Private lending advice

[Nathan Ruffrage]

Hey Oh friends! 
Investor here looking to dip my toe into private lending to another investor. 

Deal- Wholesaled property under assigned contract and buyer looking to borrow 130k at 11% for 4 months from me to finalize the deal and get the property refinanced. I will be in first position on the note.  Buyer is a seasoned investor with a good track record. Property is something I would be glad to add to the portfolio. 

My confidence areas and experience are in LTR, STR and BRRR but not private lending.

Any advice on what I should consider or create in order to protect myself or add value to the deal. Thanks! 

[Alex Breshears]

Nathan I am so glad you asked!! I have a book coming out about private lending on BiggerPockets in about 8 weeks. There are a lot of variables to think about, far too many to type in this (hence, the book).  But I can give you some guidelines and pointers. First, only lend on non-owner occupied property. Even go so far as to have the borrower in their own writing (not email, actual handwritten letter) state that the money for this loan is going to an investment property, and they will not be occupying it as their primary residence at any point.  The reason this is such a big deal is that primary residence loans are regulated at the Federal government level, not the state like non-owner occupied properties. There is very often licensing and a lot of disclosure requirements to lend on owner occupied homes. You do not want to wade into that water!   Second, make sure you thoroughly vet the borrower and the property. Do not get lulled into a false sense of security because "you know the guy" kind of feel.  At a minimum do a quick google search, Facebook stalk them, ask for professional references from someone in the local market that has has business dealings with this person. You are trying to establish what happens when their back is against the wall. If this rehab project goes sideways, over budget, over time, are they going to bury their head in the sand and hide from the problem, or are they going to step up, communicate to you as the lender that there are issues, and then take ownership of their mistakes.  I want my borrower to be the latter, not the former.  Also for the property, get an idea of what you would be comfortable lending on. For example, I know a private lender that ONLY does mobile homes. He knows that market, he knows that asset class. That's his bread and butter, where as I will not lend on mobile homes at all.  It's just my personal preference on what I want securing my money.  Third, run everything through a title company. There NEEDS to be a closing. Do not just give this person X dollars and hope they buy the property with it.  You want a clear title report, you want hazard insurance that adequately covers the property in the event is goes up in flames one day after renovations are complete, and you want your lien recorded ASAP after the closing.  At that point you can either set up the loan with a loan servicing company (which for the shorter loan term you mentioned may not work because they are very backlogged as a whole), but some way that the interest only payments can be made to you, if you decide to do monthly payments. Personally, I tell borrowers that the first loan is going to be their most expensive because we don't have history, after that it gets easier as long as that first loan goes well.  Lastly, please please please spend the money to get professional legal documents drawn up. Do not use any boiler plate stuff you find on the internet. Spend the $1000 to get docs drawn up by an attorney familiar with lending in your state. Keep in mind this likely isn't the real estate attorney performing the closing. Lending is it's own animal and real estate attorneys that perform tons of closings a day with conventional lenders just get docs emailed to them and they point where to sign. They did not draw up the documents themselves.  That should be enough to either get you started or scare you off! lol.  But just take it slow, don't be in a rush. Learn what you need to to be comfortable and look for ways to mitigate risk of loss of your funds!