Private lending is a great way to diversify your investment portfolio. If you are reading this article you are likely interested in becoming a private lender or borrowing from a private lender. We have written this article to outline questions the investor may have about the process. While this article is written for a potential lender, there is great information on how the process works for a potential borrower as well.
What is a private lender?
A private lender is a person or corporation that uses its own capital to invest or lend money to a group or individual called the borrower. The lender can lend money to a professionally managed real estate fund or directly to an individual that may not have qualified for a mortgage from the bank.
A private loan is lent to an individual using a property they own as secured collateral. A charge, or mortgage, is registered on the borrower’s home to secure the funds advanced.
In private lending, you can set up a money load for a single person or pool capital in a group. There are no maximum or minimum amounts required.
Who should become a private lender?
Legally anyone can be a private lender. There are a few people who may be better suited to invest in private lending, including:
- Real estate investors looking to diversify their portfolio
- A professional with a surplus of cash in savings
- A retired person who wants passive income
- You recently came into a large sum of money (trust fund, lottery winnings)
- You have a retirement savings account that is not invested
- Your company has profits that can be reinvested
How does private lending work?
Private lending is considered non-bank lending. However, loans from a private lender generally work in the same way as loans from a bank work.
A lender gets to set the terms of a private loan.
In a private loan, there are no rules on how the loan can be set up. As the lender, you can set the amount of the loan, the interest rate, what payments you require, and the length of the loan. A private loan will often have higher interest rates because of the increased risk, and commonly include additional fees such as a lender fee or various administration fees.
All of these conditions should be included in your mortgage commitment. The best way to protect yourself as a private lender is to hire a real estate lawyer who can take care of including terms and conditions of your loan.
Private lending comes with a lot of due diligence to ensure the deal you are entering will benefit you. It is very important to include a real estate lawyer to make sure your mortgage commitment protects you legally and the large investment you are about to make.
How to become a private lender
To become a private lender, ensure you hire a real estate lawyer to discuss and establish a lending agreement that most benefits you and your individual needs.
Your real estate lawyer can often help you find borrowers as well as lending groups if that suit your needs best, such as a Mortgage Investment Corporation (MIC) or a syndicated loan group. Finding the right lawyer will help you remove the risks associated with private lending.
Why do people use private lenders?
Borrowers look for private lenders for many different reasons. The reason they are seeking a private loan is important, and the purpose of the private loan is a question you should ask. Commonly it is the bank qualification minimums that are not met, or a desire to obtain a loan relatively quickly that turn borrowers to private lending options. While one can generally qualify for a private loan easier than a loan from a major financial institution, there are risks associated with private lending as a result.
What are the risks of private lending?
The biggest risk in private lending is the risk that the borrower will default on the loan. A borrower may be unable to meet the loan requirements, such as making the regularly scheduled payments, which will result in a default. Your lawyer can ensure that terms are included within the loan agreement that protects you as a lender in those instances of default.
We offer mortgage enforcement services so that, in the event of a borrower defaulting, we can immediately begin proceedings to ensure we can protect our client’s assets. If you are interested in private lending, our real estate lawyers can help you get started. Give us a call to set up a conversation with a Top Law real estate lawyer today.