Investing with a Private Lender: What You Need to Know Before You Decide

Do you want to invest in the ultra-competitive and lucrative real estate market, but don’t want the hassle and risk of buying or managing an investment property on your own?  If you do, investing in a private money loan fund may be an option for you. By investing in private loans, you can add real estate to your investment portfolio without being involved in the day-to-day matters of actually owning an investment property.

And the property types available for funding with private loans may surprise you. From single family homes to small commercial real estate and multi-family complexes, there are a variety of ways that a private money lender can make real estate a part of your portfolio.

The question then becomes, how do you decide if private loan funds are the right choice for your investment needs? Here’s what to consider before you make your decision.

Check the Lender’s Background Carefully

A good private money lender will handle many of the aspects of the loan, including sourcing the deal, underwriting, managing and servicing the loan. Ideally, you’ll want to look for a lender who not only knows the local real estate market, but who also has construction experience and has a proven track record working with both house flippers and investors.

And although defaults do happen, an experienced lender will be able to protect your investment through multiple channels such as active forbearance or foreclosure. These are qualities you’ll want to have on your side when checking out potential lenders.

Be Part of the Flip (Without Actually Doing It)

HGTV is full of shows that make house flipping look both fun and profitable. Of course, much of the process that actually goes on behind the scenes gets cut out so that the end result is “made for TV”. Flipping a home, in reality, takes a lot more time and experience than what you see on screen.

And flipping a home or property is not without risk. People who flip properties, much like other types of investors, look to make their investment as profitable as possible by looking for things such as:

• Whether or not they’re getting a good deal for the property
• That the renovations they want to make are cost-effective
• That they’re getting fair prices for solid home improvement materials
• That they are hiring skilled workers for labor and equipment
• And that they understand the underlying costs, zoning and permit issues.

Rather than investing your own income in flipping a property and working out all of these issues yourself, it may be a better course of action to invest with a lender who funds flips. You’ll still be part of the flipping experience but without the huge investment of time as well as lower risk.

Invest In and Help Build Communities While Creating Jobs

Investing your funds with a private lender does more than generate a potential return on your investment. It also helps invest in the neighborhood and the community as a whole. Private lenders tend to fund renovation projects that have a ripple effect on the area, including boosting local business incomes, creating jobs and improving property values.

Ideally you can make this kind of impact right where you live now by investing with a local lender. And unlike traditional stock investing, you can see the improvements right in your local area. There is perhaps no better way to see the fruits of your investment paying off than right where you call home.

But Don’t Put All your Savings in ReaI Estate

It’s never a sound investment strategy to invest solely in one kind of stock. So too should you not empty all your savings into real estate. If you have some disposable income, and want to diversify your portfolio, you can put a percentage of your funds into real estate investment and potentially get better returns than you’d get in an interest-bearing savings account.

The same goes for self-directed 401(k) or IRAs. By directing this money into real estate lending, you can use the profits from real estate investing to grow your retirement savings.

And it’s easy to get started if you want to start even smaller. There are crowdfunding real estate sites that let people start small for as little as a couple thousand dollars.

Private Lending Real Estate Loans Have Hard Assets Behind Them

Unlike traditional investments, private real estate loans have hard assets behind them — in this case the property that’s tied to the loan and the renovation. Normally there’s also a 25% cushion since most lenders require investors put anywhere from 20-25% of their own equity into the project.

If nothing else, even in a down market, the lender can turn that asset into cash.

Know What to Expect Before You Jump In

Investing is all about attractive returns with lower risk, but just like with other types of investing, the riskier the project (or the more complicated the renovation), the higher the potential return can be. Whether you invest directly into the private lending fund itself or into the project for a more hands-on option, you will get monthly statements and can then decide whether you’d like to have the dividends reinvested or paid out each month.

As you can see, investing in private money loans can make real estate a lucrative part of your portfolio while diversifying your investment strategy without requiring the actual investment in real estate itself. No matter what you decide, take a careful look at the investor and their expertise, background and track record to determine how real estate investing can fit into your overall strategy.