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How to become a private lender

One of the questions that I get a lot from people outside the real estate investor world is “how can I become a private lender?”  This is a great question.

In sort, you need to seek out a professional real estate investor and tell him that you are interested.  There are two important questions that you will need to answer during this process.  The first is what your required return on investment or ROI is; this will be expressed as a % in general.  The second question is how much do you have to invest?  Additionally, you may want to talk about the term of any loans.  Some investors look for long term multi-year loans where they can park their cash and allow it to earn interest, while others need to turn cash over in a year or less.

There is a ton of information out there on the internet that promises high rates of return on your cash by becoming a private lender.  This is all well and good: but let’s imagine the person who is looking for a safe way to grow his nest egg.  In my opinion the stock market is pretty much like playing video poker.  Only God knows if you are ever going to see your money again, and any big problem with the economy can wipe you out.   The real estate investor world offers a safe have to these people.  Even in a total economic collapse, people will still need a place to live.  We protect our investors by buying property below its market value.  We secure the loan with a mortgage or deed of trust depending on your state.  We can structure deals where the money comes back to the investor quickly or we can keep that money working for years.  With any investment there is always a bit of risk. So the private lender needs to take their time and look into the deal and into the background of the real estate investor who is proposing the deal.  You can never eliminate all risk but a bit of due diligence will save a ton of heartache later.

The process if pretty simple from the private lenders point of view, real estate investors actually have to do the work, they just get the money.  The way that it works is that the real estate investor submits some sort of deal summary to the lender explaining how and when they will get their money back and why this investment is a good idea.  From that point the private lender gets to ask as many questions as they can think of.  Remember it’s the comfort level of the lender that matters here.  So lenders keep asking questions until you are happy and you feel safe.  If you don’t feel right about making the loan, then don’t do it.

The actual loan process is simple.  You pledge the funds for the deal, and the closing agent or lawyer sets up a closing, where you will receive a pile of documents.  These documents will include a note which is your security against the property, as well as listing the terms of the loan.  The loan itself is something that both lender and borrower negotiate long before this day.   The note will spell out in legalese terms exactly how much interest will be paid to the funder, as well as the return of the principal.

As always, feel free to contact me directly with questions of comments

to your success

Josh

PittsburghREIA@aol.com

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