How can you start benefiting from all the advantages of private lending?
Private lending has been increasingly becoming a top choice for individual investors looking for a better way to deploy their money. Let’s take a look at how it works, various strategies, and the steps to getting started.
What Is Private Lending?
This is perhaps best summed up as private investors loaning their money as a form of investing.
This may take several forms. Peer-to-peer private lending, nonbank lenders providing loans to investors in the form of business purpose loans, and even institutions backing private lending companies, or acting as a secondary market to buy loans as assets.
For individual investors, this is really about allowing active investors and operators to borrow their capital in exchange for returns.
In this case, we are specifically talking about lending for real estate investments. Private loans are made to active investors who use the money to fix and flip houses or acquire and improve the performance of multifamily apartment buildings.
Private lenders often receive regular income as borrowers make their monthly payments. Based on the interest rates they are given. As well as the return of their capital when borrowers pay off their loans.
If borrowers ever default, then their debts are secured by the property as collateral. If they don’t pay, the lender can seize the property, or force its sale at auction to be repaid. In this sector, the worst-case scenario can still be very attractive.
The Benefits Of Private Lending
Private lending has become very attractive for a variety of reasons.
For a start, it carries with it many of the benefits of both real estate and debt investing. Such as strong returns, downside protection, and tax benefits.
One of the chief reasons that investors choose to upgrade to private lending is that it can deliver on all of these benefits, without all of the usual hassles involved in real estate.
You don’t have to deal with tenants, repairs, fluctuating asset values, and more. You just get the passive income and return that you lay out in your agreement.
How Private Lending Has Changed
Private lending has always been around in some form or another. It has only become more organized, sophisticated, and open.
In this case, private mortgage lending evolved in the wake of the Great Recession. It was then that the market was opened up to allow regular individuals to invest in mortgage loans. Just like the banks have done for decades, which has been one of their primary methods of building their wealth and income.
Before that, there were a variety of small, often individual hard money and private lenders who operated locally, on a small scale.
Regulatory changes like the JOBS Act, as well as the appreciation of this sector by the largest financial institutions, have further provided traction and helped it to innovate and morph into what it is now.
Today, private lenders can participate in this investment space alongside like-minded investors in more structured vehicles. A way to lower risk, diversify, and optimize for the upside, without all of the work.
Getting Started In Private Lending
1. List Your Priorities & Criteria
Before diving in, be clear about what it is that you want out of your investing. List your top must-haves. As well as must-not. These are your priorities and criteria for picking how you will invest.
For example, this may be passive income, a certain level of return, your risk tolerance level, etc.
2. Evaluate Your Investment Options
Will you risk doing it all alone as a full-time job? Will you create your own private lending company? Or will you invest in a fund that does it all for you, and just pays you out the returns?
3. Start Vetting Your Partners
Most important of all is vetting who you will work with. Depending on how you choose to invest, this may include screening borrowers, investment sponsors, or fund operators.
4. Get Your Feet Wet
Start testing this space for yourself with a reasonable amount of capital in some private real estate investments. Evaluate the performance, and double down on what’s working.