In the past decade or so, “private lending” and “private money” have become buzzwords in the real estate industry. However, private lending was going on long before everyone started talking about it, and people have been making incredible returns on their money for years by funding non-conventional deals that might not be attractive to banks with their own funds. This is entirely legal, extremely attractive and highly profitable when managed correctly. So are you interested yet? Of course you are!

Private lending occurs when one party loans party money. There can – and should – be a legally binding contract addressing how the money is loaned and how it will be repaid. However, the lien itself exists between these two parties and not between the borrower and a bank. Here are a few situations in which private lending can come in really handy for real estate investors:

  • Rehabs and Renovations
    When you purchase a house to fix up, the odds are that you do not want to take out a 30-year loan on that house. Furthermore, in many cases the bank will not let you do so anyway. In most cases, you want to get some fast cash so that you can clean that property up, make it shine and sell it at a profit in the space of a few months. Private money is a great way to get short-term loans on short notice.
  • Unique Properties
    There are many types of properties that banks simply will not take as collateral. It is not because the property is not desirable, but rather a simple matter that the bank fears it will not be able to recoup its money quickly in the event of a foreclosure. These properties can be truly fantastic opportunities, but you have to have the funds to buy. A private lender may be willing to loan money on a property in which a bank is not interested.
  • Bulk Buying
    If you tell a lender you are going to buy 30 houses and you need 2 million dollars, odds are that lender is not going to bite. However, a savvy private lender will evaluate the deal and, if the properties look good to them, they may stake you the cash in exchange for a high rate of return as you sell off the houses and pay off the loan.

These are just a few of the opportunities by which you can benefit from private lending. In the second part of this introductory article, we will discuss more ways in which you can benefit from a relationship with a private lender, or by being a private lender yourself.