How to become a private lender?
A friend of mine has 100k but doesn't know what to do with it. I mentioned becoming using it in real estate but she doesn't have the time to do so as a single mother. How can she become a private lender?
Quote from @Klavish Faraj:
A friend of mine has 100k but doesn't know what to do with it. I mentioned becoming using it in real estate but she doesn't have the time to do so as a single mother. How can she become a private lender?
Our private lenders convert their IRA to a SDIRA so they can invest their retirement money without a tax problem, (we help them through that process) them everything has to be done through escrow and title. But, she needs to know that if she plans on being a private lender, that money is tied up for the length of the agreement. So, if she does transactional funding it's tied up for under 30 days. If she funds flips it's usually tied up for 6 months to a year at a time. If she funds renovations or cash outs on buy & holds she can have it invested for a couple of years. It just depends on her goals. She should also always have enough income and savings to take care of normal expenses.
What state is she in?
Hey Mike! Thanks for your response. Yes, she has all of that planned out and doesn't need this cash that has been sitting for over 1 year. She currently lives in Tennessee.
Quote from @Klavish Faraj:
Hey Mike! Thanks for your response. Yes, she has all of that planned out and doesn't need this cash that has been sitting for over 1 year. She currently lives in Tennessee.
First she has to vett anyone she lends to. I can get more into that later. She also needs to decide what market or markets interest her. Different states require slightly different paperwork and have different rules.
I always look at "what's the worst that could happen" first. And for lending that means "what if they stop paying". For instance, in mortgage states the lender has to sue to get a foreclosure done and that can take a year. Most east coast states are mortgage states. In a Deed of Trust state a foreclosure is much faster, generally a few months. Most west coast states are Deed of Trust states.
And among other things she needs to decide is if she wants a nice long time frame with steady income or if she wants multiple short term loans in a year. Once that decision is made, it's easier to narrow down the options.
So there aren't any companies that vet lendees and make the process more smoother and protect everyone involved?
Quote from @Klavish Faraj:
So there aren't any companies that vet lendees and make the process more smoother and protect everyone involved?
Lol. No, that's called wishful thinking.
"Nobody cares about your money as much as you do."
You use title and escrow to make sure the transaction is done legally and safely but they can't vouch for either side in the transaction.
With our private lenders, the lender transfers the money to escrow (not to us), they get a receipts & proof of transfer, and then a deed (lien) is created and placed against the property so the lender is safe and there is no way the money can be used for anything other than what the lender made the loan for. And, the property can't be sold unless the lender agrees. That is also how the big banks do things because that is what gives the most protection. A note is also created that gives the amount, rate and term along with who is the borrower and who is the lender.
Some lenders make the huge mistake of sending the money directly to the borrower. That is the least safe way to do things.
Quote from @Klavish Faraj:Feel free to Direct Message me for further questions.
Hey Mike! Thanks for your response. Yes, she has all of that planned out and doesn't need this cash that has been sitting for over 1 year. She currently lives in Tennessee.
Hi Klavish! As both a woman and a private lender I feel this so much! I'm so happy you reached out to ask the right questions. First, I am one of the authors of BiggerPockets private lending book. That book will give you and your friend a really solid foundation in the considerations and action steps you need to take to actually do the loan. It will talk about the documents you should be asking for, what to look for one them, and what other paperwork you may need in the course of the loan. You can also potentially work with an experienced lender to broker the capital or invest in a debt fund to get distributions without having to shop around for a borrower and do the process of loan origination. please feel free to reach out with questions! I love helping other women get involved in real estate, and I think private lending really fits the lifestyle many women!
Quote from @Mike Hern:
Quote from @Klavish Faraj:
So there aren't any companies that vet lendees and make the process more smoother and protect everyone involved?
Lol. No, that's called wishful thinking.
"Nobody cares about your money as much as you do."You use title and escrow to make sure the transaction is done legally and safely but they can't vouch for either side in the transaction.
