Short-term private lending is becoming increasingly popular. It is a fantastic way of getting funds together for property investors, for instance, who often only need a sizable influx of cash for a short period of time. For instance, they may want to purchase a property and sell it again after just a few weeks. The problem for a short-term private money lender, in that situation, is that it becomes very difficult for them to earn any money. There are some great benefits to becoming a private money lender.
“One of the great benefits of acting as a private moneylender is that you can gain the benefits of participating in the real estate industry even if you do not have any prior experience.”
However, the downside is that because the loans are generally very short, the earning potential is very small. However, it is possible to structure short-term private money loans, if you are a borrower, to make them more interesting to your lender. One great tactic is to include a prepayment penalty.
“Prepayment penalties are usually expressed as a percent of the outstanding balance at the time of prepayment, or as a specified number of months of interest.”
This allows your lender to know exactly how much they will earn at all times. Consider for a minute that a loan of $100,000 at 8% over one month would only earn your lender $700 dollars. Hence, if you were to then cut your loan period short as well, they will earn even less, making it no longer worth their while. However, if you can guarantee their earning regardless of whether you make the term shorter, you will make it a lot more interesting straight away.
Go for 50/50
Another option is to make your private lender an investor. Basically, they invest the money, but you do the hard work. This is a tactic that is used by a number of people in Florida who are really making a difference in the world of real estate.
“Justin Wilmot, one of our students kicking serious butt in the Florida market (he’s done more than a dozen deals in the last year since getting started), structures all of his deals straight 50/50 partnership with his private lender.”
This tactic is known as equity investment, and it basically means that you take equal risks. Perhaps your investor won’t earn a lot of money, but then nor will you. And your lender doesn’t have to do any hard work, since you will be the one doing that. As such, it is like sitting on free money, whether that is a lot of money or only a little bit.
It is very important to make it clear to your lender that you understand the risks that they take. There are various tactics you can use to ensure the risks are mitigated, including making it clear that if you do not stick to your agreement, the property becomes theirs. Of course, outlining the various benefits is perhaps an even better tactic.