People who could be a private lender or hard money lender are often high-income professionals, retirees and others who are seeking a passive income. By lending money to others, they can diversify their investment portfolio and the loans are secured by real estate.
In This Article
- Introduction to Private Money Lending
- Who could be a potential Private Money Lender?
- What is the difference between a Private Lender and a Hard Money Lender?
- What do you need to become a Private Lender?
- OK this is for me, so how do I become a Successful Private Lender?
- Frequently Asked Questions:
- Conclusion
Introduction to Private Money Lending
Private lending in real estate involves individuals or non-institutional entities providing loans directly to borrowers, often for property investments such as purchase, renovate and then resale or rental. Unlike traditional bank loans, private lending offers more flexibility in terms and requirements. Private lenders may consider factors beyond credit scores, such as the property’s value and the borrower’s experience. These loans are typically used by investors who need quick financing or who may not qualify for conventional loans. Private lending often involve shorter terms and higher interest rates, reflecting the increased risk for the lender.
It’s important for you to carefully consider your lending options and assess the associated risks. You should also consult with a financial advisor to ensure that lending aligns with your investment goals and appetite for risk.
Read our FAQ on Private Mortgage Loans for answers to some of the most common questions.
Who could be a potential Private Money Lender?
Being a Private Lender is probably not something you’ve just suddenly thought of, but might think it’s too difficult; too risky and you couldn’t possibly do it. You may be wrong about all those points, as it’s perfectly possible to become a lender, although it does suit certain types of individuals a lot more than others:
- You are a high-income professional looking to diversify your investments
- Have significant investments in equities and want to diversify to real estate
- Real Estate investor who has enough cash from previous real estate investments
- Retiree seeking passive income from significant retirement savings
- You have a trust fund or other estate
- Lottery winner who has recently come into money and is looking to invest it
- Tech entrepreneur looking to diversify away from only technology
Being a private lender is all about wanting to make money from receiving interest payments, that for private mortgages and hard money loans, is usually significantly more than leaving money sitting in a traditional bank account. Being a private lender could earn you up to 15% depending on the loan.
What is the difference between a Private Lender and a Hard Money Lender?
There are key differences and similarities between a private lender and a hard money lender and it will depend on what sort of private lender you want to be:
Private Money Lending
Private money lending relies on individual investors or private groups rather than institutional lenders like banks. This type of lending is not aimed at real estate investors who require rapid funding to secure investment opportunities. The flexibility of private money loans is one of their most significant benefits, offering tailored terms, with flexibility extending to repayment schedules and interest rates, which can vary widely.
Hard Money Lending
Conversely, hard money lending is often more structured, although it remains outside of conventional financial institutions. The primary focus here is the asset’s value—usually real estate—that secures the loan. Hard money loans are a go-to resource for investors looking to engage in fix-and-flip projects or manage rental properties temporarily. The terms are typically shorter, and the loans come with higher interest rates compared to private money lending, reflecting the greater risk assumed by the lender.
Key Differences and Similarities Between Private and Hard Money Lenders
| Aspect | Private Money Lending | Hard Money Lending |
|---|---|---|
| Focus | Flexibility, relationship-based | Property value, less emphasis on borrower’s creditworthiness |
| Loan Term | Short-term, varies | Typically 6 to 18 months |
| Interest Rates | Competitive, varies | Higher, around 8% – 15% |
| Down Payment | Generally lower than hard money loans | Often 20% or more |
| Typical Use | Real estate investments, fast funding needs | Fix-and-flip, real estate investments |
| Regulatory Oversight | Less than traditional banks, varies by state | Similar to private, less than banks |
Why become a Private Money Lender
Being a private lender is a lot less work than being a real estate investor who buys properties, renovates them and then sells or rents them. By being the lender, you are securing the loan on your investors’ real estate giving your money added security. You have to manage your loan and make sure you make the right lending decisions, but what you won’t have to do is do is the rehab yourself or manage the tenants.
By buying and selling real estate, such as for fix-and-flip, you may make more profit than being a private lender. For a private lender it’s about getting paid monthly and receiving a regular passive income rather than overall profit. Real estate professionals often end up being a private lender if they have enough spare cash, as they’ll still have income even if they can’t find a new fix-and-flip or rental.
The value of stocks and shares (equities) can go up and down and so can Real Estate. The difference is that by choosing the right lending criteria and a safe Loan to Value (LTV) on real estate you can mitigate many of the risks and your money can be a lot more secure.
What do you need to become a Private Lender?
If you’re going to be a private lender, do it properly as there are rules and regulations that vary by state. You don’t need a law degree to be a lender, but you do need to do your homework and get it right! If you have some knowledge of real estate, then that would be beneficial.
