Private money lenders serve as an alternative to the traditional lending institutions, including big banks that people are so familiar with. These individuals lend their own capital to other investors and whose presence makes it possible for the average investor to run and maintain a sustainable career. This is due to the fact that there are strict requirements and timelines that are not conducive to the average real estate investor. Therefore, those with the appropriate funds could better serve investors than large institutions and now, private money lenders are a critical component to the real estate investment industry.
However, becoming a hard money lender is not a path just anyone can take. You need to ask yourself if you can afford to do so as having a little extra money in the bank does not mean that you should throw it at the first investor that comes your way. In fact, it is recommended that you do not become a private lender if you are not willing to take the time to understand the risks involved.
In addition to learning about the risks, there are a number of other steps that you need to take in order to be successful. First and foremost, you need a name for your business, as well as an address and phone number. These need to be submitted to the state so that no other organization can use the same name.
The next thing you need to do is speak to an attorney who is an expert in business and real estate. He or she can help you to determine the legal structure of you hard money lending business and the appropriate state of incorporation, as well as assist with tax issues, licensing and the different legal issues concerning residential and commercial lending. You can also have your attorney set up your employer identification number with the IRS.
The next step in becoming part of the hard money game is to draft your business plan and underwriting criteria. This should be based on the types of loans you will be making. You need to include such things as your loan to value parameters, minimum and maximum investment amounts, interest rates charged, property types such as manufacturing plants, office buildings, strip malls or apartment buildings, and payback periods. You need to think of your business plan as the roadmap that keeps your company on track.
You will also need to put together your financial projections. When you are investing your own money, you need to know the break-even points, projected monthly and annual income based on various interest rates charged, as well as your monthly expenses, legal costs and other overhead costs. Therefore, you will need to develop a balance sheet, income and cash flow statements, and a profit and loss statement.
Finally, purchase your domain name and have your website professionally done. Be sure to put an intake form on the site so that you can pre-qualify projects online. Be sure to request information including project type, loan requested, the length of the loan, the value of property, location, and other important factors based on your lending criteria. Congratulations, you are now ready to launch your business.