How could I lend money?

Question

I'm interested in learning on how to take the steps into lending money and being paid back the money with interest. How would I go about this? I kind of want to become a private lender to others rather it be for real estate or other situations. Would I come up with some sort of contract with my lawyer and find people that need money? and how would I get paid back? I pretty much need a starting/learning point.

Thanks

Will Barnard · Answer

Anytime Kyle. Fear of missing something or doing something wrong will always be there at first, the key is to not let fear stop you and take action. Education will remove that fear and I will be more than happy to educate you on it.
Email or call anytime.

Will

Will Barnard · Answer

Similar in CA too however, the second document is called a deed of trust and is recorded with the county recorder.

As far as interest payments, you can structure with monthly, quarterly or lump sum at end. I usually structure mine with lump sum and for two reasons. 1. I have enough monthly bills to deal with, I hate paperwork. 2. Making interest payments only requires the borrower to have more funds available, thus lowering cash reserves. In some cases, this could be detrimental not only to the borrower, but to the lender. The point is to get paid, and doing things that make it harder on the borrower places the lender with more risk.
If you need interest payments to live off of, then that is a situation where it should be structured that way.

J Scott · Answer

The lenders I work with are doing one of two things:

1.  They are loaning from their self-directed IRA, in which case I'm sending a check to their SDIRA custodian made out to their account; or

2.  They are loaning their private funds, in which case I'm sending a check directly to them every month (or in one case, depositing the money directly in their account by walking into a bank branch with a check).

Nobody I've worked with (yet) has used a servicing company.  Most of these are small loans ($100K or less), and most of the lenders I use are just other investors who have some extra cash to lend and white collar professionals with retirement money...so none of them are doing this on a large enough scale where a servicing company is really necessary.

Kyle J. · Answer

J  Scott That makes sense.  Do you find that most private lenders accept the monthly payments directly?  Or are they using some kind of third party servicing company?

J Scott · Answer

Here is how I borrow money...not saying it will work the same if you're lending in a state other than my state or if you're doing a different kind of loan...

Assuming the loan is being secured by the property, two documents are created for the loan:

1.  The Promissory Note -- this is the contract between you and the borrower that indicates the terms and the promise to pay.

2.  The Deed to Secure Debt (DSD) -- this is the document that attaches the property to the loan as collateral...if the borrower defaults on the loan, you get to foreclose on the property.

Both of these documents are pretty standardized, and my closing attorney will draw them up every time I borrow money for a property from a private lender (unless the lender wants to have his attorney provide the documents, which would cost the lender money, but might make him feel more secure).

At the closing, the attorney executes these documents, disburses the funds and then files the documents with the county clerk so they are of public record.

I make payments to the lender as specified, and when I sell the property, the closing attorney handling the sale will contact the lender and ask for the "payoff amount."  This is the total amount that is owed to pay off the loan, and at the closing, the attorney will wire that amount directly to the lender as part of the closing to close out the loan.

Again, this is just how it works in my state and with the deals I do, but other than reviewing the loan documents before the loan is made, sending the money to the attorney prior to the purchase closing and then providing the payoff amount at the sale, the lender doesn't really have to do anything except get their monthly interest payments and their payoff at the end.

Does that make sense?

Shannon X. · Answer

Thank you everyone for your helpful information, Will Barnard, I have sent you an email as well.

Thanks

Tim Delp · Answer

I read the message posted by the lender that did his first deal with Will and it sounded like that was a big help to that individual.  I was going to encourage you to get involved with individuals in your area that are using private lenders.  Get to know them, feel them out, ask for references, ask for list of previous deals, learn how to search on your clerk of courts to confirm that the deals they've done in the past have been paid on time and in full.

Lean towards safety and don't chase sky high returns, better to get paid back and learn your ropes before you venture to deals where the vetting of the deal is too great.

Also as you mentioned I think it is great to look for another private lender that might take you under their wing and bring you in to deals with them as a partner and they get paid a placemet fee or brokerage fee etc.

Do be careful as there are a lot of people that need private funds that are not worthly of being leant to.

Kyle J. · Answer

I read that other post from the other member you're referring to, and it was inspiring because he was basically in the same position (before he hooked up with you) that I'm in now.

I think it's just the uncertainty of never having done it before that has me worried that I'll miss something during the process.  (I learn better by example or actually doing something than from a book.)  However, once I do one, I'm sure I'll feel a lot more confident/equipped to do more.

Thanks for your post and maybe we can chat sometime soon.

Will Barnard · Answer

Shannon, there are some threads on the lending side here on BP.
Kyle J. - Same message to you. And to both of you, I am a lender and a borrower so I know both sides and would be more than happy to assist you in your lending goals. Education is key and I can get you on the right path.
Email is a great way to get in touch with me (my email is in my signature below) and i have helped many, many people get into this, including several BP Members, one of which just made his first loan this week and he posted about it.

Will Barnard

Steve Babiak · Answer

Here is Kyle J.'s thread:
http://www.biggerpockets.com/forums/49/topics/79786-how-to-learn-more-about-becoming-a-private-money-lender

How could I lend money?

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