Private lending is becoming one of the hottest and best ways to invest in the real estate space.
Sophisticated and experienced investors are finding this is the best way to participate to minimize risk, gain the most upside, and gain the most free time. Even those new to real estate investing are finding it can be the most efficient way to generate passive income and the other benefits this asset class has to offer.
Of course, the extent to which private lending is as profitable and effective as hoped for relies on how you do it.
What Is A Real Estate Private Lender
Put simply, a private lender is a non-bank entity lending in the real estate space.
Typically only for ‘business purposes, on non-owner-occupied properties and mortgage loans.
These funds are often used to fund parts of the house flipping process, such as acquiring, renovating, and remarketing properties. Or to buy, rehab, and hold them for income.
Private lenders lend their capital to front-line investors who are active in the market. The private lender takes a passive role. Securing their investment with the real estate collateral. The bulk of their returns is in the form of monthly interest being paid on loans.
Ways To Become A Private Lender:
Solo Direct Lending
In the past one of the ways individuals participated in this was to simply make small loans directly to local real estate investors. Unfortunately, this also brought a lot of risks and was very time-consuming.
You have to rely on finding the right investors, and them not only being honest but great at what they do. You are limited in diversification. It can be a full-time job for you.
Start A Private Lending Company
Another alternative is to start a non-bank lending company. You may need to get training and applicable licenses for each jurisdiction you want to operate in. As well as get insurance and employ a strong legal, compliance, and servicing team.
There can be a lot of costs to this. Though you may also pool together funds from other investors to be able to share risk, diversify, and do more volume.
Investing In Existing Mortgage Notes
Between 2008 and 2019 it became popular to invest in existing mortgage notes. Buying loans that had already been originated by others. They can be performing first mortgages, non-performing second mortgages, and multiple combinations of these.
However, the popularity of this strategy also made the space very competitive and erased much of the potential returns. While also forcing institutions to restrict who they sell to avoid lawsuits for selling to predatory lenders and bad actors who preyed on homeowners.
You now need a substantial track record and resume, as well as millions of dollars in investable capital to bid on many of these mortgage pools.
Real Estate Debt Funds
A superior option for many private real estate investors has emerged as investing in real estate and mortgage debt funds which do all of the hard work.
They operate at scale to minimize risk and optimize efficiency and profitability. They do all of the hard work of finding and vetting the right borrowers, servicing loans, and selling them into the secondary market for liquidity.
Individual private investors and even other funds and companies can invest in these opportunities without direct liability, and for strong risk-adjusted returns, and passive income. All without any of the hard work.
