Those actively involved in the real estate market have surely been familiar with raising private capital for real estate investments. Other people’s money can be used to support your real estate investments, and some strategies can be found in blogs, webinars, books, and other forms of media that can help you effectively identify this capital and use it to fund your real estate investments (OPM).
There is no storefront, marketing, or straightforward method to hunt for these fruitful sources of OPM that might assist you in finding your next endeavor. This magical pool of private wealth is quite similar to a secret organization in this regard. Private money lending, an often-overlooked form of passive income in real estate, does not get as much attention as “being the bank.” It’s feasible that you’ll be shocked by how easy a private money loan can accommodate both your financial objectives and the way you live your life.
Most people are under the misconception that private money lending is a specialized sector designated for retirement plans and elderly retired individuals with millions of dollars sitting about. However, private money lending, sometimes known as acting as the “other” person in other people’s financial transactions, is truly a diversification technique used by both seasoned and beginner real estate investors equally. We regularly see a few situations for professional investors who are also private lenders, and all of them fit rather nicely into an existing real estate portfolio.
Lend Private Cash Rather Than Flipping Yourself
The flipping situation is going to be our first topic of discussion. This glamorous HGTV-style of real estate investment often requires a significant amount of time and money to buy a house and make the necessary renovations. When the market fluctuates or unexpected life situations cause an active flipper to take a break, flippers often turn to private money lending to continue earning investment returns even when they are between projects.
This money, which would most likely earn a low-interest rate if left in a savings account, is used to fund another investor’s flip project. The process of flipping real estate will never stop being a source of active revenue, but if you want to take a vacation and generate some passive cash flow, why not lend money to a project instead? In a similar vein, an active investor could utilize money from their retirement account to support other investors’ initiatives since they cannot lend money to themselves. In that situation, borrowers should pay the interest to their own future self!
When an active flipper’s business becomes more successful, they can decide it’s time to “graduate” from a task that requires a lot of their time, like flipping, and instead focus their efforts on activities that generate passive income. One of these tactics would be to acquire money from private sources. These more experienced active flippers, who are looking for more relaxed cashflow strategies, are drawn in by the absence of stringent time commitments that are expected of them. If you are an active flipper, you may work under very tight timelines, interact with contractors at the construction site, have trouble obtaining supplies, or discover that the project has more issues than was previously believed.
Any time of the day or night, a call could come in with a possible (and occasionally actual) fire that has to be stopped. When it comes to lending money privately, there is rarely ever a situation that constitutes an emergency and requires rapid attention. This allows active investors to recover the one item that can never be purchased in huge amounts: more time. When active investors first begin to move to private finance, they continue to evaluate the project in the same way as they would if they were to acquire the flip themselves. They won’t have to worry about managing project finances, subcontractors, or supply chain concerns, which is a major benefit this time. Instead, they can just relax and watch the interest cash on a monthly basis.
Money Lending Rather than Property Management
Investors who normally use the BRRRR approach to purchase and stabilize buy and hold assets are becoming more concerned about how rising interest rates would influence their capacity to refinance and sustain cash flow, much alone get most or all of their money back out of the transaction. These investors often employ the BRRRR method. In order to avoid taking unnecessary risks in a rapidly evolving marketplace, owners of rental properties can lend their available cash to other professional investors in the meantime so that they may see the long-term trend of interest rates. Any kind of lender benefits from an increase in interest rates, and private money lenders are no exception!
Do not fall into the trap of believing that the advantages are intended just for the active and scaling investment. Landlords who are not interested in expanding their property portfolios can free up equity in their existing investment properties. You can accomplish this goal by obtaining a home equity line of credit (HELOC) or carrying out a cash-out refinancing. Next, you will need to transfer the funds into private money loans so that you can profit from a spread on the interest rates. In other words, if you take out a home equity line of credit (HELOC) for $100,000 at a variable interest rate of roughly 5% and then lend that money to an investor at a rate of 10%, you will make the difference in interest rates between the HELOC and the investor. 5% is the appropriate percentage in this situation.
Landlords getting close to retirement age and making preparations for their families may also consider turning to private loans to maintain income flow from real estate without having to put the responsibility of rental units on their successors. If the current market circumstances make selling these rental units an attractive offer, landlords may choose to move that cash into private money lending rather than selling the rents in order to maintain the revenue stream they obtained from the rental units. Some landlords may have assets in more than one state, and they may be interested in reducing their portfolio size to streamline the process of managing their properties, reduce the number of vendors they work with, and simplify their income tax forms. Taking advantage of these opportunities to pivot is an excellent method to transition into the private money lending industry.
