Real estate lending has always been a lucrative business. Banks don’t want to lend money to risky borrowers who may default on their loans which is where private lenders come in. They provide financing for home buyers and sellers. They take out mortgages from investors and then sell them to individuals or companies looking to finance their purchases. You can become a private lender by starting your own company, opening a bank account, creating a credit report, and applying for a mortgage.
What is private lending?
Private lending is an investment where lenders loan money to potential borrowers. This type of financing is popular among investors because there are no regulations surrounding it, unlike banks. For example, there are no tax implications on the income generated from your investments.
Private lenders aren’t regulated by the government like banks are. As such, they run the risk of losing everything if the borrower fails to repay the debt. In some cases, private lenders charge high-interest rates and fees to borrowers. These charges make up most of the profit for the private lender. When the borrower defaults, the lender can take possession of the collateral — usually the home — and sell it to recover the amount owed.
Advantages of private lending
There are different benefits to becoming a private money lender.
Secured by real estate
Private lenders differ from traditional lenders because they are usually backed by assets like real estate. Banks lend money against the value of that asset while private lenders borrow against the actual physical property itself. Because private loans are secured by real property, it is considered a form of real estate lending.
A mortgage is a legal instrument often used to secure a loan. In most cases, it prohibits the borrower from selling or transferring property without first paying off the lender. You can therefore endure a higher risk tolerance as you have the property as collateral. This makes mortgages different from unsecured debt. For example, credit cards do not require borrowers to provide collateral to receive the funds. Instead, they rely on the promise of future income, a riskier loan.
When it comes to investing, most people think about the riskier end of the spectrum, thinking they will get a minimum return on investment. They know that stocks can lose value and bonds can fall too so they avoid putting their hard-earned cash into those markets. What many don’t realize is that there are some investments that offer predictable returns, just like a mortgage payment every month. These types of investments are called fixed income securities, and they’re one of the safest ways to put your money to work, making lending a safer investment opportunity than many alternatives.
As a private mortgage broker, you’ll likely make many contacts during your career. You’ll build relationships with clients, coworkers, vendors, and even competitors. In addition to building personal relationships, you’ll also be presented with business ventures which can expand your knowledge base. Some positions allow you to travel around the country to attend conferences and seminars.
Others require you to take continuing education classes to keep up with changes in regulations and technology. You may even have the chance to volunteer at a local nonprofit organization or charitable foundation. All of these things will help you meet people such as private investors, online lenders, mortgage agents, and other important people who will help expand your business.
How much money do you need to be a private lender?
There is no minimum amount of cash needed to become a private lender. While some banks and credit unions might require applicants to have $10,000 or $20,000 in savings, there is no minimum requirement. Private lending companies usually charge a fee based on how big the loan is — generally ranging anywhere from 2% to 5%. For example, a $100,000 home equity loan could cost around $2,500. If you want to borrow $250,000, you’ll pay about $5,000.
People and businesses seek loans of every size so it depends on your financial situation. You don’t necessarily have to have a lot of money saved up. However, most people and businesses prefer to have enough funds to cover at least three months’ worth of living expenses. This includes rent, utilities, food, insurance, and anything else that needs to be paid each month. In addition, many private lenders require borrowers to budget for legal costs, such as obtaining a mortgage registration certificate and drafting and filing paperwork.
Some lenders ask borrowers to pay for legal fees upfront, while others allow borrowers to deduct those costs from the principal balance once the loan is closed. If you’re borrowing less than $25,000, you probably won’t need a lawyer to help you complete the loan process. If you plan to borrow more than $50,000, you might consider getting professional assistance. A good attorney can make sure everything is done correctly, and he or she can even help you avoid common mistakes.
How do private lenders work?
Private lending works very similarly to traditional bank loans. In fact, it often uses the same processes. However, there are some key differences. For one thing, most private lenders don’t charge origination fees. They also don’t require collateral. Instead, you borrow against the value of your assets. Since the loan is secured by those assets, lenders typically demand higher rates of return. This is why many people choose to use a private lender over a bank.
