Here are three questions to consider before you jump in.

COVID-19 has spurred hundreds of conversations among real estate investors, entrepreneurs and business owners about the best ways to create multiple sources of income, especially those that are sustainable long-term and provide peace of mind for maintaining our lifestyles.

One income stream to explore is private lending, especially if you have cash sitting on the sidelines right now.

Why?

It can be passive, lucrative and take very little of your time, if you do it right.

Before jumping into private lending, here are a few questions to ask yourself.

1. What internal business factors should I consider to see if it makes sense?
   Right off the bat, a few come to mind: location, liquidity, time, risk tolerance and business workflow and technology.

Depending on the cities and states you ultimately pick to lend in and the type of project you are interested in financing, the amount of capital required of you to deploy per loan will vary. Here are a few simple steps you can follow to quickly determine what your internal business gut is telling you.

Step 1 // Identify the cities and/or states in which you want to do business. Some lenders work only in one or a couple of states. One of the reasons they do this is they know exactly what they want and what they are looking for. They set the rules so it’s a win-win for everyone.

Step 2 // Liquidity is a large component of the volume of deals you can do in the location you choose. You would be a great fit as a private lender if you look like the following examples:

• You’ve done well as a flipper and you’re looking for additional opportunities to expand your business.
• You have a large amount of capital in an IRA account that can be shifted to a self-directed IRA account.
• You’re a high-income earner (e.g., a physician, dentist or C-suite company executive).
• You’re a software genius who exited a tech startup.

The bottom line here is this: If you don’t have (or have access to) a large amount of capital to lend, there’s really no point jumping into the game.

Step 3 // The total time you invest in learning about becoming a private lender and building the infrastructure for your business can be substantial. Here are a few things to consider pulling the trigger on that will take some time:

• Establishing your business name and brand and getting a good understanding of why you’re different in the marketplace
• Obtaining business insurance
• Identifying your lending criteria and focus
• Determining your marketing strategy to find potential borrowers
• Setting your risk limits

As you can see, it’s not as easy as creating a landing page and becoming a lender overnight. There are many components to launching successfully, and the time required to do so is intensive.

Step 4 // Your risk tolerance will define the way you lend. As in any business, your appetite for risk results in how aggressively you pursue opportunities to help your business grow. As a private lender, you’ll need to decide which lending opportunities you’ll focus on, including, but not limited to:

• Single-family new construction
• Single-family renovation (fix and flip)
• Single-family rentals (buy and hold)
• • Multifamily
  • Commercial
  • Land development

  And the list can go on and on. The bottom line is: What do you want your niche to be, and how comfortable do you feel in that area? If all these areas of real estate are foreign to you, maybe consider investing with an existing private lender who can offer you a yearly return but also provide insight into the space so you can start gaining more confidence in your own deals.

  Step 5 // Mastering business workflows and leveraging the right technology across multiple platforms is one of the biggest challenges private lenders have.

  Here’s an easy example: You may be a private lender who is considering a platform for loan origination and another platform for loan servicing. But you’re worried that really hot leads are getting lost, loans could stall and, frankly, your team could underperform.

  Guess what? This is not a theoretical example. This happens to private lenders every day!

  Why? Because most lenders have been trying to fit a custom workflow into multiple existing platforms that just don’t have as much flexibility as they need.

  But, imagine a world where there’s only one dashboard that can connect all the dots or a custom interface that can help manage all your workflows from a single dashboard with multiple users. This isn’t just a fantasy. This can be a reality within only a few months with the right development team behind you.

  As a new private lender, depending on how much you want to scale your business, building a custom workflow from the get-go can be a valuable component of your lending business.

  2. What qualities do you need to be “cut out” for the private lending business?
     The two big ones are being detail-oriented and patient.

  If you consider yourself a detail-oriented person, you’ll win the lending game. Why? This space requires you to bring your A-game and do your homework about the deal, the borrower, the municipality, etc. If you enjoy getting a little lost in the analysis of a deal, you’re the kind of person the private lending space is looking for. Having thorough knowledge of what you and your capital is getting into is vital to your success as a private lender.

  If you consider yourself a patient person, you’ll win the lending game. Why? Making a last-minute deal because you were caught up in the hype is a bad move, and it’s not one private lenders make—ever. If you feel something seems too good to be true, it probably is. Let others take on that risk. Stick to your lending criteria and never ever deploy your hard-earned capital on emotion. It’s a numbers game. Don’t let anyone tell you otherwise.

  3. What is a good “low-risk” step-by-step strategy to get your feet wet as a private lender?

  How would you define “low-risk”? Look for minimal headaches, a strong borrower with a solid timeline for repayment and an even stronger team to finish the project and return capital.

  Using this definition, especially if you’re thinking about jumping into the private lending game, single-family new construction and major renovations are out of the picture altogether. Starting with smaller loan amounts and a quicker turnaround (approximately 3-6 months) gives you the time to figure out the kinks in your system and your overall lending personality. Here’s a simple strategy to follow that’ll jumpstart your lending business:

  • Focus on the Midwest, or areas where you can digest the loan amounts ($55,000-$95,000).
  • Look at loans on single-family fix-and-flips that take less than six months to complete or long-term buy-and-hold (rental) properties.
  • Thoroughly vet your borrower and have them bring 20-25% as a down payment.
  • Three origination points and 10%-12% interest can be a good place to start.
  • Check, double-check and triple check your loan-to-values (LTVs) in the area.
  • It’s OK to joint venture with your borrower. Taking a percentage of profits can be a good way to develop a closer relationship with potential borrowers, given the deal and structure make sense.

  There are many components to building a successful private lending business, but if you master all of them and take your time, it can be a very rewarding experience in both the short and the long term. Remember to set your rules and follow them—don’t buy into the hype.