Have you been looking to upgrade your real estate business? You might have heard of private money lending but not really known what it is or how it works. Here I’m going to break down the basics of what it is, how it works, and how you can use it in your business.
What is Private Money Lending?
Private money lending refers to the practice of one person who has money giving their money to another person. It’s that simple. However within real estate, it can become a bit more complicated.
Private money lenders in real estate are people who will lend on a real estate deal, their money being collateralized by the property. This means that if a lender lends on your deal, if you don’t pay them, then you will lose the property. Lenders will have this in mind before they lend on a property.
Whenever I think about lending on a deal, I have an extensive process to make sure that the deal will be profitable first. I want to make sure that my money is protected before I decide to lend.
Every lender will be different. Your grandma can be a private money lender who doesn’t care about whether or not the deal makes sense or money. As long as someone has the money to give you, they can be a private money lender.
What is the Difference between Hard Money and Private Money?
This is a tricky situation.
Many hard money lenders would consider themselves private money lenders.
However, I would think that most private money lenders don’t consider themselves hard money lenders
The difference to me is that hard money lenders are more institutionalized. They have licenses. They have set processes and rates. They have teams.
Most private lenders don’t.
I have never seen a hard money lender lend in second position. However some private money lenders will do second, third, maybe even fourth.
The truth is that it doesn’t really matter. Money is money, and every lender has their own processes and requirements. As long as your deal gets funded, that’s all that really matters.
How Does Private Money Work?
This is kind of a trick question. Because of the nature of private money, every lender will work differently, and every loan has to be treated on a case by case basis.
However, for the sake of this article, I will explain the basics of how it works with seasoned investors.
Once you make the connection with a private money lender, they will normally ask you for some documents, and want to talk about the deal. They will ask questions to make sure everyone knows what the plan is and how this deal will make money.
Once they agree to fund your deal, there is going to be a conversation with a title company or closing attorney, depending on the state. An attorney, your own or one of the title companies, will draft up a few documents. There should be a promissory note and a deed of trust.
A promissory note is the document that breaks down the terms of your deal. How much money to be paid, when, what percent interest, all of that stuff.
A deed of trust is the document that says that gives the lender the power to take control of this property if the promissory note is not fulfilled. In some states, this can also be called a mortgage. This document needs to be recorded in public record.
Once these documents are written up, we wait on the title company will give the green light to fund the deal and close. Once given, the lender will send the money to the title company, who will then disburse the money to the correct parties.
At this point, the transaction is fully funded and should then follow the terms set out in the promissory note.
A couple of key points here. One, the money should ALWAYS be sent through the title company. They are a neutral third party who is licensed to handle these transactions. There are many common scams that will ask for money outside of title. Don’t fall prey to one of these.
Two, the process may seem a little complicated at first, but the title company will help you through it.\
Three, a transaction coordinator can also be useful in helping to facilitate this entire process. Contact Me and I can provide a reference to one.
As I mentioned earlier, every transaction is different, but this guideline will apply to most transactions.
Where Can I Find Private Money?
Because private money lenders are just normal people, you can find them anywhere. They can be your family members, friends, colleagues.
You can find more experienced private money lenders at local investor meetups, or online forums.
I also provide private money loans, you can find more info on the loans I offer at https://bulwarkinvests.com/private-money-loan/
I aim to help people learn more about real estate investing. If you have any questions, please feel free to Contact Me. If you are looking to become a private money lender yourself, please join my lenders list.
