You’ve probably heard of investing through the stock market, bonds, and flipping houses, but what about investing through becoming a private lender?
Becoming a private lender is a great way to enter real estate investing, however, with less responsibility and work.
Although that sounds simple, there is actually a lot to know before committing to becoming a private lender. There are certain things you need to do and know to protect yourself and set yourself up for success.
Lucky for you, we have plenty of experience working with private lenders. It’s an exciting and lucrative business to be a part of, so we have gathered some of the most important information needed to know to be successful as a private lender.
Anyone Can Be A Private Lender
You may be wondering, “who can become a private lender?” And it may seem like someone needs a large amount of money laying around to become a private lender, but that’s not true!
Anyone with extra money can become a private lender. If you have been saving money up in a savings account but aren’t making much return, you could become a private lender to make a bigger return.
If you are simply looking for a way to earn passive income or maybe you are simply interested in getting involved with real estate, but from a distance, becoming a private lender might be a great idea for you.
Simply put, you don’t need to have a bunch of cash lying around. As long as you have some, you can work your way into becoming a private lender. This is a business where you’re almost always likely to see a return on your investment, so expect your cash to grow! If you’re ready – you can invest that capital back into another property investment and keep going from there exponentially.
The Advantages
To begin with, let’s look at some of the reasons why you might consider being a private lender in the first place.
Buying a property can be pricey. Because of this, many real estate investors can’t get the properties they want on their own and seek aid to do so. It usually results in a win-win situation for both the investor and lender, so why not seek a little assistance?
You are investing with minimal effort. If you want to get into real estate but don’t want to take part in the purchasing, selling, renting, flipping, and repair processes, then becoming a private lender might be great for you. You can invest your money in someone that will do all those things, but you will be playing a smaller role while still investing.
You can feel more secure as a lender. The real estate market fluctuates and can be risky sometimes when it comes to investing. However, when you are investing your money as a private lender, you are almost always going to get something back.
Money lending is much more measurable than actually purchasing a home. As long as you aren’t risky with lending to just anyone and you perform credit checks, you should almost never be on the losing end of an investment. If there is ever a situation where the borrower does not pay you back, there are certain processes and steps to take to be able to make back what you lent.
Overall, the main advantage of becoming a private lender is that you are able to invest while not taking much risk. If done correctly, you should see positive returns on a consistent basis. Now that we got the good stuff out of the way let’s see what else you should know before committing.
You Still Need to Do Your Research!
Is there less effort when it comes to becoming a private lender and being the one to flip a house? Yes, but that doesn’t mean it’s going to be a walk in the park.
As a private lender, investors will seek you out and present a specific investment to you. This is where you do the work to keep your investment safe, assess risk, and try to understand what you might be committing to.
Before negotiating with anyone about a real estate investment, you need to understand the market, how investing in real estate works, and know which vital questions you will ask investors who are proposing an investment to you.
Agreeing to just any proposed investment that “sounds good” could possibly set you up for a troubled journey. If things go wrong, you will most likely be able to initiate claims to get your money back, but it is an intensive process, to say the least.
Do your research on the investment itself, do your research on the borrower and their credit history, and understand the market. Taking the necessary steps before commitment will save you a lot of hassle in the future.
Steps to Become a Private Lender
So you’re convinced and want to get started as a private lender, great!
The first step in doing so is determining where the funds are going to come from and making sure they are protected. Are you planning to set up different accounts to manage your investments or use your personal accounts? Speaking to a lawyer and making sure to obtain the proper insurance to best protect yourself is always a good idea as well.
Decide where and how you want to lend your money and then look for investments. Do you want to lend locally or expand? What is your max lending amount? Once you figure out exactly where and how you want to aim your focus, seek opportunities. There are multiple peer-to-peer lending platforms and networks to find investors seeking lenders and vice versa.
Once you have found an investment you are interested in, assess the investment itself, the borrower, and the risk. Make sure all parties agree with the terms of the investment and that it is going to provide a return for you. You can then finalize any paperwork to establish the deal.
And there you have your business as a private lender off the ground. You should have negotiated with the borrower how and when you should get paid back. Therefore, you should have a rough idea of what the timeline will look like for you and your investment.
Conclusion
Becoming a private lender will be as simple as you make it.
If you prepare well, you shouldn’t run into many issues and can make solid returns. However, if you go into it blind and don’t do your research, you will make it a much more complex process and lose your investment.
Private lending is a great way to dip your toes into the real estate industry while maintaining a comfortable distance.
If you are wondering if there are any other options to get involved with real estate or want to work with us as a private lender, you can send us an email!