Becoming a private money lender and mitigating risk.

[Danielle Z.]

I have access to about 225k cash.  I'm trying to figure out if buying another property  and renting it is a better than being a private lender.  My husband and I are very busy with our current day jobs, I own a business which is particularly time consuming.  I thought that perhaps being a private lender might be a very hands off way to invest.  My husband is skeptical and feels there is no safety net if the person we lend to isn't able to keep their end of the bargain (he is in finance... specifically he's a quantitative risk analyst). I argued there are contracts, but he says well what will those contracts get you if they don't hold up their end (long lawsuit etc) ? Being inexperienced, I really don't know how it works and didn't have a response to him.  Currently we own our home and have one property (condo) that is a rental. It's in pristine condition and requires little work or attention on my part. If we had another rental I worry it wouldn't be quite so easy.  I don't think doing an actual flip (although I would love to) is something we have time for.  At least for now my business is extremely demanding and I know my husband wouldn't have the patience for that kind of work.  Have any of you done private lending? what were your experiences? How much did you lend?  What are typical returns? Has anyone run into problems? Anyone highly recommend or feel against being a private lender? If so, why?  If you do recommend, where do you find reputable people to work with?  thanks in advance for any advice.

[Matthew John]

@Danielle Z. The good thing about Private Lending is you get to structure it however you want! 

Typically private lenders charge interest only at 10-12%. How much depends on the market that the investor is in. Here in the suburbs of Detroit, I can be all in Purchase + Rehab for 75k with ARV between 100k - 120k. However, this is my personal buying criteria because my strategy is to build a rental portfolio.

Some people you could lend to might be flippers and work in higher priced markets because the profit margins are greater. It totally depends on the market you're working in! 

As far as finding a private lender, you have to do your own research on the market/deal and see some of the previous results of the investor. I have a "pitch deck" I send to private lenders that I'm networking with that highlights typical deal structure, shows the numbers on previous deals I've done, and shows you exactly what type of returns you will be expecting. 

Any legit investor is going to make sure you're paid because they want you to keep coming back and reinvesting with them. Working directly with private lenders is possibly the quickest way to scale a real estate business!