NO Homeowner Loans or Second Homes
If you’re a private lender, we recommend that you only work with real estate borrowers who are looking to purchase an investment property that is NOT their primary or secondary residence. In other words, they are not and will never reside in the property. Lending to homeowners is what traditional banks are for! Your best customers will be those who want to make real estate investments as a business or personal investment who will not be living in them. This is very important, as there are legal and financial considerations and federal laws.
Why NO Homeowner Loans Makes Sense to Private Lenders
Federal laws like the Truth in Lending Act (TILA), the Dodd-Frank Act and the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) set nationwide standards, including mandatory disclosures and consumer protection measures. These laws apply mostly to owner occupied real estate. However, it is essential that you as a private lender understand your responsibilities under all state and federal requirements, as the penalties for non compliance can be extremely high.
Federal Acts You Must be Aware of:
The Truth in Lending Act (TILA) primarily covers consumer credit transactions, including loans for owner-occupied properties. However, TILA may not apply to loans for investment properties or business purposes, particularly when the borrower is not a consumer. Therefore, private lenders lending solely for investment purposes may not be subject to the same TILA requirements as loans for owner-occupied residences.
The Dodd-Frank Wall Street Reform and Consumer Protection Act primarily focuses on regulating financial institutions and protecting consumers in various aspects of the financial sector. While Dodd-Frank includes provisions related to mortgage lending and consumer protection, its scope is broader than just mortgages. Certain provisions of Dodd-Frank, such as the Ability-to-Repay rule and Qualified Mortgage standards, apply to mortgage lending for both owner-occupied and investment properties. However, Dodd-Frank may not necessarily cover all aspects of private lending for investment purposes, especially when the borrower is not considered a consumer. Learn more about the Dodd-Frank Act.
The Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) aims to enhance consumer protection and reduce fraud in the mortgage industry by regulating mortgage loan originators. The SAFE Act requires mortgage loan originators to be registered or licensed and provides guidelines for their conduct, including background checks and continuing education requirements. However, the SAFE Act primarily applies to individuals or entities that originate residential mortgage loans for owner-occupied properties. Therefore, it may not cover all aspects of private lending for investment purposes, especially when the loan is not considered a residential mortgage. Learn more about the SAFE Act.
OK this is for me, so how do I become a Successful Private Lender?
On our website we offer a lot of information to guide you on your way, such as financial calculators, manage your mortgage for free and free documents. Start by reading our article on How to Become a Successful Private lender or Hard Money Lender.
You’ll need to setup a business. Read our article on How to Setup A Private Lending Business.
Frequently Asked Questions:
1. How can I start participating in private lending?
To get involved in private lending, begin by setting up your business and securing the necessary insurance. Consult with a lawyer to establish the legal structure of your company. Decide on the area of lending you wish to focus on, such as real estate fix-and-flip or property purchase, rehab and then rental.
2. Who qualifies as private mortgage lenders?
Private mortgage lenders are either individuals or entities that offer their own funds as loans to property owners. These loans are typically secured with a note and a deed of trust, or a mortgage (depending on the state) against the borrower’s real estate.
3. What defines a private lender?
A private lender is a non-bank, non-institutional entity that loans money to individuals. Unlike major banks or corporations, these lenders operate independently and earn through the interest charged on the loans they provide.
4. What steps are required to become a professional mortgage lender?
To become a professional lender you may need certification and you must find out what is required in your state. For example, as a licensed Mortgage Loan Originator in California, you must first apply for an NMLS account and ID number. Then, complete the required NMLS Pre-License Education and pass the NMLS Mortgage licensing exam. Following this, apply for your California MLO license, complete the necessary background checks, and pay all associated fees.
5. What about Foreclosure, isn’t that the biggest risk?
The foreclosure process for private lenders and hard money lenders can be scary, but it doesn’t have to be. The easiest way to avoid a foreclosure is to never have one in the first place! That might sound impossible (and nothing can be guaranteed), but you can certainly dramatically reduce the likelihood of one by being a competent lender.
Conclusion
Lending can offer high-income professionals, retirees and other wealthy individuals additional income, where they manage their borrowers but do not have to actively manage the properties that their borrowers purchase. Their money is secured in the Real Estate. This is of course not without risk and it is essential to be a competent lender. Learn how to be a successful private and hard money lender.
Further Reading on Private Lending:
- Article: The Beauty of Hard Money: Learn its Purpose and Benefits.
- Article: FAQ: Private Mortgage Loans What You Need To Know.
- Article: Private Lender Or Hard Money Lender: How To Be Successful.
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