The last two months have been a great education in private lending. By the end of this month I’ll have closed 3 deals with Private Lenders. I also (accidentally) became a private lender myself when I owner financed one of my condo’s to another investor. Here’s a video about how I did that.
Having dabbled on both sides of the game, I got some perspective. On the whole, I think private lending is a tremendous tool for investors on both sides of the deal. Here are 13 ways it can benefit you whether borrowing or lending.
7 Reasons to borrow from private lenders
- Better returns – Professionals utilize leverage responsibly. It’s true in all markets. By working with a private lender, your capital requirements go down, and your returns go up. My partner and I were calculating annualized returns on a flip we’re about to buy around 3,000%. It’s a good deal, and we’re putting very little down. If we we’re using our own money it’d be more like 150% annualized
- A diverse pool of capital – Investors of all kinds, including banks, can be fickle. Developing relationships with multiple private lenders is a good way to minimize your risk. If one decides to get out of the lending business, you’ll have multiple other options.
- A deep pool of capital – One of the lenders I’m working with has the capacity to lend millions. If you want to scale your business, financing is really important.
- Top grade your network – Experienced private lenders have expansive networks. They can connect you to other people who might have a huge positive impact on your business.
- Learn from your lenders – Individuals who have capital to lend and invest have obviously been successful in their careers. I’ve learned a lot about business and real estate from the two that I’ve closed deals with.
- Get feedback on your numbers – Working with lenders gives you feedback on your deals. They want to make sure they’re protected. For them to be protected your numbers have to be good. Some of them will require Appraisals or BPO’s. This gets yet another set of professional eyes on the deal.
- Expand your capacity – If you can do one flip at a time with your own money, you can probably do at least 3 when you partner with a lender.
6 Reasons to lend to real estate investors
- Better returns than checking account – If you have money sitting in a checking account private lending will handily beat the returns you’re getting. I offer 12% returns, which will actually beat the stock market most years.
- Secure investments, backed by real estate – Real estate is a pretty stable asset. There’s a reason banks are able to leverage their mortgage loan portfolio’s 10-15 times. A very small percentage of loans go bad. When loans do go bad, banks foreclose on the house and sell it to recover their capital.
- More control over your investments – I spent 6 years trading stocks professionally and generated almost $1,000,000 in revenue. It sounds good, but that’s nothing crazy over 6 years. I can tell you from that experience that the people making real money are the ones who have control. Insiders playing by a different set of rules. Control is underrated in the investment world. Being able to know and influence the people you invest in is powerful.
- Non-correlated returns – Ask any financial adviser, this is the holy grail of finance. Everyone wants returns that aren’t correlated to the stock market, but they’re extremely hard to find. Private lending returns are linked to the quality of your borrower, deal, and negotiations.
- Truly passive income – I’ll be receiving ACH deposits each month for the loan I made. I’m not responsible for tenants or toilets. Plus, the borrower is an experienced investor who I’ve already worked with. It doesn’t get much more passive than that.
- Learn real estate – Plenty of people have capital to invest, but they don’t feel comfortable managing transactions or rehabs. You can learn a lot from the process of following along with an experienced team. I considered going this route. I’d probably be much farther along if I had.