Advice on becoming a private lender?

Question

Hi BP! I know it has been quite a while since I've had any activity. I fell into some pitfalls (when it rains it pours) as well as working very hard towards eliminating a drastic amount of CC debt I had accumulated and have been working massive overtime at my job. With a little luck I should have it completely eliminated in a month.

Initially I had wanted to get my foot in the door wholesaling real estate. Although I believe in the industry and that it is very doable, I realized I just didn't have the time I would need to do it successfully checking out leads all across Houston. I was right at the brink of dropping my marketing strategies to start and guess I got cold feet in the end.

I decided that I would prefer to get my feet wet privately funding the right individuals projects and in time work towards doing my own projects. Though I have pm'ed one of my colleagues who has really helped in guiding me in the past, I also wanted to get insight from others who might help in pointing me in the right direction (i.e. Finding the right solid individuals, evaluating the actual investment, expected yields I should be prepared for, any stipulations or questions I should need answered before committing, setting up the deal etc.).

I see a ton of articles here and across the net on how individuals can go about finding private capital, but can't seem to find any on what steps individuals such as myself who would like to invest in others should do to safeguard and make the most solid investment for themselves.

I would be starting off rather small (5k-10k or hopefully more assuming my company keeps the overtime going for a while). Any feedback would be greatly appreciated, thank you.

Don Konipol · Answer

Since you are located in Texas you should look into making a few tax lien loans.  These take the position of the taxing authority, so your lien is superior to a first mortgage.  Current rates are 12-15%, with 2-4 points added.  As an individual making investments and not actually in the business, you can do up to five annually without being registered (a long and cumbersome process).

You can also attend some Entrust Retirement meetings and see if any investors that purchased property all cash may need $10K cash out for other expenses.

Familiarize yourself with real estate law, and make sure to use a REAL title company.  As an inexperienced private lender, you are a target for the con artist infiltrating the industry.  Be careful, but don't be discouraged - plow ahead.

Jon Holdman · Answer

Never, ever, ever make a second position loan.  $5-10K isn't enough to fund a rehabber in most areas, but it might be enough for the rehab work.  That would put you in second position, though, that's very weak.  If the first foreclosures, you're very likely to be wiped out.

At a minimum, you need enough cash to purchase and rehab a house in your area.  More practically, you also need enough to deal with the fallout if the borrower defaults.  If you can't afford the legal costs to foreclose, and the borrower knows it, he has you over a barrel.

Curt Davis · Answer

I hate to be the reality person here but lending $5k -$10k will do nothing for anyone.  When private lenders lend money they are always the first and only position lien holder on that piece of property so honestly I dont see how this small sum of money will help anyone.  These days you almost need at least $50k to make something happen.

Go get a line of credit at your local bank for $50k, then lend it out. Good luck

John H. · Answer

Don, can you explain how the 12-15% and points work?

Is it 12% amortized over a year, or the term of the loan?

Account Closed · Answer

Hey thanks Chris for the links. I will be sure to check them out. Also thank you Don for the solid advice. I will look into those suggested areas as well as take heed of using a real title company and beware of cons.

Thank you for the great advice everyone. Very much appreciated. I will look into some of these suggested areas which some of you pointed out. I was also thinking of maybe investing in some mutual funds after some careful thought. Even at 5%, though it maybe a small yield, if I keep putting money in and letting it compound I could maybe get started in 5 years or less. I mean who doesn't want to get started right away, but at least while the principal and interest keep compounding and can create and recreate a more solid foundation so that when I do start I have at least some kind of game plan for where I'd like to go. I'm 32 so I still have time to get there as I've heard, "It's not a sprint, it's a marathon." Thank you all!

Chris Martin · Answer

I agree with Jon on taking a second position and Curt on lending with the small $ amount. See also this BP topic on $1K to $5K investing and some of the pitfalls of that small an amount WRT real estate. Also this BP topic on other ways to invest, although this topic got sidetracked a little.

Account Closed · Answer

Thanks for the feedback everybody. I'll just pray the overtime keeps rolling in ;)

Curt Davis · Answer

Yes, there are companies where you can put your funds in the account like mentioned but the issue is your not in control of anything, someone else is and that does not mean its bad, just beware.

David Wedemire · Answer

If you only have $10-15K then you would be loaning out for rehab money. So best to partner with a rehabber. That amount would be 1 maybe 2 deals.

Or you could pool your pool with a group of other and syndicate to lend the larger sum out as hard money lenders or private equity fund to invest.

Advice on becoming a private lender?

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