Lending money to investors

[Allen Clark]

I'd like to educate myself on real estate investing from the other side of the equation; lending some of my cash for real estate.  Most of the sites I find on the web are from the other direction.  They explain the process of securing hard or private loans as a real estate investor.  So my question in this post is two part: (1) what vehicles exist for me to lend money to be used in real estate and achieve a decent return on investment and (2) What are some basic resources I can look at to educate myself on this topic?

1) Investment Vehicles

I've heard of several options but don't know much about any of them. Syndication loans, online lending platforms, reits.  A few years ago I found a construction loan for a large apartment complex in Phoenix that was offering about 6% return.  Are there other options I am not thinking of?  What are some pros/cons to each?

2) Educational Resources

How can I educate myself on this topic?  What are the FCC regulations I should be aware of?  What are some sales-pitch dangers that newly accredited investors should be wary of?  Is there a good overview post on the blog?

Thanks!

[Aaron Byrne]

Great question. I am a proponent of the benefits that passive cashflow from secured debt notes provide investors. It offers a stream of income and diversification to your real estate portfolio.  

In terms of vehicles, three paths immediately come to mind: 1) you lend directly to a local real estate investors, or 2) you would lend to the investors that are connect to you through a broker, or 3) you invest in a fund/pooled investment that--in turn--lends those dollars to real estate investors. 

In the first option, you would need to find experienced investors by asking around in your personal circles or advertising on platforms like Facebook, BP, etc. Once you have those connections, you would charge whatever points/fees is agreeable to the borrower, then you would need to prepare loan documents, add your mortgagee clause to the property insurance, coordinate with title/escrow, service the monthly payment, etc. This is the most active of the three options. 

For the second option, you would work with a company--like the one I work for--who already has those relationships with experienced real estate investors and help broker the loan. You still own the loan, but the company provides the opportunities, prepares the loan documents, facilitates the closing, payments, and payoff/release of lien on the backend. The tradeoff is that you earn 100% of the interest, but the broker earns the loan points. However, in my opinion, the professional expertise saves you time, reduces your risk, and provides you a plethora of resources. This is a direct model.

Finally, the third option is the most passive. My company offers a pooled investment fund which--for accredited investors--allow them to contribute dollars into a pool which goes directly towards funding loans for real estate investors. The tradeoff is that you do not get to choose each loan like you do in the direct model. The fund manager does this for you. But, you earn a portion of the loan points and interest based off your amount invested. This gives you diversification, allows you to compound earnings, and keep your annual return high since you are always invested. This is the fund model.

As to educational resources, we have a host of free material about private lending on our website. These videos/articles cover both the direct and fund options. I will connect to message you the link, so feel free to review at your leisure. 

There are tons of avenues for direct lending and educational resources for increasing your knowledge base. My advice is based off my experience, but others may have different options for you to consider.  

Happy Investing!