How Do You Make Private Lending a Win-Win?

Question

Hey BP crew! I’ve been digging into private money lately—trying to wrap my head around how investors and lenders make these deals a win-win. What’s one thing you’ve learned (the hard way or not) about structuring a loan or partnership that really clicked for you? Maybe it’s a term you swear by, a deal that surprised you, or just a tip for keeping things smooth. I’d love to hear your experiences—hoping to soak up some wisdom as I figure out my next steps!

Doug Smith · Answer

As a lender that has also personally invested in many properties, I think both sides can get too greedy. You can also add realtors and wholesalers into that statement. I think we as lenders need to remember that we have a vested interest in making sure an investor is successful. If the investor is successful, they'll come back again and again. In many instances, parties to a transaction try to hit a home run in one deal instead of remembering that they'll do better in the long run by taking care of the other people in the transaction. That doesn't mean that we'll sacrifice to the point where we lose money, but we always remember that the deal has to work for everyone. That's how long-term relationships are made. That's my tip for this thread.

Jeff S. · Answer

We only lend to experienced rehabbers who have been doing this full-time and locally. Our process is to initially get to know them face-to-face, by meeting a few times over lunch or dinner and even walking a few of their properties. Since we only lend our own hard-earned money, this gives us the confidence that they are the kind of people with whom we want to do business—and vice versa.

Most people are good people, but occasionally, we meet a stinker. We don’t consider the higher fees on a deal or two as the “win.” The long-term relationship, with those we genuinely like, over dozens of deals, is where we make our money. What a shock that these are our most valuable borrowers. The property is always a close second, and the borrower must always make money.

I attended a real estate club recently where they played “Shark Tank.” Here, four major lenders sat at the front of the room, and potential borrowers presented their scenarios. I thought it interesting that none of the lenders seemed to care that some of the borrowers would obviously lose money on the property they presented. I even asked this of the panel but only got evasive replies. It was one of the most interesting REI clubs I’ve attended and very telling.

We make it clear to all borrowers up front that we will only lend if we are confident they will make a fair profit. Since we hold our loans, their profit is the only way we get paid back. We have strict financial criteria we use to ensure this and can prove time and again that our criteria work. It’s not perfect—“stuff” always happens—but the most important part of any loan is that the borrower makes a fair profit. If they make money, we make money, and I know we’ve talked more borrowers out of deals than we’ve approved loans.

Amir Khan · Answer

@Christian Cunningham the one thing I've learned is to be upfront working with PMLs about their expectation about a specific deal. We deal with distressed properties, so I put everything "good-bad and the ugly" in front of my PMLs. I also teach PML certification course where I emphasize new PMLs ask operators for "more than one" real example of past deals...

Jeff Wills · Answer

Lots of great info in this thread already, so I will only add to what has not been shared.

Ensure you have a great title and attorney team for the docs, as those can make or break both the lender and borrower, and ensuring both sides have equal footing is crucial.

Drago Stanimirovic · Answer

Christian, biggest lesson: clear terms and transparency up front. A solid promissory note, recorded lien, defined exit strategy, and regular updates keep both sides protected and confident. Win-win happens when trust is backed by structure.

Happy to help if you’re putting together your first deal. Best, Drago

Jonathan Chan · Answer

Avoid 2nd position loans. Yes, they come with higher rates of return. When you factor in the losses, 1st position loans that are safe and properly secured will give you a much higher probability of making money.

Chris Maddox · Answer

Find out the goals for each private lender and keep a record of it. I have a list of PMLs and their lending criteria (1. amount they'll lend, 2. ROI they want and 3. time line they're willing to let you use the money) and then as I find deals that match their stats, I call them up to tell them I have a deal that fits there criteria and see if they are interested. Obviously, the people with the better terms get all the calls. The win for them is a deal that works for their terms and is highly secure on an asset for their money. The win for you is having a lender that will fund your deal and if you analyzed it well, you have the opportunity to make a profit with little to no money out of pocket and the chance to build a great relationship together. As you do more deals and build confidence, there's a potential for them to lend more money to you and maybe even negotiate better terms.

Matt Bridgman · Answer

It is all about a plan.

Hard Money  = There is nothing wrong with taking a hard money loan at a higher interest rate as long as you have an exit plan and can really drive to a time table to not turn that hard money loan into a long term loan

DSCR - Pre-Payment Term: I see a lot of lenders sling out the 5 year pre-payment term to flash the lowest rate which could be an investor in a pickle if they need to do something different with the lending portion of the property in the future. Looking at a 1 year or 3 year pre-payment maybe worth the small increase in rate to have the flexibility.

In the Investor space I think it way better to be working (Shamelessly tilted opinion here) because the lending market changes big and small all the time. Investors need someone who can stay with all the market movements and have the best lending solutions for the investors current goals.

Noah Wright · Answer

Every borrower is different. My number 1 client who loves me the most, what they do is find undervalue property, purchase it at a steep discount with 10% down bridge funding. Then they immediately cashout refi it with us. This often gives them more money out than they put down in the first place. They now own 14 more properties than they did before we started working together just 8 months ago. I'm always just looking to play to my borrowers strengths and tailor solutions that really accelerate their portfolio growth and development. Happy to help --

Chris Seveney · Answer

Want to know the best way to have a win-win in private lending---> do not give someone a loan who does not deserve it.

We buy defaulted debt and I cannot tell you how many deals we are seeing right now to people who have never flipped a property and the numbers from the outset never worked, it also does not go into people without experience, its people with experience but attempting to work out of state or in other markets.

But many of the programs are broker driven where everyone gets fees upfront and pushes the loan down the line to an institution. So for me, its best to give a loan that will succeed to someone who is qualified. 8/10 loans we see are passed on because the deal does not work but the investor will continue to seek someone to tell them yes.

How Do You Make Private Lending a Win-Win?

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