Rreal estate investors are well-acquainted with the concept of raising private money for their projects. Various platforms like blogs, podcasts, books, and other media sources provide strategies to secure this capital and utilize it to fund real estate investments through the use of other people’s money (OPM).
This elusive pool of private capital almost resembles a secret society, devoid of physical establishments, advertising, or convenient ways to locate these lucrative sources of OPM for financing your next venture. However, what is often overlooked is the discussion about how one can “be the bank” by becoming a private money lender—a lesser-known avenue for generating passive income in the real estate realm. You might be pleasantly surprised by how seamlessly private money lending can align with your investment goals and lifestyle.
Most individuals assume that private money lending is a specialized market reserved exclusively for retirement plans and affluent retirees with substantial funds at their disposal. However, private money lending, which essentially involves being the “other” person in other people’s money, is actually a diversification strategy employed by both seasoned and novice real estate investors. There are several common scenarios in which active investors also engage in private lending, all of which complement their existing real estate portfolios.
One such scenario is forgoing personally engaging in property flipping. This glamorous type of investing, often showcased on HGTV, requires significant time and capital for property acquisition and renovation. As market conditions change or life circumstances necessitate a temporary pause for active flippers, many turn to private money lending as a means of earning interest income while they take a break between projects.
Instead of allowing their capital to idle in a low-interest savings account, these flippers opt to allocate it towards funding another investor’s flip project. While flipping remains an active source of income, why not take a breather and generate some passive cash flow by becoming a lender for a project instead? Similarly, active investors may employ their retirement accounts to fund other investors’ projects, as lending the money to themselves is not permitted. In such cases, borrowers repay interest to their future selves.
As active flippers progress in their careers, they may eventually choose to “graduate” from the time-consuming nature of flipping altogether and explore more passive income avenues. Private money lending can be an attractive strategy in this regard. The flexibility and freedom from strict time commitments make it appealing to these experienced flippers who seek more relaxed cash flow approaches. When transitioning to private lending, these investors continue to evaluate projects just as they would if they were purchasing flips for themselves. The added bonus this time around is that they can sit back and watch the monthly interest income flow in without the hassle of managing project budgets, subcontractors, and supply chain issues.
While a phone call can interrupt an active investor at any moment, demanding their immediate attention to resolve a potential crisis, private money lending rarely presents such emergency situations. This allows active investors to reclaim their most precious asset—time. When active investors begin shifting towards private lending, they still evaluate projects in a thorough manner, just as they would if they were personally flipping the properties. The difference now is that they can enjoy the steady stream of interest income each month without the complexities of dealing with project management, subcontractors, or supply chain challenges.
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.