When you research private lending, you're bound to come across phrases like "financial freedom" and "wealth-building secret," but you may still be left wondering: What is it exactly?
In short, it's taking strategies financial institutions have been using since banks were first created and applying them to your own finances.
Private lenders are people just like you who are trying to minimize investment risk while also generating higher returns than can be obtained from most traditional investments. They're entrepreneurs, investors and individuals looking to secure a comfortable retirement.
A private lender is any person or group that loans money but is not a financial institution, such as a bank or credit union. In many cases, these loans are for the purpose of purchasing real estate.
"Private lending involves only three easy steps."
Banks make money by loaning funds to borrowers and charging them interest on it. In order to minimize risk, banks typically insist on hypothecation. George Antone, author of "The Banker's Code," explains how this is the secret to creating passive income through private lending.¹
"Hypothecation takes place when a borrower pledges collateral to secure a debt," Antone says. "When a property owner pledges property as collateral for a mortgage, that's hypothecation. Now the bank has a loan that's secured by the property. They can turn around and reuse that loan (a piece of paper) and pledge it as collateral for their own loan. That's called re-hypothecation. And that's precisely where banks shine, and anyone that understands that can as well."
Put simply, private lending involves only three steps: finding borrowers to loan to, securing money to lend out and structuring the loans so they minimize risk and maximize profit.
Completing those three steps is easy once you understand the market.
First, finding borrowers who are willing to pay a premium for private loans is not difficult. Following the Great Recession, traditional financial institutions tightened their belts and made it much harder to secure funding. Stricter qualifying standards and other limitations have led to many borrowers, especially those in the real estate investment game, to turn to private lending.
In fact, Julian Castro, secretary of the U.S. Department of Housing and Urban Development, recently talked to Bloomberg about how difficult it is to obtain a real estate loan. Even Ben Bernanke, former chairman of the Federal Reserve, complained about not being able to get his home refinanced!²
The need for private lending is very real, and this puts you in the ideal position to capitalize.
Your next step, securing money to lend out, can be as simple as making use of your own savings or pooling money together with other investors interested in generating high returns.
Finally, the most important step is arguably structuring the loans. Just like bankers, you can protect yourself and ensure profit by focusing on favorable underwriting standards.
"Underwriting criteria are the conditions and standards or benchmarks you create that all your borrowers must meet and that will help minimize risk," George Antone says. "These parameters are set by the lender and are designed to filter the type of borrowers we are prepared to accept."
Criteria may include the types of properties you're willing to lend against, location, credit requirements, loan-to-value limits, down payment requirements, the borrower's income – the choices are up to you.
The key to completing these steps correctly is educating yourself on how banking professionals have done it for generations. That's where MPactWealth comes in. Through our training programs, you will learn the ins and outs of private lending, as well as how to implement your strategies and ultimately prosper.
Besides the chance to bring in higher returns than you can with other investment vehicles, many people turn to private lending because it's often a safer alternative than other strategies, as loans are backed by real assets.
Even better, private lending is about creating passive income, which means you don't have to contend with the headache of constantly managing your portfolio.
Put simply, it offers you that path to financial freedom you've heard so much about. And yes, this wealth-building secret can be learned by anyone.
1. "The Banker's Code," George Antone, 2012, WealthClassesPublishing.
2. "Julian Castro: Broad Support 'For Doing Away With Fannie' Backstop," 2014, ValueWalk.