The Benefits of Private Lending and How to Start
Not everyone who is or wants to invest in real estate can afford to sacrifice more time than they already are. This is why private lending has become an attractive form of real estate investing to so many investors.
Once you have an established business partner and process in place, you won’t have to deal with the purchase, rehab, or sale of the property. The real estate investor (REI) you lend to will take care of that. You just invest and then collect your returns. Pretty simple right?
What’s even more attractive is that you can get returns 2-3x+ the highest CD rates with an asset that’s secured by real estate, unlike shares in a company. This makes private lending much more attractive to investors, they get good returns and know their asset isn’t going to just disappear.
Find a Partner
This is when you start your networking journey. Go to local networking events like the WiscoREIA or other similar meetups. Let people know you’re looking for some reputable house flippers in the area.
You’ll want to make sure any potential partner has a solid reputation. Ask for references from previous lenders. Ask to inspect previous and current projects, look for quality and timeliness.
If everything checks out, you’ll still be nervous lending such a large amount of money. But, once several deals have been completed together, the relationship and trust in the partnership grow. It takes time.
Never Go “All-In”
You should never fund the entire acquisition, rehab, and sale in the beginning of any partnership. A routine investment for a private lender is often around 65% the ARV of the property. Receiving monthly interest payments for the duration of the loan is recommended for new private lenders as well.
By only contributing 65% you leave the investor to fund the other 35%. This ensures that they’ll have enough risk in the deal to incentivize them to complete the project on-time and within budget. This also leaves you with plenty of equity in the property in a worst-case scenario. Allowing you to foreclose on the property for resale to protect your initial investment.
These “rules” are relative to the relationship you’ve build with your business partner. If you’ve worked with them on dozens of projects, stretching these rules are likely OK. Especially when it allows you both to fund more deals together making you more money.
There is one thing you can do as a real estate investor that you can’t do as a shareholder in a company, insure your asset. For example, fire coverage will protect your capital investment if your property burns down or sustains structural damage from a fire.
And with all the people walking through the property you never know what can happen. For this reason, you’ll want liability insurance to make sure that personal injuries are covered as well.
With so much of your money invested, make sure that you’re added as an insured party on any policies purchased against the property.
Private lending can be a lucrative business. It requires a lot of work to get started which can be a big hurdle for many. But if you find a good partner and structure your deals properly, you’ll minimize your risk and see strong returns.
If all the necessary learning, networking and due diligence that’s necessary is unattractive, investing with a Hard Money Lender like Best REI Funding is a great alternative.
You get the benefits of being a private lender, without any of the work. We find reputable real estate investors, analyze and evaluate properties, and manage the loan until it’s repaid. If the worst-case scenario were to occur, we’ll do the foreclosure, finish the rehab and handle the sale of the property.
And if you have any other questions, please Contact Us online or give us a call at (888) 341-2282.
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