Private lending might be an excellent option for wholesaling as a start.
Even though this kind of private money lending utilizing cash that has been “borrowed” is a more sophisticated approach, expert investors are not required to participate in private lending. Private lending can be a recommended entrance point for many investors who are concerned about the idea of wholesaling real estate deals. In many cases, wholesalers claim they can enter the real estate market with little or no money by advertising their services.
While this may be applicable for some of the courageous individuals who are ready to engage in all of the activities required in this multi-disciplined sector of the real estate industry, the reality of the matter is that many newcomers are sometimes discouraged by a large number of skills and capabilities they need to gain in order to genuinely be successful in wholesaling. Additionally, similar to active flipping, wholesaling demands an almost constant connection with your mobile phone since salespeople do not often arrange meetings in advance to discuss a deal.
Making cold calls, going door to door, and bargaining with hesitant sellers may be quite overwhelming, which is why some novice investors look for alternate entrance routes into the real estate investment market. Shareholders, loaded with “a tiny” amount of capital—possibly not enough to genuinely start a flip on their own—play the role of the bank for other investors so that they may earn interest income and learn how to underwrite transactions along the road. This enables investors to learn how to underwrite deals even when they only have “a small” amount of cash.
Understanding how Private Money could be Beneficial
Private lending is an excellent way to earn additional income while investing in real estate. There are many reasons to understand and include it in your plan. To begin, the lender is the one who gets to create the ground conditions. The lender can select the terms and conditions of the loan, including the interest rate that will be charged (within the parameters set by state and federal legislation). Private lenders can enter into any agreement with the knowledge that they already know how much profit they will make, which is probably not achievable with other types of real estate investment strategies. Many private lenders prefer short-term loans with features similar to certificates of deposit (CDs) because they provide liquidity without the low interest rates presently available on CDs and other forms of depository assets. Every time the money is moved around, there is a new chance to earn origination points and any costs linked with the loan.
Traditional Lending vs Private Money Lending
There are many similarities between a lender and an active investor regarding due diligence when funding a new business venture. Real estate investors who are just starting may learn the ropes while their more experienced borrower does most of the tough lifting. The journey from flipper or landlord to the lender is smooth for experienced investors looking to enter into more passive investment techniques. Since they are already familiar with underwriting projects, the transfer is easier.
Lending money to individuals can also be made in a competitive teamwork environment. Investors involved in a project may be used to “going it alone” and taking full responsibility for all aspects of the endeavor’s development. On the other side, the lender has many specialists on staff to advise and protect the cash included in the loan.
How much Private Money is available
Private money lenders have access to legal assistance in the process of drafting the documentation necessary for the loan, a title representative who will conduct a title search and ensure that the title is clear, and a hazard insurance broker who will assist in reviewing insurance quotations provided by the borrower, and even other private lenders in their network who will assist in balancing out the risks and rewards associated with the loan. It is even better if a private lender can establish a strong virtual team since many employees can simply become the information reviewer rather than the information collector.
One of the most important facets of private money lending is that transactions can be completed anytime and anywhere. A company that can be carried about in a backpack, if you will.
This freedom does not merely relate to one’s financial situation; rather, it pertains to one’s ability to make choices about one’s lifestyle. Those who desire to live their best lives while at the same time putting their capital to work for them in the form of real estate-backed private money lending. Although most individuals go into real estate investment in the hopes of achieving financial independence, most of the time, they are truly looking for the flexibility to do other things with their time or even to move to a new place. Their “why” is often focused on the want to do whatever they want, wherever they want, and not necessarily on the desire to have an income of $10,000 per month coming in. Building a successful private loan business from anywhere on the globe is simple for those who put the highest emphasis on their ability to manage their own schedule!
Even if you don’t consider private money lending as something you want to pursue as a future profession, it might be helpful to understand more about how the process is carried out safely and securely from the perspective of the lender to increase the probability of successfully raising private finance. It is in the best interest of private lenders to collaborate with borrowers who are worried about the risks involved with being the creditor on loan and know how to manage such risks. The more expertise you can demonstrate to prospective private debt partners and explain how you can manage their investment via secure and safe lending methods, the more confident the lender will be in collaborating with you.
Sharing your expertise in real estate investing with people in your network can make one of them become a private lender for you if you are familiar with how private lending works and can explain the process to them.
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