Becoming a private lender question

[K S.]

I lent money to a flipper in San Diego who claimed bankruptcy and fled to Canada. I then realized the lender made over a million dollars when he foreclosed on his property. I was wiped out as second lien holder which got me to thinking about legitimetly becoming a private lender.

My question is if I already make 7.5% off a few of my 250k condos, then how does private lenders (not hard money lenders) make money off charging 7-8% returns when they can just purchase condos in cash for the same CAP rate?

[Mike Klarman]

Ok, so we really have to define "private lender". If a group of very wealthy businessmen pool together 250 million and start lending on unconventional loan products such as bridge loans and DSCR loans can they advertise as "Private Lender"? Because that's exactly what big box HML are.

Or do you mean Private Lender like an individual lending out their private capital for a real estate investor?

The big difference between the two is that often times one is the lender of the note and the other is the lender of gap funds to close.

I mean to fund someone's bridge loan on a fixxer upper would cost 150k?  200k?  Most do not have that capital to deploy and if they did that's not how they'd deploy it.

Gap funding an inexperienced, capital strapped investor is a terrible investment. Especially with no rights to the house. I'd make someone put up collateral that matched the loan amount. If I lend 30k for someone to close a REO deal then I'll have their car pledged, or have a co-signor that pledges the 30k if it is defaulted.

a 2nd lien position with no protection is like going to Vegas and betting on black, only on that bet you win 30k, in a 2nd lien position what do you stand to make on a 30k short term loan?  10%?  3k?  On the roulette table I win 25k if black comes out.  I'd rather do that cause you see what happened to you.  You have what's called a cautionary tale that you should share.

The lending industry is like the cola industry.  When you walk down the soda aisle of your local grocery chain, you think there's a zillion choices, bunch of companies all making cola and variations there of, but no, it is an illusion.  Most cola brands are owned by Coke or Pepsi.  Those brands are selling coke and pepsi products wrapped up in different packaging.  Are there some small indy soda companies?  Yeah, but they are a fraction of the cola drank in the US.  Can't find them everywhere and they are only for certain people.  Not for everyone for sure.

In lending, you think there's all these lenders out there but there's not.  There's a handful of lenders and the rest are brokers who sell the lenders products.  Are there indy lenders who lend personal capital?  Yeah, but they won't just lend to anyone for obvious reasons.  

Now, if you have a rich sibling or parent then that's what I call PRIVATE MONEY. Most of anything else is not that much different than the other when it comes to HML and PML.