Help getting started as a private lender

[Kevin Greene]

Hello everyone!

I am looking to get started lending out of my IRA. I looked into note buying, and while I really liked the idea, it seemed like having good access to notes was key and I don't have that.

Right now I'm attending the local REIA in order to network and meet other investors. I'm also working selecting a self-directed IRA custodian. I know I will need excellent legal and tax advisers, and I have people for that. I'm a little cloudy on the next steps though. Part of my confusion lies in the terminology in this field. Private money lender, broker, loan servicer, hard money lender, etc. I don't completely understand the roles and responsibilities of each party to this type of transaction.

Can anyone help me fully grok the next steps I should be taking? If there's any educational material I should check out, let me know! Thanks BP!!!

[Bill Gulley]

Actually, there are 5 C's a lender looks at; credit, collateral, capacity, capital and character. 

A "private" lender is someone known by association to a borrower, friend, relative, business associate who they have had a business relationship in the past. They lend personally, as John Doe Public, not from a lending business platform. Generally, they are exempt from lending regulations using their own money. (Pretty much why hard money lenders try to claim they are private lenders, that and "private money" has a better marketing pitch to it.)   

Those who offer to lend money are not "private lenders" when they seek out a borrower they are a "hard money" lender they also get involved in "being in the business of" lending, which then takes them to a lender and/or a broker status. A lender will have applicable compliance with legal requirements of lending. Anyone lending from a business platform will be a hard money lender or broker, again they don't meet the definition of a "private lender" being in the business of lending.

Those who lend funds other than their own personal funds are brokering loans, additional lending compliance kicks in with applicable brokering laws.

If you deal with any "pool", "broker" or others you have a 6th C, compliance and those original C's matter even more as to who you are dealing with. If they are not in compliance with applicable laws (and most won't be) your money is at risk! These guys also have SEC requirements to jump through, so there can be even more compliance requirements. One big problem with these arrangements is the lack of capital and reserves the broker holds, often they rely on a new investor to take out an existing investor, if that flow stops they have a big problem. (This can also put them in illegal dealings quickly, understand Ponzi Schemes.)

Probably the best place to start lending is as a "Transactional" lender (TL). Investors borrow money to close a purchase transaction (like a wholesaler) and that very short loan is paid off in the next sale transaction. Very low risk because you only use your money when you know the last borrower has funds in escrow to close. Note, I did not say risk free!   

A Commercial TL will have fewer laws for compliance, usury laws may apply. 

I won't go into the issues of consumer lending and someone saying their loan is a commercial loan, that goes much deeper in loan classifications than simply trying to define a commercial loan as proceeds funded for any business purpose. So, your attorney needs to kiss your deals IMO. 

You also need to really know real estate before making a secured loan on real property. There is much more to it than assessing a value of your collateral.

You should also understand how "life occurrences" play on your loan, incapacitation, incarceration, marriage, divorce, bankruptcy and death. In some of these instances you won't be able to foreclose and secure property collateralized. Interest is money earned over time, time is money, if your loan goes to a non-accrual status (may not bear interest) you lose money. 

Economic facts; risk and reward and barriers to entry, high risk = high reward, lending can be a very high risk. The barrier to entry is also high, the higher the barrier they higher reward can be. 3 barriers for any lender, capital, knowledge and compliance with laws, just having capital won't make anyone a good lender.

Good luck!