I wanted to thank @Karen Margrave especially for creating this separate discussion board for my question and for all of the great advice and questions she raised!
I am overwhelmed by the wealth of responses here and just wanted to express my gratitude to @Jay Hinrichs @Ann Bellamy @Ted Schmidt @Jeff S @Bill Gulley for sharing so much of their detailed knowledge and experience with me. I will take all of the advice I found here. I definitely have a long way to go in knowing about private and hard money lending.
I just came here fairly naively wondering if lending money for flips might be a better way for me to make money from the rehab or landlording business than jumping in myself. I was hoping I could learn from rehabbers by investing with them. That way they would get something they want and I could watch several flips from start to finish. And yes, I also want a higher return on my money. I have a lot of my funds in a managed investment account that has been averaging over 8% per year. I am not rich by anyone's standards. I'm not talking a huge amount of money here. But I am so impatient for financial independence having worked for other people for many years and running into all sorts of tricks and disappointments. I've been working for myself as an internet marketing contractor for about two years now and not making spectacular money. This is supplemented by one and only real estate investment, a vacation rental condo I bought for cash 2.5 years ago at the bottom of the market.
My friend is about to start her third flip and wants me to invest with her. She is guaranteeing a 10% return plus "discretionary bonus when we kill it." I am hesitating because I do not know her partner (he has managed all of her flips in another state while she put in the money. On the next one, she and I would split the money contribution and he would find the property and do all the work.) Also, on non-business related things my friend tends to drop out of site for days or weeks at a time and not return my calls. If I invested with her that would be unacceptable. I need to think of a tactful way to bring this up.
@Bill Gulley I take your point that if I am actively soliciting or seeking people to lend to I am no longer a PML, but a HML, which requires registration and a whole passel of other legal requirements. I am not ready to attempt something like this, so I will not be going that route. However, how does anyone become a PML in the absence of any friends (except for the one mentioned) or family who are real estate investors? Is it just a matter of luck what friends and family you happen to have? I think pawn brokers are out of my comfort zone as well ;-)
@Jay Hinrichs so if I invest with a HML who is licensed, does that mean I do not have to be licensed?
@Ann Bellamy Thank you very much for directing me to the threads that discuss this question! I searched for a similar thread before, but must have been using the wrong keywords. I also appreciate the words of caution you gave me, the advice to find a real estate attorney who specializes in private lending (my current one does not) and the emphasis on being in the 1st position. I am not sure my friend who wants me to flip with her even knows about 1st vs. 2nd position or any of these concerns. She tends to do business on the fly and based on "trust" and I have already learned a lot more here than I think she knows about in terms of the legal agreements.
@Jeff S Thank you so much for pointing me to the detailed HML thread where you have outlined the process! As I said, I am not ready for HML at this point, but I am still going to study every part of that to help understand the business. "Know, Like, and Trust" is an excellent principle. If I do get involved I believe it will take me a while to get to know anyone well enough to get to the "Know, Like, and Trust" stage. The greater Phoenix area including Scottsdale has gone from a flipper's paradise two to three years ago to a not particularly conducive market. I know that if you are really good at this you can make money in any market, but my friend/mentor said that right now is probably the worst time to start out as a rehabber. That is because the investor feeding frenzy in the last three years has gobbled up almost all of the foreclosure inventory and REOs and on top of that, after a huge rebound, our market is morphing into more of a buyer's market. There is a lot of market rate inventory, demand is down, and there is very little below market rate inventory. That is part of why I thought lending would be better for me than rehabbing.
