What Is a Private Money Lender?
Whether you’re fixing and flipping or fixing and holding your property as a rental, finding a good private money lender is one of the best business strategies you can use in real estate. Good private money can literally change your business and life for the better.
Private money lenders are simply the people giving out loans, most commonly for real estate investment purposes. It can sometimes be a company or organization, but more often it’s just a single person.
Who Are the Private Money Lenders?
They can be anyone from your network of people. It might be your parents’ boss, your uncle’s friend, an acquaintance of an acquaintance, or even one of your relatives.
These people are usually the ones who have extra money to put into investments (they don’t necessarily have to be rich). Most of the time, they share the same interest as you in real estate — they just don’t have the time and knowledge to do it themselves.
Steps to Secure a Loan from a Private Money Lender
- Be professional and create a business plan that you can show them.
- Make a personal guarantee on the loan: That means putting your personal assets on the line as collateral. This shows that you’re serious and that their money is safe with you.
- Give them a promissory note from your LLC: This means putting your LLC on the line by providing a promissory note stating that you’re going to pay them back with interest. This letter has to lay out all the terms of the loan.
- Make them an “Additional Insured” on the property: In the event that something happens to the property, the insurance check would have their name on it. This shows you’re not the only one with ownership interest.
- Allow them to put a lien on the property: This gives them control through foreclosure if you don’t pay them back.
How Much Interest Do Private Money Lenders Charge?
You can negotiate it to be around 8–12%, but it ranges depending on your relationship with them. A private money lender can fund your real estate business from the entire purchase price to rehab. So, think about what a fair range would be for both of you. Compare this to the rates you’d find with a hard money lender, which typically charges 8–15%.
When Do You Pay Off Your Private Money Lender?
That depends on what type of private lender they are. Lenders who lend less money may want their money back in just a couple of months. But when you start dealing with people who have more money to lend, they rarely want their money back immediately. Once you’re ready, you can cash-out refinance to pay them off and keep the property long-term.
Pros and Cons of Being a Private Money Lender
Pros:
- Monthly interest income.
- Ability to set whatever terms you’re happy with, including collateralizing your loan and setting up the payment rules.
Cons:
- It takes more attention, skill, and sophistication than just throwing your money at anyone.
- You are not entitled to any of the appreciation value of the property.
- There is no inflation protection — if the value of the property rises, you’re not getting more than the negotiated interest percentage.
How to Become a Private Money Lender
- Find a borrower by working with mortgage brokers, realtors, and appraisers, or speak to your own network.
- Understand the marketability of the property your borrower is investing in — including location, property type, and equity. Use your bookkeeper to keep the financial records straight.
- If both parties agree to terms and conditions, get a lawyer to start the legal work and put everything on paper.
Keep in mind that it’s going to be harder to find deals if you have less money to lend, since mortgages are usually for large amounts.