With our private lenders, the lender transfers the money to escrow (not to us), they get a receipts & proof of transfer, and then a deed (lien) is created and placed against the property so the lender is safe and there is no way the money can be used for anything other than what the lender made the loan for. And, the property can't be sold unless the lender agrees. That is also how the big banks do things because that is what gives the most protection. A note is also created that gives the amount, rate and term along with who is the borrower and who is the lender.
Some lenders make the huge mistake of sending the money directly to the borrower. That is the least safe way to do things.
Mike, how many times have you ended up foreclosing on property?
Hi Klavish, one option is to invest into a debt fund that lends to real estate investors, I would suggest a lender that only originates 1st lien position loans. We are currently raising capital with attractive returns. Please feel free to PM me for more details.
-
Lender
- We Lend
- 212-257-3888
- http://WeLendLLC.com
- [email protected]
Quote from @Alex Breshears:
Hi Klavish! As both a woman and a private lender I feel this so much! I'm so happy you reached out to ask the right questions. First, I am one of the authors of BiggerPockets private lending book. That book will give you and your friend a really solid foundation in the considerations and action steps you need to take to actually do the loan. It will talk about the documents you should be asking for, what to look for one them, and what other paperwork you may need in the course of the loan. You can also potentially work with an experienced lender to broker the capital or invest in a debt fund to get distributions without having to shop around for a borrower and do the process of loan origination. please feel free to reach out with questions! I love helping other women get involved in real estate, and I think private lending really fits the lifestyle many women!
I can second reading their book. I've met with one of the authors and they were really super helpful. I have some experience in lending, but the book still gave me a lot of really good information. My next loan funds this friday, with changes I learned in the book. Really a good starting point.
Quote from @Kevin Parekh:I actually started my career on the other side of the loan, bailing people out of foreclosure. I haven't had to foreclose since I understand the "loop holes " and psychology of borrowers.
Quote from @Mike Hern:
Quote from @Klavish Faraj:
So there aren't any companies that vet lendees and make the process more smoother and protect everyone involved?
Lol. No, that's called wishful thinking.
"Nobody cares about your money as much as you do."You use title and escrow to make sure the transaction is done legally and safely but they can't vouch for either side in the transaction.
With our private lenders, the lender transfers the money to escrow (not to us), they get a receipts & proof of transfer, and then a deed (lien) is created and placed against the property so the lender is safe and there is no way the money can be used for anything other than what the lender made the loan for. And, the property can't be sold unless the lender agrees. That is also how the big banks do things because that is what gives the most protection. A note is also created that gives the amount, rate and term along with who is the borrower and who is the lender.
Some lenders make the huge mistake of sending the money directly to the borrower. That is the least safe way to do things.
Mike, how many times have you ended up foreclosing on property?
When your job starting in the industry is putting eggshells back together, you learn what breaks eggs and you avoid and mitigate those things. I've spent countless hours on the phones of lenders negotiating loan mods, better terms and prolonging the process to keep lenders from foreclosing.
Most private lenders are overly optimistic because they haven't been though a down cycle. We are entering a down cycle now and extra precaution needs to be taken. Most private lenders aren't prepared for the cycle.
As they say "you don't know what you don't know". Knowing the mechanics is only one part of the equation. Know how to prosper in a down cycle is golden.
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#3 Starting Out Contributor
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no offense intended, but if all she has in the world is 100K, I don't see how private lending would be a good idea...
conversely, if she is a HNWI and has say $1M and is looking to diversify, then I guess it's a different story...
@Klavish Faraj the lenders money would be protected by a mortgage on the property. Some private lenders also require the lender to obtain life insurance as added protection.
Appreciate all responses!
@Alex Breshears Ahhh, thanks for the book recommendation. I'll read Lend to Live next.
@Mike Hern you're realistic response is extremely appreciated. Sometimes people hear success stories and just want to jump on the bandwagon. I am taking everything you mentioned into consideration.
Quote from @Klavish Faraj:
A friend of mine has 100k but doesn't know what to do with it. I mentioned becoming using it in real estate but she doesn't have the time to do so as a single mother. How can she become a private lender?
