Private Money Lending: How to Earn 10-12% Interest by Becoming the Bank
Private Money Lending: How to Earn 10-12% Interest by Becoming the Bank
CORE INSIGHTS
- Be the Lender: Instead of buying a rental property, lend money to the investor buying it. You hold the mortgage (Note), and they do the work. Your return is fixed interest (10-12%).
- Collateral Protection: Your loan is secured by a First Lien on the property. If the borrower defaults, you foreclose and take the house. A low LTV (70%) protects your principal.
- Short Duration: Most private loans are for “Fix and Flip” projects, lasting 6-12 months. This allows you to compound interest quickly and adjust rates.
Banks pay depositors 1% interest and lend it out at 7%. Why not cut out the middleman? Private Money Lending (Hard Money) is a passive income strategy offering double-digit returns backed by hard assets.
What-If Scenario: The Default (Worst Case)
| Step | Value | Result |
|---|---|---|
| Loan Amount | $150,000 | Your Risk |
| Foreclosure Sale | $190,000 | Fire Sale Price |
| Net Profit | +$35,000 | Still Positive |
Visualizing the Safety Margin
*Figure 1: Risk Profile. The Equity Cushion (Green) protects your Loan Principal (Blue).*
Strategic Action Steps
1
Find Borrowers
Attend local REIA meetings. Look for experienced flippers who need speed and are willing to pay for it.
Attend local REIA meetings. Look for experienced flippers who need speed and are willing to pay for it.
2
Underwrite the Deal
Ignore credit scores; focus on the Asset. Order an appraisal. Ensure loan amount < 70% of After Repair Value (ARV).
Ignore credit scores; focus on the Asset. Order an appraisal. Ensure loan amount < 70% of After Repair Value (ARV).
3
Use a Title Company
Never send money directly to the borrower. Send it to the Title Company. They ensure the First Lien is recorded correctly.
Never send money directly to the borrower. Send it to the Title Company. They ensure the First Lien is recorded correctly.
The Bottom Line: Who Should Choose What?
- Choose Lending: Investors with >$100k cash wanting high yields without landlord headaches.
- Choose Rentals: Investors wanting depreciation tax benefits and long-term appreciation.
Frequently Asked Questions
What is Private Money Lending?
Lending personal capital to real estate investors. You receive a Promissory Note and a Mortgage securing the loan.
Is it safe?
It is secured, not guaranteed. Your safety net is the LTV ratio. If the borrower defaults, you take the property.
Can I do this with my IRA?
Yes. Using a Self-Directed IRA allows the interest payments to flow tax-free back into your retirement account.
Disclaimer: This content is for informational purposes only. Private lending involves default risk. Consult an attorney.