A lot of smart investors are opening up to the possibility of making good returns in Real Estate. The one question on everyone’s mind is how private money lending works in the real estate sector.

In this blog, we review how you can start and use private money for real estate investment.

WHAT IS PRIVATE MONEY LENDING?

Private money lending became popular recently as an alternative to traditional mortgage lending from big banks. In private lending, individuals and small investors lend their personal capital to a pool of experienced real estate investors or professional real estate funds.

The loan is secured with a mortgage and against real estate property to protect against losses. The fund managers generate a profit from real estate rentals, property price appreciation, and sale purchase agreements. In most cases, private money lending gives a higher rate of return than placing your savings in a bank account.

WHO CAN BENEFIT FROM PRIVATE LENDING?

Private money lending is more suitable for seasoned investors who want a higher return from property investments, and willing to take greater risks as well. Most rookie investors prefer to stick with savings accounts. However, as they gain more experience, they realize that Cash ISAs and saving accounts offer a very low rate of interest and hardly protect against inflation.

If you meet any of the criteria below, you may want to build a higher return portfolio and consider private money lending.

• You are a retiree or getting close to retirement and want a decent passive income.
• Your retirement savings are adequate and you want to diversify your portfolio with real estate investment.
• You want to use real estate investment to help a close relative or friend.
• You already own some estate or another trust fund.
• You are a business entrepreneur with a successful startup and have more cash than you need at the moment.
• You want to benefit from the booming real estate market.
• You have won the lottery or received an inheritance.
• You are a professional lawyer, doctor, accountant, CEO or professional of another kind who generates a good surplus income.
• You want to take advantage of tax breaks or want to lower your tax rate.

TIPS FOR STARTING OUT

In a nutshell, private money lending gives you the opportunity to act as the bank for real estate management professionals and funds. Instead of purchasing real estate directly, you fund the estate managers who own and manage commercial or residential properties. Your risks are mostly covered through insurance while the rate of profit is generally higher than bank accounts.

Here are some tips that will help you make the most of private money lending in real estate.

1. Start out small and invest no more than 10% of your total savings to get a good idea of the sector before making heavy investments.
2. Have a good legal attorney to help you review and negotiate investment contracts.
3. Try to focus on properties in an area you are aware of.
4. Research multiple real estate management firms before deciding on one that you like.
5. Don’t leave everything up to your real estate management firm. Do your research as well about property markets.

This was our short guide on private money lending in real estate. Do you have comments or questions? Email us.

For more information, you can visit Real Estate Calculators.