Getting started in private money lending

Private Lending & Conventional Mortgage Advice
8yFollow

Getting started in private money lending

Tito Burgos
Investor · Cliffside Park, NJ · Member since 2016 · 46 posts · 15 votes

I've been investing in real estate for over 20 years, mostly buy and hold condos and a few flips. I've been saving money to buy a multifamily property but it's been two years, a few close calls but I have not been able to find a property with a decent return. I have about 300k in cash sitting around that I was planning to use for my down payment and I was thinking of using those funds to provide private money to flippers. I don't have any hard money lending experience and I never used a hard money lender. However, I have a banking finance background and I don't think the underwriting for HML is complicated. I don't think 300k is enough to fund multiple project in the area I live so I was thinking of perhaps starting to get into this business by providing funding to flippers for the down payment normally required by HMLs. This is very risky as HMLs do not like 2nd liens to be put on the property.

Wanted feedback from the you guys on what's the best way to secure my investment and if any of you have done this what advice can you provide?

Thanks.

0Reply
178 views

Most Popular Reply

Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y

what you talking abut has been coined these days as " gap funding" and many of the fix and flip guru's preach it. 

you can set it up many ways..  however the main point is if for some reason your borrower has a hiccup do you have the funds to step in and cure their first loan.  finish the project etc.

I use a step in agreement when I do these.. I also put the first lender on notice and get a written confirmation if my borrower is in the process of a water landing I can step in and take over the project.  Attorney can help you with this.

This should only be done with top flight operators. 

Also second position gap funding is generally done in a profit share plus rate.. don't get fooled into only taking mortgage rate interest .. as the risk position is far higher.

Podcast Guest on Show #222
JLH Capital Partners51 Review
WebsiteView Page
2Reply
See this reply in the discussion

30 Replies

Jump to latestLatest
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y
    Originally posted by @Eric Jacobs:

    @Jay Hinrichs I hear you though I wouldn't do it as fractional. The lender is an LLC and the investors sign something like a participation agreement. This way the Lender controls the process and extraneous issues are less likely to interfere ...

    that works you could do a basic LLC and have uneven distributions which is the major benefit to the LLC.. the LLC lends the money you have 2 or 3 buddies as members.. you the sponsor be the managing member.. then cut the pie however you like..

    when I had my shops I did this through guidance lines with my banks.. we put the cash out for the loan.. then back filled and pulled from our guidance line.. for every 1 mil in cash we had we got 4 mil from the bank.. I had that up to 30 some million in 08 it was sweet.

    bank money was 6%  were putting it out at 20% apr.. so we made 14% on the delta on the banks 4 mil and the full 20 on ours... we were printing money until the darn economy cratered.. then the banks wanted their money back  :(

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    2Reply
  • Alina Trigub
    Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes
    8y

    @Tito Burgos in addition to private lending you can also invest as an equity partner in syndications. You can learn more about it by joining my Meetup or search BP for it or feel free to reach out to me directly. Keep in mind that notes are taxed at ordinary income rate so you get back much less after taxes. 

    0Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    8y

    This is a business I know pretty well :)

    There is a lot that goes into a deal and knowing what to do when one goes South is where protecting the money up front matters.  Underwriting is the first and most important part of the deal.  The key is making it easy for the borrower while making sure your money is safe.  

    0Reply
  • Rae Copitka
    Rental Property Investor · Roseburg, OR · Member since 2015 · 15 posts · 19 votes
    8y

    I think the most important detail is to know your partner, then do a detailed LLC or JVP agreement and spell everything out, down to last detail, including an exit/dissolution in case things go bad. Choose an attorney who's familiar with these kinds of agreements and done a dozen or more. I guess what I'm saying is CYA!

    0Reply
  • Odie Ayaga
    Specialist · Delran, NJ · Member since 2016 · 2k+ posts · 951 votes
    8y

    @Jay Hinrichs just wanted to clarify...you've done gap funding deals where you got an interest rate as well as 50% of the net profits on the sale? Wow, business sounds nice!

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free