Let’s take this scenario into account: you have retired, and you have gathered a nice fund that would sustain you for the rest of your life – and even more. The issue is this: you don’t want your money to just stay there in an account, waiting to be spent; you want to make it grow; maybe let your children and grandchildren benefit from it as well.
How Private Loans Work?
Private money loans are generally lumps of money that are secured by a person’s income or real estate assets. Depending on the loans that are offered, these can be used to buy anything from your daily groceries to a house.
Anyone can be someone’s private lender – from a friend to an acquaintance or an already established lending company. 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 about private loans, their immediate train of thought goes to hard money lenders. These lenders issue loans on the short term – generally from one month to another – which can be used to repair a car, renovate a home, etc.
These loans are perfect for anyone, no matter if you are a short-term “fix & flip” investor or a long-term “buy & hold” one. Therefore, if you are an investor, you need to know what type of private lender you are opting for.
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Private lenders are divided into three categories – each of them having the relationship between the lender and the borrower in mind.
● Primary circle of private lenders: Friends and family.
● A secondary circle of private lenders: Personal and professional acquaintances, colleagues.
● Third-party circle of private lenders: Hard money lenders and accredited investors.
If you are considering an investment in private lending, then you should first decide what circle you want to be a part of. However, most people tend to opt for third-party lenders – specifically, hard money lenders. This is because they are usually the most reliable batch – and the 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. Investing in private lending is a good way to make that money grow.
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Pros and Cons of Investing in Private Lending
When you are retired and want to put your money to good use – while making it grow – you may be very tempted to invest in private lending. And indeed, there are advantages to stepping into the lines of a private lender – some of which include the following:
● A private lender can earn up to 15% – and even more – from their returns. However, it will depend on the borrowers that they tend to attract and the overall financial situation of the state.
● If the borrower defaults on the loan, the lender has 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 headaches and risks that have been associated with renting and flipping.
● Considering that private loans are in the short term, the investor has the possibility of moving that money in and out anytime, according to his or her preferences.
As you may have realized, investing in private lending can be a very 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. Furthermore, even if the borrower defaults on the loan, you can still get your money back through the process of foreclosure.
Investing in private loans is indeed a good method to draw in some extra income – particularly if you want to practice it for the years to follow. However, you have to analyze the market to ensure that you’ll reap benefits – and make sure that you understand all the pros and cons.
Tips for Becoming a Private Lender Investor
You have made up your mind and decided that investing in private lending is a good opportunity to earn some extra funds every year. However, since you are still a beginner, you do not have all the basics down. 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 – for example, in an apartment building or a storage unit. They will “park” their money there – and once that project is stabilized and sold, it will start bringing 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 a suitable option for you.
In this case, you might want to surround yourself with people that already know the ropes. This way, you can combine both your knowledge and do a good job.
● Know Your Deals
If you want to be a successful private lender, you need the ability to evaluate every deal that you make. Learn about 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 or projects that help you see exactly where the money is going. This way, you will be able to take over an asset or a 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. These deals can’t simply be done with a handshake – so you will have to be prepared.
When investing in private lending, you will have to make decisions, discuss taxes, create a deal-reviewing system, and many more. This is why you will need a good accountant to help you out through the process.
Plus, to ensure that there are no legal problems and that you get your investment back, you will need a good lawyer. He/she will advise you what to do in the event that someone defaults your loan.
● Trust, But Still Verify
The advantage of private loans for clients is that they do not have so many restrictions – such as the ones implemented by banks. This is why you should always do some background check on the people that you plan to lend money to – and therefore, invest in them.
Granted, those people may not be frauds – but they may still be incompetent. The means would be different, but in the end, the result would be just the same. You would be losing your money – and there would be no profit in it for you.
As you can see, 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 are retiring with a nice sum of money, you can make your investments grow.
Plus, considering that you will only be lending money, there is nothing much that you have to do. You will only 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 interesting gathering up, that “baby” will grow with each passing year.
AUTHOR BIO: JCAP Private Lending is a Direct Lender who closes and services Investor Funded Short-Term Real Estate Loans. To learn more about us, please visit our site: www.jcap.net