Should You Be a Private Lender?

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By Greg

As you start building your real estate investment business, you’re going to come across a variety of different ways to make money with distressed houses. Just as a few examples, you can get into investing in real estate as a wholesaler, by flipping houses, by buying and holding properties, or even as a private investor or lender. As a financial expert, I let Mike handle the flipping side of our partnership, while I focus on the money. If you’re considering a great way to continue investing in real estate and to build passive income for your retirement, you may want to look into your options for becoming an investing partner or private lender with another flipper.

How Private Lending Works

Basically, as a private lender, when you partner with a real estate investor, you’re making a real estate-secured investment. Your borrower agrees to pay you back at a given interest rate on a fixed schedule and by an expressed deadline. If they break this agreement, you will then assume ownership of the property, and you can protect yourself against losses by selling it yourself.

Because you are guaranteed ownership of the property, your losses can only dip as low as the property’s sale price. In most cases, this affords the private lender a quality hedge against risk exposure, and the deal is often profitable for both the lender and the borrower.

The Biggest Disadvantage of Being a Private Lender

Of course, if the borrower cannot complete the rehab on the property and/or the property stays on the market for too long, it will not have a great deal of value. In this case, the borrower is still responsible for paying you, but if they can’t afford to make their payments on your loan, you will have no other recourse than to attempt to cut your losses by selling the house. And that can still leave you with fairly sizeable losses if the house can’t be sold quickly or at the desired market value.

Due Diligence and Good Relationships

On the other hand, whether you decide to become a private lender or you would rather be a full investing partner, it always pays to know the right people. Partnering with respected investors who have a good track record for their real estate investments is the best way to protect yourself against loss. By performing your due diligence before you agree to fund an investor’s projects flipping houses, you’ll set yourself up for a lot more success. By building strong relationships with these people, you’ll set yourself up for even more great deals in the future.

Flip Now, Lend Later

One great way to go about this is to begin your career flipping houses yourself. You’ll gain a deep understanding of the business as you build your wealth. Then, to continue increasing that wealth, you can invest it not only in your own future flipping ventures, but in other real estate investments, as well. This can help you move from actively flipping houses to becoming a more passive investor, all while continuing to diversify your investment portfolio and build your wealth.

When it comes to real estate investment, there are a lot of opportunities open to you, and flipping houses is most definitely one of the most exciting. At the same time, if you want to continue growing your wealth into your retirement years and you don’t want to continue being so involved in all of your flips, you may want to consider becoming a private investor or lender. Build relationships with other flippers and investors now, and you’ll have a lot more opportunities to grow your wealth down the road.

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About the author

Greg has spent the last 10 years focused on the growth opportunities and wealth accumulation through Real Estate vehicles. He has provided management direction, capital restructuring, investment research analysis, business projection analysis, and capital acquisition services which governed and impacted over $700 million in Real Estate transactions. Greg is also a much sought-after platform speaker on the topics of capital development, investment growth through use of self-directed IRA vehicles, and estate planning.

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