Understanding how to invest in private lending can help anyone grow their money, according to an article by Donna Cornejo of JCAP. These short-term, private, month-to-month loans offer the option to take care of car repairs, home renovations, or other immediate financing needs. They can also be funded by anyone, are secured by a person’s income or real estate assets, and are more relationship-based, a stark contrast to banks where significant limitations can occur.
There are three types. or circles, of private lenders for these types of loans. Family and friends make up the primary circle of private lenders. The secondary circle consists of personal and professional relationships, acquaintances, and colleagues of the individual. Third-party circle members include hard-money lenders and accredited investors. Most opt for this, Cornejo said, as they are reliable and interest rates are standardized.
Significant advantages of investing in private lending for investors include high earnings (up to 15% from returns) and the ability to take back money or secure physical assets if a borrower defaults. These also allow investors to further invest funds without the risks of renting or flipping and offer the possibility of moving money in and out at any time.
Cornejo explores some tips for anyone looking to become a private lender investor.
- Learn how to take calculated risks: make sure to have a way to recover money from defaulted loans and surround yourself with people who know about private lending
- Know your deals: understand the costs, potential, and purpose, and whether or not the investment will be fruitful
- Have a good team and attorney: be sure to have managerial and legal backup for those unknown and potentially negative risk situations
- Trust, but verify: be sure to do background checks on anyone you are lending to
There is significant potential to make money with these types of loans. Follow these tips to get the most out of your investment.