Pro Tips to Lend Private Money to Make Passive Income

By BiggerPockets’ James Dainard

Why would you lend your private money in the first place?

  1. Diversify the type of real estate assets you are exposed to
  2. Dictate the terms and the duration of the loan
  3. Reduce risk of your portfolio (lend at a discounted loan-to-value such as 70% LTV and get a first lien on the property)
  4. High returns (10 to 18%) without all the work of finding the right property and dealing with repairs

How to vet the deal and the borrower/operator correctly?

agreement blur business close up
  1. Verify the information the borrower brings (budget and value)
  2. To verify value, you can rely on a local broker/agent or an appraiser (paid analysis)
  3. For construction / renovation loan, the copy of the budget must be reconciled with the after-repair value. Budgeted items must make sense
  4. For the operator, focus on their experience but also their credit report (no active bankruptcy or collection) and their asset sheet (which can serve as additional collateral)
  5. To legally protect your money, everything must be duly documented : get title insurance, an escrow, deed of trust and a promissory note
  6. Get a personal guarantee (do not do second mortgages)

Leave a Reply

Your email address will not be published. Required fields are marked *