What is a Private Lender and Is it Worthwhile?
by Christopher Levarek
“Alone we can do so little. Together we can do so much.”
Helen Keller
Let’s take a trip back to 2018 and my very first real estate deal with partners. If you haven’t yet heard the story, I purchased with the other co-owners of Valkere, yet to be created, two duplexes in Durham, North Carolina. I clearly remember taking far too long on this deal, making a load of mistakes and many sleepless nights wondering if it was all going to work!
Still, as this was our first deal, needing capital, we partnered with one other investor who became a “private lender” for the deal. This partner provided the 70% capital needed to purchase the deal all cash and allow our team to avoid dealing with a bank for the initial purchase.
This partner was a private lender. A investor who loaned money to another partner or investor for an agreed amount or terms just like a bank might. So why does this make sense? Should you consider investing as a private lender?
Today we are going to take a look at private lending as an investment. Let’s jump in.
What is a Private Lender?
As mentioned, a private lender is simply another investor who loans capital for an agreed return on investment to another investor. Much like syndication, it is simply a partnership whereby one person with capital and one person needing capital come together to accomplish something together. The terms of the partnership can be structured in various formats and it really allows for creativity in the arrangement.
Typically private lenders will lend capital at an agreed interest rate, like a bank, with a set term or timeline before the capital should be returned. In many cases, the term limits are much shorter than say a 30 year normal mortgage and could be anywhere from 1 month to 5 years, it really depends on the arrangement.
In real estate, we see private lending investment commonly in shorter term projects. It is very common with flipping, brrrr deals and other residential type purchases. Although not as common in commercial investment due to the size of the acquisition, with the right partners it is possible.
Is it Worthwhile?
This entirely depends on the investor. However, in many cases private lender investment greatly simplifies the partnership and legalities of the deal. When we compare to something like a real estate syndication which requires SEC regulations to be strictly followed, private lending with 1-2 partners is much easier to understand and coordinate.
Let’s breakdown some of the benefits or attractions to private lending investment for an investor:
Easy to understand - Capital for Interest
Shorter term limits - Partners not bound together for long period.
Higher Liquidity - Loaned capital returned faster
Less legal paperwork required for all partners
Less expensive to setup
Less management needed
Less “real estate operations” needed.
Alright so what might some consider “drawbacks” of being a private lender :
Lack of tax benefits as no real estate ownership
Risk of non-payment on loan
Lack of upside potential on deal
How Does it Work?
Private lending is very simple and easy to understand. This is of course one of it’s attractive qualities for many investors. This is how it works for an example deal :
Example Deal : Single Family House
Summary : Single Family House acquisition for to manage as a short term rental with Airbnb by an operator. $100,000 is being loaned from a private lender to fund the renovations.
Steps for the partners :
A promissory note, a contract, is drafted stating the lender’s name, the borrowers name, the amount being lent, the interest rate and the terms or timeline.
The promissory note is signed by the borrower and the lender.
The capital is wired or sent by check to the borrower.
Payments begin as specified according to the promissory note and continue throughout the life of the loan.
Upon the final day of the loan, capital is returned to the private lender with any final interest payments.
This is a very simple setup for a private lender. Other arrangements might call for a joint-venture agreement to further detail key elements of the partnership.
In other cases, additional collateral might be negotiated between partners for lender protection whereby a deed of trust is given on the property to the private lender guaranteeing the property as collateral should payments be not paid.
The terms are really up to the partners, their respective needs and level of trust in the partnership. Yet, keeping the private loan simple and easy are commonly why this investment model is favored over others.
In Final
Hopefully you now know how private lending investment works and perhaps will want to add this to your investment strategy. Having a few longer term investments for tax benefits while keeping a few shorter term investments for cashflow can be a great strategy to ensure you always have some capital on hand when needed if a good opportunity arises.
At Valkere Investment Group, we offer both as we have found interest from our investor base on both fronts. Check out our recent Short Term Rental, listed on Airbnb and VRBO, which was purchased with other private lenders from the Valkere Investor Club.
If you are interested in opportunities like this, simply click the button below to join the club and see these deals as they become available. Happy Investing!