Arbitrage in private lending

[Jaša Rot]

Hi guys,

my name is Jaša and i have recently read a book about banking that opened not only my eyes regarding financing but my whole brain...

So basically the idea is to become private lender (or trust deed investor). You borrow money for lower interest rate (say 7%) and then lend it out to someone with higher interest rate (12%) = arbitraging 5%

This is absolutely genious! 

Has someone experience with this?

I have found broker who will relay me borrowers' information, so I only need to find someone to borrow for low interest rate from.
Any help will be much appreciated!

Thank you very much

Jaša

[Marshall Robins]

Hey Jasa, 

I would imagine there are going to be a bunch of folks jumping in there to lend their expertise, so just because I'm first, doesn't mean I'm right, but: 

Generally that initial loan needs to be secured by real estate. So that's your first major hurdle. You'll only be able to cash out a certain percentage of that existing equity.

So let's assume you have significant enough equity in a property to pool together a reasonable amount of starting capital.  

By the time you take out a trad. cash-out refi, you'll be eating a bunch of fees, which will chew into your theoretical 5% arbitrage spread. 

Now you'll need to source a new lending opportunity. Depending on the opportunity type and the licenses you have, that will either be pretty hard or really hard. 

But remember, you're now on the hook for ~7% payments on the refi, so while you're looking for borrowers, you're likely chewing back into your capital pool to make those payments. 

Now you have x% of your original property equity, less cash-out fees and however much you need to pay to service the original loan while you're doing business development. 

The next big hurdle: You'll need to basically perfectly match either the loan or loans you lend on to the amount you pulled out to make that theoretical 5% spread on the arbitrage. 

There is a world where you could use a HELOC, but the line of credit you'll be able to get won't be big enough to justify the labor that goes into underwriting and servicing. 

Again I could be wrong, and I don't want to be a Debbie Downer, but this seems like a tough road. I also don't know if it's legal.