meetups then he has a coffee chat/interview with the potential investor about the specific project they are looking for him to fund. PM me your contact info and I'll pass it along to him :-)
- Rental Property Investor · Chalfont, PA · Member since 2021 · 189 posts · 90 votes4y
@Aaron J Latal thanks so much!
- Rental Property Investor · Chalfont, PA · Member since 2021 · 189 posts · 90 votes4y
@John Underwood does your attorney specialize in lending or general attorney?
- Rental Property Investor · Chalfont, PA · Member since 2021 · 189 posts · 90 votes4y
@John Underwood what type of attorney? Did they specialize in lending?
Join the conversationCreate a free account to reply, vote on answers and follow this thread.