One investor recounts his journey into private lending and the factors he considered as he scaled.

Similar to the experience of other private lenders, my first opportunity in the industry fell in my lap. I graduated from a small technical engineering school in Massachusetts with a degree in computer science in 2016 and was working full time as a software engineer when I was first exposed to private lending.

My journey into real estate investing began with the purchase of a duplex in 2019. I lived in one of the units and rented the other. I was happy being a landlord. I owned an asset that provided passive monthly income, and living in the building made it easy to take care of any maintenance issues.

In spring 2020, I set out to purchase my second investment property. By the time I started actively looking, the mid-2020 COVID-19 runaway real estate market was in full swing. I couldn’t find anything on the MLS where my numbers worked. Being a full-time engineer, I didn’t have the time or interest to knock on doors, find off-market properties, or manage my own flips. After looking for a few months, I decided I needed to find another path forward as a real estate investor—and a place to park my down payment money.

Discovering Private Lending

I had heard that many investors use private lending money to purchase flips and other projects that banks deem too risky. I figured there was a good reason banks stay away from those projects. All the podcast interviews I listened to gave me the impression you needed millions of dollars of either your own or investor capital to get started.

The idea of not owning the underlying real estate but controlling it via lien was very appealing to me: I would be able to participate in real estate investing, but since I would not own the property as a rental, I would not be subject to 2 a.m. calls from the borrower about a problem with the property. So, I pushed private lending to the back of my mind and committed to reconsidering it once I had the appropriate funds.

But then someone purchased the property directly behind mine as a fix and flip. Being the nosy neighbor and real estate investor I am, I searched the county records to find out who bought it and what they were planning to do with it. I discovered the investor used a private loan from an individual to purchase the property and “only” borrowed $100,000, an amount within my reach. My interest in private lending was rekindled.

Learning the Basics

I set out to learn everything I could about private lending. At the same time, I pursued my MBA with a specialization in finance at the University of New Hampshire, reasoning that an MBA would help advance my goal of diving further into real estate investing and private lending.

Interestingly, I discovered it was very easy to find information on how to borrow private money, but finding information on how to lend it was very difficult. Occasionally, I’d stumble across a blog post that offered advice such as “it’s what you don’t know that can hurt you with lending” or “make sure you know what you’re doing.” That advice wasn’t actionable, and it didn’t give me a place to start for becoming a private lender.

I knew from my preliminary research that the legal side of private lending was the first part I needed to figure out. If I at least understood the mechanics of private lending, I’d be able to focus on finding deals later. I was afraid to find a good deal and then not know what to do with it.

I also read it is important to have a team in place to help underwrite and close a loan—and your attorney and title company are critical members of that team. I contacted a few local title companies to see if they would help me understand the legal side of private lending and produce a document set for me.

This proved a bit more difficult than I anticipated. An attorney at one title company told me private lending is illegal and I needed a license. From my previous research, I was fairly certain that in my home state of New Hampshire, a license was not necessary.

Finally, I received a call back from a local title company, recommended to me from another local real estate investor in my network. I set up an appointment to meet with their attorney and paralegal. They explained the legal side of things and sent me home with the documents they use for their clients. After familiarizing myself with them, I was confident they would be able to handle a closing for me. Now I just needed to find a deal.

Before discovering APPL, I was able to find a couple of books on private lending and a few more articles that taught me the importance of conservative underwriting, emphasizing the textbook terms of lending 80% of the purchase price of the property and 100% of the repair costs—up to 65% of the after-repair value of the property. I was relieved to have a concrete box to use as a guidebook for my first deal to help ensure that it would work out.

My First Deal

A couple of weeks after I talked to the title company, I received a referral from another local real estate investor. One of his friends was interested in buying a property in southern New Hampshire. The investor was looking for a $100,000 loan toward the purchase of a property that he was buying for $140,000. He was going to fund the repairs himself. The closing was in 2 1/2 weeks. Being new to the industry, I was afraid to make a decision. I was then asked the question I was dreading: “Are you interested in lending on this property?”

I finally had a deal. I thought I would have been excited. Instead, I was petrified.

On a Friday afternoon, I spoke to the investor on the phone and asked him a few questions about himself, how he got started in real estate, and his experience level. I requested a few references. Then I visited the property with him and his agent. It needed mostly cosmetic repairs that likely would take just a few months to complete.

I spent that whole weekend trying to talk myself out of the deal. I was about to

give a stranger $100,000 of my own money with nothing but some paperwork to ensure that I got repaid—paperwork that I didn’t even fully understand yet. I told my parents what I was doing; they told me I was crazy.

By Sunday afternoon I had started to convince myself the deal was sound. I was lending well below 80% of the purchase price of the property to an experienced investor with exceptional references, with a title company and attorney that had completed hundreds of transactions involving private lending. I told myself I’d done enough due diligence and should be comfortable with the deal; it was time to go for it.

After the closing, I didn’t hear much from my investor, and I didn’t really expect to. Toward the end of the month following the closing, I was curious whether I would receive my monthly payment. To my relief, on the 25th of the month (seven days early), my first mortgage payment showed up in my mailbox.

I had officially become the bank. I was hooked. I wanted to do it again, but I was out of money.

A Business Is Born

That loan had consumed most of my savings and until it was repaid, I couldn’t do any more deals. Knowing I had about six months before the money would make its way back to me, I spent my spare time reading every piece of information about private lending I could get my hands on.

While I was looking for other lenders I could connect with and learn from, I stumbled upon a private lending Facebook group and became an active participant. Through this group, I learned that several smaller lenders use investor funds to grow their businesses via the whole-note (sometimes called “trust deed”) investing method. This is an arrangement in which I would find deals for my investors and place their funds into deals for them. I would find the deal, arrange the closing, handle the paperwork, and service the loan. I thought it sounded great, but I wasn’t sure how I was going to convince anyone to invest with me.

In the meantime, I had been talking to friends and family about what I’d been up to. After explaining what private lending is and how it works, a few of them asked how they could participate.

That was the moment the light bulb went on. I realized I potentially had a viable business. I just needed to put the pieces together.

I spent the next several months working with my attorney to understand how I could legally place investors’ funds into deals for them. We had to navigate state and federal securities laws and other legalities to ensure what I was trying to do was legal.

Lessons Learned

My biggest challenge has been growing both sides of the coin. As a whole note lending company, I essentially match borrowers with investors. Maintaining a steady and roughly equal flow of borrowers with deals and investors with capital is crucial to keeping the business running. My local market is a small world. I did not want to earn the reputation of being the lender who can never close a deal. I chose instead to grow my local circle of borrowers slowly and steadily as I continue to tap my personal network for potential investors. Paying attention to the lead flow on both sides of the transaction has been critical to keeping my journey into private lending relatively smooth and steady.

I have also learned to trust my gut a bit more. As a generally agreeable person, I tended to see the positives in all the deals I consider, which means I sometimes overlook the negatives. I’ve realized that not everyone that reaches out is a good fit for me to work with and that leveraging my network to get references for potential borrowers is cheap insurance.

Additionally, I have decided not to compete on price. I have rates and terms I am comfortable with, and I do not waiver from them. Instead, I strive to provide my borrowers with the best service possible. I want to work with people who are willing to pay a bit more to work with someone local who can close quickly.

My next goal as a private lender is to scale so I can lend full time. I’m close, but I haven’t made it to the point of having a steady enough deal flow to leave my W-2 behind. My goal for 2022 is to build the consistency required to grow my business beyond a side hustle.