Private lenders have emerged to become a significant part of the real estate ecosystem. What are they?
Private lenders have exploded in popularity over the past decade. They have filled a very important void in the market. A gap that was left wide open after 2008. They are only more important now.
Many more people are becoming interested in this form of investment for their own needs and financial goals. Yet, there are several types of private lenders and ways to participate in this space. What are they? Which is right for you?
Individual Private Lenders
At its most basic a private lender can be an individual who lends their own money. In this case, for real estate-related uses.
They often lend to local house flippers who are buying, fixing, and reselling homes. Though some may participate in financing rentals and multifamily projects for a fixed amount of time. Usually from acquisition through rehab. Until they are refinanced out.
They usually charge high-interest rates, for short periods, and offer low loan-to-value deals.
To participate like this individuals want to have at least several hundred thousand to several million dollars to spread around and diversify.
Private Lending Firms
In the past few years, we have seen the emergence and rise of private lending firms.
These are investor-focused companies that specialize in lending to front-line real estate investors and operators.
These firms are more organized than individuals. They will have a website, more formal loan applications, and underwriting guidelines. They may offer several loan programs. They may be single-state or regional lenders. With a few attempting to be national.
They pool funds from individual investors or institutional investors, or both, to make larger loans, in higher volumes.
Loans typically center on asset-based lending, commercial real estate financing, business purpose loans, and hard money type loans.
The lender handles all of the origination, loan servicing, and investor accounting.
Individual Private Investors
Individual investors also participate in this space and all of the benefits by taking advantage of private real estate investments through lenders and funds.
Instead of taking on all of the liability and management of trying to lend their money directly, they invest in a fund, which in turn does all of the hard work. The lender then does the underwriting and vetting of borrowers and properties, servicing, accounting, etc.
The private individual simply receives their dividends and returns, without any of the other work and time-consuming headaches.
Why Private Lending?
Private lending has become attractive for a variety of reasons.
It is a great way to achieve high investment returns, with the backing of hard real estate collateral. It offers the potential for passive income, with plenty of potential tax benefits.
Many prefer this to the hyper volatility of the stock market or other alternatives. While being able to have more control over their financial futures.
You get all the benefits of investing in real estate, without having to deal with tenants, clogged toilets, renovation projects, and other front-line risks.
Which Type Of Private Lending Is Best For You?
There are several ways to participate in this space. The key is to be clear on your personal goals and what you want out of your investments.
If you want a hobby to keep you busy, and returns and safety for your capital are second to that, then you may take the direct route of lending right to flippers yourself.
If what you want are strong returns, downside protection, and more passive income and free time, then it is probably best to invest through a fund or lender who does all the hard work for you.