Private Lending 101: Who Are Private Lenders?

by Michel Lautensack August 31, 2008

Private lending is the practice of borrowing money by a real estate investor to be used to purchase rental real estate directly from private lenders rather than a bank or other commercial lender. Private lenders tend to be ordinary people such as doctors, lawyers, accountants, business owners and possible retired people.

Most private lenders are simply looking for better investment returns than they can typically get from bank CD's, money markets or even bond investments. Over the past couple years these type investments have yielded a paltry 3% to 6% pretax rates. After taxes and inflation these investments have, in some cases, produced negative returns for their investors. This is why people are looking for better returns and private lending is the answer.

Private lenders are looking for returns in the 9% and 15% range and secured by local rental real estate. This kind of return will provide investors with positive investment return of almost 300% over CD's and money markets. The result is a perfect match of private lenders looking for better returns on their money and secured by real estate and real estate investors looking for cash to fund deals and the ability to pay higher returns.

How to Find Private Lenders

As a real estate investor looking for private lenders, realize that private lending opportunities will not always come to you. You may need to go out and find them. The best way to find private lenders is through networking and low key marketing. Ask people you know directly or friends of friends about the amount of money they are currently making with their investments and would they like to learn how to increase that yield by 300%.

Let people know you are a real estate investor who is paying private lenders 9% to 15% or more and secured by local rental real estate. Those who are interested in learning more will ask questions and express interest. For those people who express interest you may want to arrange a private one-on-one meeting or group meeting with several people to introduce them to your private lending program.

Advertising for Private Lenders

You can do some types of advertising for private lenders but it is very important that you use relatively low key advertising and usually in small local areas. We do not recommend ANY form of internet advertising. With internet advertising you cannot control who will read your ads and the SEC may deem your advertising as a solicitation. You do not want this happen and will cause all kinds of problems.

A much better solution can be flyers in elderly communities or bulletin boards at local grocery stores. Your advertising should simply offer to provide information as opposed to offering investments. Public speeches for elderly groups or financial professionals is an outstanding way to offer to provide some education and in many cases will lead to people requesting further details about your program and possible investors down the line. The important point is keep it low key and local and you will street clear of problems.

The author offers a FREE 20-page ebook titled "Discover the Secrets of How to Fund Your Real Estate Deals with Private Lenders!" Visit Reprinted by Permission. Copyright 2004-2014 BiggerPockets Inc. All Rights Reserved.