Real Estate Investors: What is Private Lending?

Private lending, as I teach it and as I do it, is a relationship type of lending between my company and another individual. That individual can be one of two people. It can be what I call an outside third-party person. Maybe I do not know that person but through marketing, relationships or referrals, I have developed a relationship with that person. I have sat down with that person, either in one-on-one or in group settings.

Private Lending Investors

I have developed a program by which I explain to them how they can invest in my real estate investing business. I’ve gone through and explained my background and my skills and I’ve shown them deals, both good and bad deals.

I’ve explained to them the investment returns they’re going to get. I’ve explained to them the security they’re going to get on their loans. At that point that individual may or may not want to invest with me, but that is a person that up and to that point I did not have a relationship with.

That relationship may go quickly in some cases. I have had people that I’ve met and within two weeks have been lenders. I’ve had other people that have taken me well over a year. We’ve had a couple of meetings. We’ve kind of lost touch for awhile. A few months go by; they get another piece of mail from me. They call me up, something changes in their life. Maybe they’ve come into an inheritance or something of that nature and suddenly they have some additional cash and they want to invest.

People that get lump sum of money, a bonus at the end of the year, all of the sudden may call me up and say, “Alright, I’ve got some extra money to invest.” That is one type of private lender.

What Private Lending Is Not

The other important element of that is a private lender is what it is not. Private lending is mot a bank or hard money lender. It is very, very rare that private lending is done with banks. Banks are very rigid. They have incredible regulations and rules and things of that nature that they have to work by. That’s not what private lending is.

Private Lending Involves Two People

Private lending is two people, individuals, sitting down and working through a transaction or a lending deal that benefits both parties. I will structure it so it benefits me. I will fit it into my deal. I will put it onto an already existing deal, but in some respects it has to benefit me and the same for the other fellow, the lender. Obviously, it has to benefit me.

It has to provide enough interest to more than offset his additional risk. It has to provide enough security for him to be interested in doing the deal. It also has to fit his timing. If he’s going to need his money back in a year or two or three, it has to fit his timing. It has to be a win-win situation. I know that’s an overused term in the world anymore, but it has to work for both of us. If it doesn’t work for both of us, it’s not a transaction that’s probably going to happen.

Private Lending with a Seller Involved

The other type of private lending transaction is between a seller, somebody selling their real estate to me and putting money back into the deal. Selling private lending is a little bit unique in the sense that they come with the deal. So when the deal happens, they are part of that deal already. They either accept the terms of the transaction or the deal or they don’t.

You do not need to market with them. You don’t really need to establish a relationship with them per se. It’s a good thing to do down the road because they are going to be a lender and you have to pay them back, but at least initially you do not normally have a relationship with them in the beginning. The information we’re talking about tonight really doesn’t relate to sellers in that respect too much.

Again, as I said it’s a one-on-one relationship type of lending between two individuals in such a way that both individuals are meeting their own needs in terms of lending that money. That is, in a crux, a private lending. That’s what it is.