How do you structure a private loan?
A loan structure is a set of conditions under which a lender extends credit to a borrower. These conditions include:
- Interest rates
- How much will be paid each month/year?
- The period of time over which the payments will occur
- Principal repayment schedule
- When will the principal balance decrease?
- Is the principal balance decreasing due to monthly payments, or is the principal decreasing due to an amortization schedule?
- Collateral requirements
- What type(s) of asset(s) must be used as collateral?
- Are there limits to the amount of collateral that may be used?
- What type(s) must be provided as collateral?
Who should consider becoming a private lender
You may want to think about investing in private money lending if any of the following apply to you:
- You’re a real estate investor looking for ways to boost your portfolio
- You work as a doctor, lawyer, or businessperson or another kind of professional who has extra cash to use
- Your retirement savings account is large
- You’d like to invest in something else besides stocks and bonds
- You’re looking for a passive income source
- You own a house or apartment building
- You’re retired and would enjoy having extra cash flow coming into your bank account each month
5 tips for becoming a private lender for real estate
1. Get a degree
Although it is not a necessity, a bachelor’s degree can really help you get the foundations you need to succeed in the business. Obtaining a bachelor’s degree can give you a head start in the lending industry. You’ll learn how to manage money, handle customer accounts and work within a team environment.
A bachelor’s degree in business administration or accounting may provide you with some insight into the banking and finance world. You may also build strong professional relationships with your classmates and professors while studying. This can lead to future job and networking opportunities. Some employers even offer tuition reimbursement programs.
2. Gain experience
Business school graduates are often looking for work in finance, accounting, marketing, sales, human resources, operations management, law, real estate, consulting, and investment banking. These fields require specialized skills and training, which makes it difficult to find jobs without some sort of professional experience. However, there are ways to gain practical experience outside of a traditional internship program.
Here are three options.
- Start your own business
- Work for free
- Join a startup
Gaining additional experience will help you better understand the real estate market, the market conditions, and how prospective borrowers work which will give you a head start when it comes to closing real estate deals.
3. Get a mortgage license
To become a licensed mortgage banker or loan officer, you must obtain a mortgage license, in order to distribute mortgage loans. Private lenders and SBA lenders do not have to go through the same certification requirements as banks and credit unions. However, most lenders still require a license to legally offer mortgages.
4. Know your province
Mortgage lenders are required to follow provincial laws when providing loans to borrowers. Private lenders must comply with the Consumer Protection Act, Financial Services and Insurance Act, and Credit Unions Act. These three pieces of legislation cover almost every aspect of consumer lending. However, the rules and regulations can differ slightly from province to province, so it is integral that you are fully up to date on all the regulations of the province within which you are operating.
5. Hire an attorney
You will need an attorney if you decide to become a licensed mortgage broker or money lender in order to ensure that you are fully covered during every single deal. If you decide to go into private money lending, you will need to protect yourself legally. Hiring a local attorney who specializes in real estate law will be indispensable to your success.
Finding a good attorney can be difficult. However, if you do your research correctly, you should be able to find an excellent one who will work hard to ensure you get what you deserve. Just remember that you must also hire someone to negotiate and review contracts.
Private lending services
It is often the case that loans from banks fall through as they are unwilling to lend money to individuals for a variety of different reasons. Whether you have a poor credit rating or any other reason, potential borrowers are often denied loans for reasons outside of their control. That is where private lenders come in.
At Refinancement Hypothecaire we understand how frustrating this inability to secure loans from traditional banks can be for prospective borrowers, which is why we are committed to helping you source alternative private loans. We realize that every borrower is different, which is why our process begins with a personalized consultation in which we go through the basic components of borrowing with you to ensure you understand the process. From there we assess your credit report and find the best possible lender option.
Our experts will sit and talk to you about all the options available before you settle on a loan. We also offer a range of other services including: