Considering Being a Private Money Lender

I am going to discuss being a private money lender and some of the basic top things to consider before jumping in.

Disclaimer: I am not a tax advisor or an attorney. I am not giving tax or legal advice and highly recommend finding a good Real Estate Friendly CPA and Attorney if you consider moving forward with private money lending. 

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I am using my PML experience, training from wonderful coaches and I am always continuing my education.  I want to share with others who may be interested in learning about using their own money to invest in others. Make a better ROI on their investment besides their traditional retirement account. I am speaking to those who want to learn to be more in control of their outcome.

WHO IS A PRIVATE MONEY LENDER

A PML, (Private Money Lender), is a person who provides funding with their own capital in a contract to another individual. For the purpose of this discussion, we will be referring to real estate investors as the borrower. An individual who would then barrow the money and use it towards a project like flipping a house.

The PML would use things like a Promissory note to list out the terms such as but not limited to; the amount to be loaned, interest rate, terms-length of loan, penalties for extension. A promissory note can be provided by Title and Escrow and some Attorneys, in Attorney states. There should also be a lien on the said property. The private Money Lender will want to be in first lien. This way your money is backed by property.

The borrower then follows the written terms of the promissory note to pay points, interest and penalties. The PML, (lender), has the choice to set up the loan for payments as they determine best fit.

Example

• Points paid up front
• Interest payments paid monthly
• Balance and penalties paid on back end of the loan

WHO WOULD YOU LOAN YOUR MONEY TO AS A PML

• Friends
• Family
• Individuals who work in the industry

WHAT I HAVE LEARNED (GOLDEN NUGGETS)

1. This is a business so treat it like a business.

Be upfront and follow through with the terms you have set up. This protects your assets and relationships. Be aware of where the project is as all times and address things if they are not going to plan immediately. (Good to note – don’t be the PML who calls every day for an update. I have found, updates monthly and when things are not going well is sufficient in most cases)

• Put any changes in writing
• Clear expectations
• What happens if terms are not followed
• FOLLOW THROUGH

2. It is true that the borrower is slave to the lender, (feeling).

Keep that in mind when loaning to friends and family because this can change the dynamics and even the loss of a relationship. You must decide if the risk is worth it.

3. Things will go wrong.

Know yourself and how your barrow. Knowing how you and your borrower will react to those challenges will help determine if the individual is a good fit. This will help determine the potential success or failure of the outcome.

4. It is your money!

You worked hard for it. It is important to pick who you will work with carefully and do your own due diligence. Write out your parameters ahead of time. This will help limit getting emotionally involved and saying yes to the wrong deals. You are interviewing them as much as they are interviewing you. If you provide the money and the deal does not work out, you will loose money and potentially not be available to invest in the next person.

Some items to consider when choosing who to work with:

• Experience Requirements
• Property type
• Exit strategy
• You own due diligence on the project; knowing ARV, LTV, Rehab budget….
• Are there any other lenders involved in the project
• The borrowers skin in the game

NOTE: there are a lot of new real estate investors who have little experience. Learn what it takes to be the right fit. What risk are you willing to take.

5. IMPORTANT! Everything goes through Title and Escrow or Attorney in Attorney states.

Never send money directly to an individual. It gives you another layer of protection. This is not negotiable in my books.

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There is a lot to learn in being a PML but it is easy to do. Start learning today. You can change the world with your investments. Changing your life and others.

Learn More about Opportunity for Education January of 2023