How did you get started in private lending?

[Anderson Charles]

I am an landlord and own 5 properties, 3 are free and clear. I just finished the private lending book, so I feel like a brand new private lender - hence the starting out post. For those that do private lending - what are the biggest pitfalls you have found that you didn't expect in the beginning? I'm a bit nervous to take out mortgages on the properties to then lend out - so I wanted to see what could be some risks that maybe the book didn't cover.

[Alex Breshears]

Hi Anderson! Welcome to the private lending family! And I hope you enjoyed the book!

In the book, we actually have a personal risk assessment exercise in the first step of our CPR method to private lending. It's a PDF worksheet you can print off and start really putting pen to paper and figure out where you are financially, risk tolerance wise, and timelines. I can recommend starting there if you haven't done that already. It is the first thing we talk about in the supplemental materials for the book.

Second, if you bought the book through the BiggerPockets bookstore - in your Bonus content area of your account is a video about risk mitigation. In that video Beth and I talk about the four most common risks new lenders need to mitigate, and how you can change the terms of the loan to help mitigate those risks. I'm not saying you can get to zero risk, but it's more an exercise in seeing what COULD go wrong and how you can avoid it.  Life happens, and even with the best underwriting, if your borrower gets hit by a bus three days after closing that will be something you have to contend with. I don't want to leave you with the idea that this is a risk free way of investing.

As far as the mortgage part of your question. Depending on your cash position right now - if you have a smaller amount to lend now - say from a retirement account, a 401k, of even a bunch of very low yielding CD's at the bank - you can try your first loan with that capital. Basically start the process with training wheels, see if you like it, and then you can talk about the process of equity harvesting from the rentals you already own. One thing I will point out is that if you get an amortized loan on these properties to shore up cash flow - while yes you may be borrowing it at 5% or 6% - it's amortized - so the payment is going to be much higher than a fee simple (interest only) payment. You can find amortization calculators online really easily to play around with the numbers to see what your monthly payment could be (with PITI) and what you could potentially get returned to you on a monthly basis in the form of a payment from a borrower of those funds. While it sounds awesome to borrow at 6% and then lend it out at 12%, there are other factors that will affect what your actual cash flow is on a monthly basis.

I hope that helps and I'm looking forward to others comments on this!