How do you start lending money to RE investors?

Question

How does one start lending their own money to other RE investors?

I am curious how this process works, what rates/ terms are common? Is this a common practice? Risky?

Looking to learn more about this space

.

I appreciate the insight!

Thanks!

Stacy Patel · Answer

To start lending your own money to real estate investors, you need to first educate yourself on the fundamentals of real estate financing and investment. Begin by networking with local real estate investors, attending industry meetings, and possibly joining real estate investment clubs. It's essential to determine your investment criteria, including the loan amount, loan-to-value ratio, and types of properties you're willing to finance. Common terms for private money loans include interest rates ranging from 8-15%, short-term durations (usually 6-24 months), and LTV ratios around 65-75%. While private lending can be lucrative, it carries risks such as borrower default and property devaluation, so thorough due diligence and legal protections are crucial. Consulting with legal and financial advisors will help ensure your lending practices are compliant and secure.

Jay Hinrichs · Answer

good post I have been in this business since the mid 80s with thousands of loans done all over the US.. I just have a few comments to add.1. I dont think you can call it totally passive if someone does that they are probably going to make a mistake you need to work the loans and put time into them to ensure all the safety items you mentioned.2. During the GFC values in certain markets values CERTAINLY dropped more than 30 % I had over 450 loans out at the time All our own money .. And a big portion of my defaults about 200 of them values fell more than 30%..  ATL GA  fort Meyers FLA  Phx  Vegas  inland empire. Although the PNW I think that is generally a fair statement.. Although I bought lots in Hood river and Bend Oregon from my bank for 20 cents on the dollar in 2010 2011..  All your other points hit the mark in my mind.. !!!

John Neufer · Answer

@Sean Haberman - I love this question. I have been brokering private money and commercial mortgage loans for 10+ years. I coach people on how to build private money brokerages and eventually start lending their own money.

You are stepping into one of the best passive retirement strategies hands down.

- 100% passive

- Fixed Monthly Income

- High Yields of 10-15% APY

- Personal Guaranteed debt

- Backed by Real Assets

- Insured by Insurance companies

Here are some guidelines you should STICK BY:

1. Stick to Local Property Locations: you should start out by only lending in areas you already have a good understanding of. Particularly: Values, Crime Rates, and Stigma's

2. Stick to <65% LTV's: in all of the recessions, including the great financial crises, housing prices have never declined more than 30%. 65% is a staple number for most hardmoney lenders for this reason.

3. Stick to a <12/mo Term: the longer the term, the more the risk. Stick to short term notes so your money isn't wrapped up in one asset for too long.

4. Confirm Exit Strategy: make sure your borrower has a clear exit to get out of your bridge, whether that is to Sell or Refinance after property is stabilized.

5. Borrower Experience: make sure your borrower has experience with the strategy they are proposing. You don't want to learn with someone who is learning. Lend to experienced individuals who own other rental properties already

6. 6/mo Payment Reserves: insure the borrower isn't broke and has the ability to repay your debt.

7. 100% Hazzard Insurance: make sure the borrower secures hazard insurance that at minimum covers your Loan Amount ie "replacement cost". If you are issuing a Perm Loan you should include 12/mo Rent Loss coverage

The list could go-on, but this is a solid foundation to start.

My team sees deals all the time, so if you are looking to invest, let me know :)

Beth Johnson · Answer

Hi Sean! I would suggest picking up a copy of the book I co-authored titled Lend to Live: Earn-Hassle Free Passive Income in Real Estate with Private Money Lending. It's available on BiggerPockets bookstore and comes with a ton of bonus content, too! That's a good primer for understanding all the key considerations for finding and funding a private money loan to create passive cashflow. It's a highly nuanced industry that isn't very regulated so you will need to know what you can and cannot do legally and then create some personalized guidelines around what you want to fund and what you want your returns to look like. Deal structure is very important so that you have enough equity protection to secure your principal loan amount. Once you've read the book, then I am sure you'll have more questions so feel free to connect on BP and then reach out!

Greg Scott · Answer

There are lots of ways you could do this, but the execution is largely up to you.

Most of the private lenders I have worked with were experienced real estate investors themselves with excess cash they wanted to put to work.  For them, there was very low risk, because they knew how to gauge the after-repair value and set terms in their favor.  Usually, their worst-case scenario is the loan gets paid back.  If the borrower stops paying, they know they can take over the property and make more money by fixing it themselves.

On the other hand, if you don't know these things, it is very risky.  Your best bet might be to find a private fund that aggregates money and lends it back out to real estate investors.

It is worth adding that this is not a tax-efficient way to get involved with real estate.  You will pay ordinary income on the interest.

Chris Seveney · Answer

As mentioned, recommend reading beths book. Then also decide whether you want to chase down loans to find and originate or buy loans on secondary market from others. As an example we originate some loans and then sell them off to investors so they do not have to spend all the time and effort upfront.

Jerel Ehlert · Answer

Without knowing your background and goals, that's a tough call.

Know the market where you intend to invest. Terms are local.

Know what your borrower should be doing.  You need to monitor your borrower and your collateral.  If you must foreclose, you need to step in and do what they failed to do.

This is not exactly "passive" like a stock you can buy and forget.  There's some good advice here.

David Ramirez · Answer

I wouldn't consider it risky if you properly understand how to underwrite a deal. You could get an appraisal report before closing to secure your position.

You would want to be in a first-lien position to foreclose and get paid first. Rates for hard money are at 10.99% annual interest only with 1.5-2% origination points upfront. Terms for these bridge loans are usually 6-12 months.

You could assess how much to charge for interest and points based on how experienced the investor is.

Would love to connect!

Stacy Patel · Answer

Private money lending involves using your own funds to finance real estate investors' projects, offering interest rates of 8-15% with terms of 6-24 months. To minimize risk, lenders should assess the property's value, maintain a low loan-to-value ratio, conduct thorough due diligence, and use legally binding contracts. Getting started includes educating oneself, starting with small loans, partnering with experienced lenders, and networking with real estate investors. Resources like books, forums, and investment meetings can provide further guidance.

How do you start lending money to RE investors?

Most Popular Reply