Undoubtedly, active real estate investors have heard about raising private money for real estate projects. Blogs, podcasts, books, and other media share tactics to successfully find this capital and have it fund your real estate investments using other people’s money (OPM).
This magical pool of private capital is much like a secret society with no storefronts, no advertising, and no easy way to search for these lucrative sources of OPM to help you fund your next project. However, what isn’t discussed as often is how to “be the bank” as a private money lender, an often-overlooked source of passive income in real estate. You might be surprised by how easily private money lending can fit into your investing goals and lifestyle.
Most assume private money lending is a niche market reserved for retirement plans and older retired people with millions in loose change. However, private money lending—the act of being the “other” person in other people’s money—is actually a diversification strategy employed by experienced and novice real estate investors alike. There are a few scenarios we commonly see for active investors who are also private lenders, all of which fit nicely into an existing real estate portfolio.
Lend Private Money Instead of Flipping Yourself
The first scenario we will cover is flipping. This flashy HGTV style of investing often involves a lot of time and capital to acquire and renovate a property. As the market changes or possible life events require an active flipper to pause for a period of time, flippers often utilize private money lending to earn some interest income while they take a break between projects.
This capital, which otherwise might sit in a low-interest savings account, is instead used to help fund another investor’s flip project. Flipping will always be an active income source, but why not take a break and earn some passive cash flow by becoming a lender on a project instead? Similarly, an active investor may use a retirement account to fund other investor projects since they cannot lend the money to themselves. Borrowers pay interest to your future self in that case!
As an active flipper grows, they may choose to “graduate” from such a time-consuming activity as flipping altogether and pursue more passive income routes. Private money lending can be one of those strategies! The lack of strict time commitments attracts these maturing active flippers as they search for more relaxed cashflow approaches. As an active flipper, you might be under very tight deadlines, dealing with contractors at the job site, difficulty getting materials, or even finding more problems with the project than initially thought.
A phone call can come in anytime with a potential (and sometimes literal) fire to be put out. In private money lending, rarely is there an emergency moment that must be addressed immediately. This allows an active investor to regain the one asset no one can buy more of: time. When active investors start transitioning to private lending, they still underwrite the project the way they would if they were to purchase the flip themselves. The bonus this time is that they get to sit back and watch the interest income stream in monthly without the hassle of dealing with project budgets, sub-contractors, and supply chain issues.