How (and Why) To Become a Private Lender

How (and Why) To Become a Private Lender

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Private LenderIf you have the financial means, becoming a private lender to builders, developers and other businesses can lead to big payouts.  Negotiating favorable terms, increasing cash flow and meeting new business associates are all perks of being a private lender.  But when things go wrong, it can lead to big financial losses.  

Before you decide to be the bank, here are some things to consider.

Calculate the Risks

There are several ways to invest your money without being actively involved in a deal.  For example, you can park your money in large projects like self storage units or apartment buildings until they are sold off.  

However, before you do this, you need to make sure that you can recover financially if the loan goes unpaid.  If you are not 100% sure that you will recover, private lending is not for you.  

If this is your first time, be sure to surround yourself with experts who can add knowledge to the experience.  You might want to start off small like doing a few flip projects and then tackling a bigger investment.

Know Your Subject

To make it as a private lender you need to analyze the deals put in front of you.  Knowledge of construction costs, permits, zoning and real estate trends needs to be on point at the local level.

If you don’t have the expertise in these areas you could invest privately with a fund controlled by experts.  If privately investing on your own is what you want to do, try working as a property manager or a developer to get the hands on knowledge you’ll need to go at it solo.  

It can be beneficial to invest in what you know and are familiar with.

Have a Strong Stomach

There are a million different problems that could come up if money doesn’t come as planned or doesn’t come at all.  As a private lender, you have to be ready to weather the storm.  

One way you can feel more secure about a project is by building a great team.  Find an attorney you can trust that will know the ins and outs of your deals.  Your attorney will get your documents organized, and be your legal backup.  A good accountant is also a must to know tax implications and help you make the best decisions.

Risk v. Reward

Keep in mind that if a deal sounds too good to be true it probably is.  While you might not be dealing with a fraud, it could just be someone who is naive or incompetent.  Run the numbers to make sure they will work and evaluate for yourself.

As a private lender, you need to look to see if lending your money will improve the operating cash flow of the person you are lending to and makes sense for you so you have a win-win situation.  Always keep in mind that even the smartest, most well thought out loans can fail.

There can be a lot of upside when it comes to being a private lender. But you have to do your due diligence. Even after you check all the above boxes, make sure you risk only a small part of your net worth on a private deal.

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