I have a deal that may work for your friend. Secured by real estate. She would receive a monthly cash flow interest payment, and then he principle back in the form of a ballon payment.
They can talk with a local conventional lender and see if they know any hard money lenders looking for investors.
Go to your local REI group by you. Meet investors, gauge their experience. Educate yourself on bridge loans. Call hard money lenders and grill them on how they work.
Find solid investors that make money. Don't worry, if you start advertising that you will gap fund deals for the right investors, then you will have people running toward your door like you just rang the bell for chow time.
But you need a strong vetting process, and a very strong contract that outlines everything from interest rate, leverage, and term, but also what happens if they default? Make sure you get the property and make sure you get in first lien position on the insurance and on the recorded mortgage.
-
Lender
- 267-251-7649
- [email protected]
Quote from @Klavish Faraj:
So there aren't any companies that vet lendees and make the process more smoother and protect everyone involved?
Typically, an attorney is involved in setting up the relationship between a private lender and a real estate investor. A property is secured by a note and deed of trust which give the lender the right to foreclose if the investor doesn't fulfill their end of the relationship.
Also, an insurance certificate can be made out to the lender so they are protected with insurance in case of a total loss.
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- Insurance Agent
- Norwalk, CT
Klavish,
Another option for your friend is invest in a partnership/fractional ownership of a property. The advantage is that your friend would get the benefit of a professional management team that sellected the investment. One of my clients puts out a newletter on this. You can sign up on their website. If your interested, PM me and I will give you their web address.
I just joined a FB group called lend2live that gets into that a lot. It’s more for lenders than borrowers
Quote from @Mike Hern:
Quote from @Klavish Faraj:Feel free to Direct Message me for further questions.
Hey Mike! Thanks for your response. Yes, she has all of that planned out and doesn't need this cash that has been sitting for over 1 year. She currently lives in Tennessee.
Hey Mike,
I would love you observations on companies like this one below:
https://www.nuviewtrust.com/5-ways-to-start-lending-money-from-a-self-directed-ira/
Quote from @Alex Breshears:
Hi Klavish! As both a woman and a private lender I feel this so much! I'm so happy you reached out to ask the right questions. First, I am one of the authors of BiggerPockets private lending book. That book will give you and your friend a really solid foundation in the considerations and action steps you need to take to actually do the loan. It will talk about the documents you should be asking for, what to look for one them, and what other paperwork you may need in the course of the loan. You can also potentially work with an experienced lender to broker the capital or invest in a debt fund to get distributions without having to shop around for a borrower and do the process of loan origination. please feel free to reach out with questions! I love helping other women get involved in real estate, and I think private lending really fits the lifestyle many women!
Purchased, I'm not a woman but thanks Alex.
@Klavish Faraj
I’ve done both; used private lenders and have lended. I only lend to investors I know, this way I can vet them and I already have a good understanding of the success of their project. I did the buy the private book, it’s a great book and did pick up on some tips. In general, you should be able to analyze a deal to make sure it’s a good deal and has a good chance of being successful. I wouldn’t suggest someone without any knowledge of real estate investing be a private lender without the ability to analyze deals. It is your hard earned money.
Most lenders go through an attorney and create a mortgage or deed of trust depends on your state, a promissory note is prepared which is really the guiding force on the agreement. It stipulates who is lending and who is borrowing, the terms, the default rate if applicable, etc. Money should always flow to a title company at a formal closing never ever directly to an individual or company. You are the bank, just like a mortgage lender. There is always a degree of risk, nothing is risk free, but you should protect yourself as best you can. Interview possible borrowers. They will tell you there successful deals, but I’m interested in the deals that didn’t go smooth and how did they resolve it. Did they make there lender whole. You should at all cost protect your lender. Even if it means a loss. That lender will probably lend to you again if you show your integrity.
There are many companies out there that take your money to lend to their clients and give you 10% to 18% returns.
Look for them, do your due diligence and carry on. :)