Being a private lender

[Matthew Tierney]

Hey BPer’s

So I’m curious what a private lender deal looks like from the lenders end? If I was to lend 50k to an investor that’s buying distressed properties and flipping them and cherry picking the best deals for his personal rental portfolio would a 10% return over a 12 month term look like a good deal and what terms could be put in to protect my principal loan

Thanks in advance guys

[Jeff S.]

How absurd. Many hard/private money lenders lost their wall street money as the pandemic struck and halted lending several months ago. They are trickling back but this illustrates that many hard money lenders are not, “… always there and very liquid.” Good for you if yours never skipped a beat.

Private lending is not about squeezing the last percent out of a lender’s interest rate, any more than it’s about foreclosing on a borrower at the first opportunity. It’s about long-term relationships. While some borrowers either don’t understand or care about that, and who you’ll always want to avoid, @Matthew Tierney, many welcome long-term close connections.

“Private money either needs to be cheaper than a HML or take the 2nd lien position or /corporate debt.”

What a silly made-up construct. Dangerous too.

Don’t fall into the trap, Matthew, that there is any difference between the terms hard money lender or private money lender. Legally, there is none. Nada. Zero. This appears to be an important distinction (without a difference?) for some – especially on this board.

In the eyes of the law, you will be a lender, period, and your paperwork, licensing, origination, and even behavior, must comply with the same laws as every other lender in your state; large or small. I can assure you a judge won’t care what you call yourself if you lend money and have an issue. It appears some feel you just deserve less because of what they want to call you. This is your money, Matthew. I bet you’re like most and worked your butt off for it. Don’t let anyone define you.

We've been loaning our money privately for ten years now and I detailed our process step-by-step a few times here. See my post in this thread, which should give you good idea about getting into the business safely: Becoming Private Lender

Safely also means never lending in second position, unless you have a lot of money and want to specialize in this. Second position is about as dangerous, and leaves you as vulnerable, as it gets. I’m sorry, but I’m not sure your $50k is enough to avoid this.

I’ll add that like every other business, lending is also about your competitive advantage. After speaking to many potential borrowers you’ll find you’re asked the same questions over and over. You’ll realize the diversity of what most borrowers really want, and it will rarely be about squeezing the last half percent out of you. In fact, rates and term are usually regional and won’t differ much among lenders. The competitive advantages we chose are likely different from what yours will be, but I can assure you we are not the low-cost leaders and business has been very good.

Be safe and best of luck to you Matthew.