The Rules of Thumb blog from MoneyThumb does our best to inform and educate our readers on all things finance. In today's post, we would like to address those of you who are considering becoming private lenders. Private money lending has surged in popularity since at least 2010. It has always been there, but opportunities were less accessible and visible than they have become in recent years.
If you are flush with cash, becoming a private lender can be one great way to invest your money for steady returns. However, there are certain hard and fast rules, advice from experts who have been there and done that, which you would do well to follow. The Rules of Thumb blog has listed 6 pieces of advice below for those of you who are considering starting a private lending practice:
Advice on Starting a Successful Private Lending Practice
- Stay local. The private lending business model is most successful when you focus locally. Most of your loans should be within 100 miles of your office. Most of your private lenders will be local to your community. You will succeed in funding loans because you are a local expert and you understand your local marketplace. Remember that a reputable private lender is really in the investment business first, and the lending business second. Invest in what you know and where you know.
- Find your sweet spot. If the funding capacity of the majority your investors ranges from, say, $50,000 to $250,000, then market this range as your niche. Be honest with your referral network as to your sweet spot. Build your book of business by starting out small, creating volume, then working your way up to larger loans. You can earn more in fees by doing 5 – $50,000 loans than 1 – $500,000 loan or even 1 – $1 million loan. You can charge more points on smaller loans, plus the fees. They close quicker and easier. Larger loans fail to close at a much higher rate than smaller loans.
- Focus. Be specific in your advertising and marketing. Don’t say that you are “nationwide” and you fund “all loan types” and loan amounts. We guarantee you that brokers who market themselves as such do not have a thriving business. Focus on small loans at first to locals. Keep it simple and laser-focused as you build your lending practice.
- Strive for total transparency. If you have a website don’t have pictures of skyscrapers or smiling people in suits shaking hands. Use pictures of actual deals you have funded. Make sure you are totally transparent, that your name, address, personal photo, and email address is there for all the world to see. You want your phone number to be local to your area. Have a great LinkedIn profile. Your authenticity and transparency will attract customers to you in a big way.
- Refer, don’t broker. Always originate loans rather than brokering them. When a call comes in for a loan that’s outside of your area, expertise or capacity, refer that caller to one or more reputable private loan originators. Brokering, in most cases, is a waste of your focus and time. Especially if the lead is coming from another broker. You do not want to be in the middle of a daisy chain. Daisy chain deals mostly fail because the borrower does not get well served. The reason they fail is that there is no way for every agent to get paid without over-charging the borrower. The goodwill created by referring loans will come back to you.
- Coaching, Mentoring & Consulting. The best investments you can make are in yourself and your business. Success and leadership coaching is an important part of my life. Read books, attend seminars for lenders, and watch videos to help you master the disciplines you need in order to succeed. Attend industry conferences and seek out those who have achieved success in this business and follow their advice. Hire an industry professional to review your practices and help you achieve compliance with state and federal regulations. Conduct this business properly, and soon you will have a steady stream of new leads as you grow your local reputation for performance and thoroughness.
The team at MoneyThumb hopes the tips above will help you become a very successful private lender. Another way to help you succeed as a private lender is to use the best PDF financial file converters on the market. Seamlessly convert loan applicants' bank statements so that you can quickly make the most informed loan decisions based on your client's bank statements with little hassle.
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