Private Lending is the Perfect Launching Point for Your Real Estate Business

The following is adapted from This Sh*t Works, by Kent Clothier.

Investing in real estate in a way that delivers fantastic returns without lifting a hammer might sound too good to be true, but it’s not.

There are plenty of investors out there who possess the real estate knowledge and drive to succeed in this field, but they lack the money needed to fund their growth. That’s where you come in as a private lender. You lend the money; your borrower swings the hammer.

Private lending is one of the most passive methods of real estate investing, which makes it the perfect way to raise money while you’re doing the time-consuming work of launching your real estate business.

What is Private Lending?

As a private lender, you’re acting as a private bank, loaning your own money against a secured asset — real estate. You’re loaning your own funds to others who meet your criteria for a good lending investment.

This can be a preferable alternative to traditional investments like stocks, bonds, mutual funds, and annuities because you have greater control over your investments. Furthermore, there’s relatively little competition in this private lending sector.

When most people think about investing in real estate, they think about shows like Flip This House. They think about owning a property, fixing it up, and having contractors and tenants.

They don’t think about passively earning money through private lending, but they should be. Great returns are possible, much greater than what you can get with banks today. You can invest as a lender and see returns of upwards of 10 percent, as opposed to having money in the bank at their measly 1 percent.

The Problem with Traditional Lending

In order to fully answer the question of “why private lending?” we have to look closer at the traditional source of funds for real estate investing: banks.

A bank’s purpose is not to make money for us, but from us. Banks serve as middlemen who control other people’s money. Currently, they typically pay us less than 1 percent on our deposits, then turn around and loan it out at a 4 percent to 6 percent rate or higher. If they offer such an unfavorable deal, why do we keep using banks?

Many people believe it’s safe to keep your money in a bank, and they’re right. It’s secure, it’s easy, and the risk is limited. But it’s also a dismal way to make money. Banks follow established rules created by the banking structure. It is legal for them to pay out a lower rate of interest, while they make a higher rate of return.

Guess what? It’s also legal for you to do the same thing as a private lender. In other words, you can be a bank and lend money out based on opportunities you choose, with connections you make.

Private Lending is a Launching Point for Your Business

Not only is private lending an effective and passive way to make money, but it also serves as an excellent launching point for your real estate business.

Private lending teaches you about real estate without taking up all of your time. If you always wanted to get involved in real estate, but you don’t feel like you have the time and expertise to deal with the property, contractors, and tenants, learning how to lend your money through other people’s deals is a great way to learn the documentation.

You have direct control over your money and sole discretion over the deals you accept or decline, which allows you to decide how much time and money to put into investments, and how much to apply toward growing your business. You get to make all of your own decisions.

Invest the Way You Want

Making decisions about your money, controlling the shots, and investing the way you want are the top reasons private lending should be a go-to source for passive real estate income. You get many of the benefits of real estate investing without the hands-on time and experience requirements of flipping houses.

Granted, you have to go into this business with eyes wide open, realizing that statistically speaking, if you loan enough money over the years, at some point you’re probably going to run into trouble and have to take a property back. It’s bound to happen, and that’s a little bit frustrating. But the pros far outweigh the cons.

By embracing the control factor of playing the bank’s role, you can mostly avoid difficult situations and instead collect a steady, passive return as you focus on growing your larger real estate business.

For more advice on real estate investing, you can find This Sh*t Works on Amazon.

Kent Clothier is the CEO of Real Estate Worldwide, a software training company for real estate investors, and the founder of the Boardroom Mastermind, the most elite real estate investor networking group in the country. He’s flipped thousands of homes over the past fifteen years and helped tens of thousands of people learn how to do the same. He is passionate about teaching what he’s learned in a simple way so that it’s easy for anyone to connect the dots. As a husband and the proud father of three amazing kids, Kent has built the ultimate life for himself and his family.