In Shakesspeare's "Hamlet", Polonius advises his son Laertes: "Neither a borrower, nor a lender be. For loan oft loses both itself and friend." You may also have heard the saying, "Don't lend money to friends--it causes amnesia." Or, the quote by Marc Faber (Swiss investor, author of Gloom Boom & Doom Report newsletter): "My worst investment decision so far is to lend money to friends. So far, it has all come to zero."
All of these thoughts on lending to friends....well, these are not from professional, private, residential real estate lenders. If you speak with the lenders who are members of TREIA--and there are lots of good lenders within TREIA, you'll hear the opposite! We like lending to people we know. For those of you considering becoming a private lender, this blog is for you. Here are things to consider when you are getting started:
1. How active do you want to be? Think business development, marketing, underwriting and loan servicing.
2. To avoid the concerns that Polonius shares with Laertes, you want collateral and proper documents. Deed of Trust, Promissory Note, insurance, title insurance...
3. Short term loan, by definition, means that the loan will return quickly. Be prepared to keep finding new loans to fund.
5. Pro Tip #1: Start with a borrower who is not doing his/her first deal. You'll sleep easier.
6. Pro Tip #2: When marketing, let people know how much you have to loan! Just saying you are a lender will waste people's time.
Lending is a great business. It's dynamic, and rewarding.. But there are a lot of details and a fair amount of work: marketing, underwriting, Deeds of Trust, title insurance, etc. If you're just getting started, all the details could be discouraging.
If you're serious about being a lender, here's one way to address the mountain of details: start small. Better yet, eschew Polonius's advice and lend to a friend. As you work through the first loan, you will start learning about the details.