The Easiest Way to Become a Private Real Estate Lender
Transacting through a fractional loan program allows the benefits of being a private lender without the hassle. You can truly “be the lender” without originating loans all by yourself.
On one end of the difficulty spectrum, an investor can lend money directly to borrowers for a real estate project. This requires a great deal of the investor’s attention and full-time effort, and carries significant risk of loss.
On the other hand, investing through an already-established private lender allows you the best of both worlds. The lender deals directly with the borrower and performs all the due diligence on borrowers and properties. As the investor, your duties are limited to conducting research on the integrity and health of the lender and the properties (or fund) you want to invest in. You have the opportunity to invest in real estate in a “closer” way than with a REIT while avoiding all the hard work and administrative tasks of being an actual lender.
This article discusses the various ways investors can get involved in private lending in Texas, and highlights the benefits of partnering with a hard money lender like Capstone Capital Partners.
With Capstone’s Fractional Ownership program, you can actually be the lender without having to worry about the hassle of managing the loan. Hand-pick the loans you wish to hold first lien positions for and reap steady returns. Note that being the lender technically means you’re not “investing”, such as with a stock or fund. You’re earning returns through interest. This is the most direct and easiest way to become a real private lender without the massive responsibility of opening your own firm!
The options for getting involved with private lending vary widely in terms of the risk involved and the expense and effort required. Texas does not require private lenders to obtain a license unless they make “consumer loans” with interest rates above 10%. Hard money loans for real estate projects typically do not meet the state’s definition of a “consumer loan.” This means that almost anyone with the means and the willpower to do so could participate in private lending.
What are my options for becoming a private money lender?
The main ways to get involved in private lending are as follows:
Start a private lending business: Create a limited liability company or other business entity for the purpose of lending money and do all of the work involved in hard money loans yourself, including marketing, investor relations, due diligence, and collections.
Become a private lender on a smaller scale: Loan money to friends, family, or others in exchange for interest. This also leaves you in charge of everything involved in servicing a loan.
Become a lender through Capstone’s Fractional Ownership program: Capstone Capital Partners will vet borrowers and present you with loan opportunities. Every loan is asset-based and the properties are right here in Texas. After we inform you of all the current opportunities, you decide how and where to lend your money. We do the rest.
Invest in Capstone’s private real estate fund: While this option technically doesn’t allow you to “be the lender” (as your money is put into a fund), you are still reaping returns from real estate debt. We handle all the details: loan application approvals, collecting borrower payments, ensuring projects progress on schedule, and everything in between. You reap the benefits of time-tested Texas real estate.
One of the main differences between investing in a private real estate debt fund and actually lending the money yourself comes down to your involvement. Funds are more “hands off” – the firm you’re working through selects the properties in the fund. On the other hand, participating in a fractional ownership program as a lender allows you to hand pick the property or properties you’re most interested in – it’s more active on your part.
How much money do you need to become a private lender all on your own?
The short answer: a mid six-figure amount (if your first borrower buys an average property). You’ll need enough money to cover your debts if a borrower defaults, and an attorney to write important loan documents for your protection. Keep in mind this does not include a physical office space, administrative staff, or marketing.
You will need money to cover operating expenses while you wait for your business to start turning a profit. Even if you’re just loaning money to people you know, you will need to cover loan administration costs. If a borrower defaults, you are on the hook for all costs involved in collecting the debt.
On the other hand, investing in a private real estate fund only requires the amount of money you intend to put toward a private loan. The lender services the loan and deals with matters like collection, so nothing else needs to come from your pocket.
What are the advantages and disadvantages of becoming a private lender?
The main advantage of becoming your own private lender, whether you form a business or lend money in a less formal manner, is probably the autonomy that comes with controlling every part of the lending process. The main disadvantage is a product of the same autonomy. You would be able to decide who gets a loan and control the whole process, but you would also be responsible for everything.
If you were to start a private lending business, you would have to form an LLC or other entity and go through the entire process of creating a business. This means renting office space, buying office equipment, hiring staff, obtaining insurance, and more. You will have to pay for marketing and build business goodwill to attract both borrowers and investors. The business will have to bear all of the costs of making, servicing, and enforcing its loans. You will need a significant amount of money to get started, and unless you have experience in finance, you might not know where to start.
Loaning money with interest to friends or family doesn’t require as much setup, but it is just as risky. It could be more risky, actually. Lending your own money is not a diversified investment. If the borrower defaults, you will bear the full impact. Money also isn’t all that’s at risk with this kind of loan. In addition to the loan principal, you risk losing whatever relationship you had with the borrower.
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How is investing in a private real estate fund easier than becoming a private lender?
When you invest in a private real estate fund, you can enjoy many of the benefits of being a private lender without most of the risks and hassles of becoming a private lender. Your investment goes into a fund that a hard money lender manages. The lender has vetted its borrowers and built personal relationships with them. It can give you a range of options for where to invest your money. You can invest in a loan because you like the project, the location, or some other aspect. Thanks to the lender’s track record of success, you know that the loan options presented to you are likely to be good bets.
Investing with a private lender is a win-win-win scenario:
You collect returns without the hassle of servicing the loan.
The borrower gets a seamless experience with the help of a seasoned lender.
You’re not responsible for marketing and attracting borrowers or vetting them for risk. Working through an already-established private lender relieves you of these time-consuming tasks.
Be the lender without the hassle – partner with Capstone!
As a hard asset, real estate provides security for hard money loans and reduces the risk for you. Whether you’d like a more hands-off approach with our Growth Fund, or a more active role in our Fractional Loan Program, both of them take advantage of private real estate debt in Texas. This is a tried and true vehicle for preserving capital for years to come.
Learn more about our private debt real estate fund and our fractional lending program. We’d love to meet you and discuss what’s most important to you as an investor or lender. Simply answer a few questions about yourself and we’ll reach out!
