Top Tips for Private Lenders

Are you looking for valuable insights to help you get started as a private lender in real estate? Get ready to take some notes because we're about to spill the ultimate lender secrets to help you make the most out of your investment!

To succeed in private lending, you must take preventative steps to safeguard your investment. We've devised our list of the top six tips for successful private money lending in real estate:

1. Know the market: Before investing any money, it's essential to understand the real estate market. And not just the entire market, but your specific market. Study up on trends, neighborhoods, and property values to make informed decisions and avoid getting burned. A recommended market to start is the one you are most familiar with, your local neighborhood. By starting locally, you can leverage your knowledge of the area and meet with potential investors in person.
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3. Build relationships: Networking is key when it comes to private lending. Build relationships with real estate investors, brokers, and other industry professionals to expand your opportunities for lending and earning a healthy return. One important relationship to build is with a real estate attorney. The attorney can help you set up legal protections and assist with contract review and negotiation. I recommend Geraci LLP, as they specialize in private lending loan origination and are the general counsel of the national organization, American Association of Private Lenders.
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5. Underwrite the deals: Make sure you're investing in deals that make financial sense and are likely to generate a profit. If you need more confidence in your underwriting of certain deal types, consider working with a professional underwriting service or consulting with your real estate attorney. Gain insight into the distinction between underwriting and comping by exploring our blog post, available here.
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7. Do your due diligence: Before lending any money, you need to conduct your due diligence. Thoroughly review the borrower, assess the property, and scrutinize the proposed business plan. Borrowers will try to convince you to engage in deals, but it is your responsibility to verify the financial history and property ownership and analyze the plan to ensure it can be profitable. Cardinal Creative Investments has a few options for lenders looking for help with due diligence.
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9. Secure your funds: Protect your investment by putting a lien, mortgage, or deed of trust on the property and setting up an escrow account or other safe mechanism to ensure your funds are secure. Consult with a trusted third-party provider to confirm adherence to all legal requirements, and do not rely on your borrower to handle this for you. Instead, they should pay for the associated costs as a part of their loan agreement.
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11. Enforce your contract: Don't let borrowers take advantage of the relatively unsupervised private money lending process. While the process may be more flexible and informal than traditional lending, you cannot overlook the importance of proper documentation and legal protections.

Private lending is an exciting opportunity for lucrative asset backed lending and returns tied to real estate. Tapping into this investment strategy can help you unlock the benefits of investing in real estate without the headache of managing permits, flips, tenants, and the many things that can go wrong. BUT - Without proper due diligence, you can open up a whole new list of ailments and migraines.