Investing in Private Lending – Know the Ropes
Apart from performing a few DIY projects you can find on this post and renting out your second property to generate additional income, there is another save way through which you can increase the amount stored in the savings account of your bank.
Let’s take this scenario into account: you are retired and gathered a nice fund that would sustain you for the rest of your life. The issue is that you don’t want the money to just stay in your account. You want to make it grow, so maybe your children and grandchildren could benefit from it.
How Private Loans Work
Private money loans are lumps of money that are secured by a person’s income or real estate assets. Depending on the loans offered, these could be used to buy anything from your daily groceries to a house.
Anyone can be someone’s private lender. These types of loans are more “relationship-based”, since they do not have the restrictions brought by your regular bank loan.
However, when people think of a private lender, they immediately think of hard money lenders. Private lenders issue loans either on the short term — generally from one month to another — can be used to repair a car, renovate a home, etc.
These loans are perfect for anyone, whether if it is short-tern “fix & flip” or a long term “buy & hold” investor. If you are an investor, you need to know what type of private lender you are opting for.
Private lenders are divided into three categories — each of them have a relationship between the lender and borrower in mind.
Primary circle: Friends and family
Secondary circle: Personal and professional, acquaintances, colleagues
Third-party circle: Hard money lenders and accredited investors
If you are considering an investment in private lending, you should decide what circle you want to be a part of. However, most people opt for third-party lenders — specifically, hard money lenders. This is because they are usually the most reliable batch and interest rates are standardized.
Hard money lenders tend to provide loans that go from 1 to 3 years and interest rates that can go up to 12%, depending on the credit of the borrower. This is why a private lender would benefit greatly from offering private loans because it is a good way to make that money grow.
Pros of Investing in Private Lending
There are advantages to stepping into the lines of a private lender — some include the following:
A private lender can earn up to 15% – and even more – from their returns. However, it will depend on the borrowers and that they tend of attract and the overall financial situation of the state.If the borrow defaults on the loan, the lender had the right to secure their physical assets – such as the property that they have added as collateral. This way, the lender can take back the money that he/she has lost – and also the interest. A private lending investment will allow the individual to further invest his/her funds into things such as real estate. The advantage is that they can do it without the risks that has been associated with renting and flippingConsidering that private loans are on the short term, the investor has the possibility of moving that money in and out anytime.
Investing in private lending can be a fruitful business. As a borrower, it will allow you to invest in your assets and make everything grow with the borrowed money. On the other hand, as a lender, you will get many benefits from the interest rate. Even if the borrower defaults on the loan, you can still get your money back through the process of foreclosure.
Tips for Becoming a Private Lender Investor
You have decided that investing in private lending is a good opportunity to earn extra funds every year. However, you are still a beginner. If you want to be an investor and become someone else’s “bank”, here are a few tips that you might want to consider:
Learn How to Take Calculated Risks
A private lender can easily make a passive investment in a large project, such as in an apartment building or a storage unity. They will “park” their money there and once that project is stabilized, it will start brining returns.
However, one thing that you should make sure of is that you have a way of recovering money from defaulted loans. If you don’t know how to implement a Plan B for every loan, then private lending might not be suitable option for you. In this case, you should surround yourself with people that are knowledgeable about private lending.
Know your Deals
Learn the costs, the potential, the purpose of the loan and whether the investment will become fruitful or not
At first, you might want to invest locally in people and projects that help you see where the money is exactly is going. This way, you are able to take over an asset of project in the event that one of your loans goes unpaid.
Have a Good Team and Attorney
If you want to be successful, you need to have a well implemented managerial and legal backup. When investing in private lending, you will have to make decision, discuss taxes, create a deal-reviewing system, and many more. This is why you need a good accountant to help you out through the process.
To ensure that there are no legal problems and that you get your investment back, you need a good lawyer. He/she will advise you what to din the event that someone defaults your loan.
Trust, But Still Verify
The advantage of private loan for clients is that they do not have so many restrictions. This is why you should always do some background check on the people that you plan to lend money to.
Investing in private lending can be a good opportunity if you want to make the most out of your money. Even if you are still in the workforce or retiring with a nice sum of money, you can make your investments grow.
Considering you will be only lending money, there is nothing much that you have to do. You willonly have to sit back and watch how your interest grows.
Hopefully, this article shed some light into the process of becoming a private lender. It’s an investment that you can start with little money, but eventually with the interest gathered up, that “baby” will grow with each year