private lending real estate cash flow

Generating cash flow from private money lending in real estate

In a housing market fueled by bidding wars, the majority of investor buyers are looking for quick and easy access to the money they need to close on a property. An all-cash transaction is one way to secure a deal. However, there will always be more deals available than you have cash to buy.

A private loan allows an investor to leverage multiple profitable opportunities, provided the downpayment and experience requirements have been fulfilled.

Private money lending, also known as Trust Deed Investing, is a very profitable cash flow strategy for those looking to passively grow their wealth.

Private lenders are generally real estate experts, looking to make a play on the market, without having to be responsible for the physical asset. As such, they will either split the profit of an investment property with the investor buyer, or charge a certain interest on the loan, or both, with the property as collateral, much like your conventional bank or mortgage lender.

In other words, rather than using your money to purchase a property, you can choose to loan your funds for a certain level of return. Trust deed investing through private lending permits investment in the full potential of the real estate market, without the hassles of ownership, rehabbing or property management.

Risks and rewards of private money lending

There are mutual benefits of private money lending for both the lender and the borrower. Lenders can passively generate substantial cash flow over short periods (the typical duration of a private money loan ranges from 6 months to 5 years), thanks to generous interest rates on the loan value.

On the other hand, because private money loans are typically granted in a matter of 2-3 days, sometimes for up to 70% of the property value, they help investor buyers secure a property quickly and easily, cutting out the red tape associated with borrowing from a bank. This is particularly interesting for experienced buyers with a challenging credit history.

In terms of risk, borrowers of course have to clearly understand the financial terms of the loan in case of default. Also, since interest rates are usually higher through private lending, the buyer must be well advised on the total cost of purchase vs. resale or future property value.

For lenders, the risk associated with private lending is minimized by proper due diligence and appropriate documentation. This is of the highest importance, as you need to thoroughly understand applicable laws, including usury laws, predatory lending laws, Regulation Z issues and other local, state and federal Laws that specifically govern and address private lending.

What’s more, you need to obtain a proper assessment of the property in question, if nothing else but to ensure that there is sufficient collateral to offset any default risk.

Beacon Property Solutions can serve as a primary principal and private lender partner in private loans. Almost in every case, the loan will be secured by a first position 65% LTV lien in real estate.

If you would like to discuss a private lending strategy for your real estate portfolio, or if you have any questions, we invite you to contact us by phone or email, whichever is more convenient for you.