The Do's and Don'ts of Private Lending: A Comprehensive Guide
In the world of finance, private lending offers a unique path to significant returns. However, it's a path that needs to be treaded with caution and knowledge. We've previously explored the benefits, legalities, and shared real-life experiences of private lending. Now, let's delve deeper into the critical dos and don'ts that can guide you towards success in private lending.
IMPORTANCE OF EFFECTIVE DUE DILIGENCE
Trust but verify - a mantra that holds great significance when it comes to private lending. The importance of effective due diligence, especially with asset-backed loans, cannot be overstated. I've touched on this already, but I want to drill this point home so you understand its importance.
The Do's of Private Lending
Before we dive into the specifics, let's briefly summarize what the "do's" of private lending entail. These are the actions that can set you up for success in your private lending journey.1. DO: Understand Your Legal ObligationsAs we've emphasized in ourarticle on legal considerations in private lending, it's crucial to familiarize yourself with your legal obligations. This includes understanding usury laws, ensuring all loan terms are appropriately documented, and all liens, deeds, and mortgages are correctly recorded.2. DO: Conduct Thorough Due DiligenceBefore lending, conduct a comprehensive evaluation of the deal, the borrower, and the verified information. This includes assessing the deal's timeline, security, cash on cash return, structure, and more. Similarly, evaluate the borrower's background, education, experience, assets, income, and credit. Ask yourself - Can they repay the loan? Is this their first rodeo?3. DO: Have RulesJust because private lending doesn't 'have' to have the same rules as the bank, doesn't mean you should disregard all rules. Take what works in a professional banking process and apply it in a way that aligns with your market, experience, and skills.
The Don'ts of Private Lending
Now, let's shift our focus towards the "don'ts" - actions that you should avoid to ensure your private lending journey is free from unnecessary pitfalls.
1. DON'T: Neglect Your Exit Strategy
Every loan should have a clear exit strategy. This involves not just the end-use of the property (long term rental, fix and flip, etc), but also how you, as the lender, plan to exit the loan. Whether it's via the sale of the collateral property or the borrower's commitment to a refinance, knowing your exit strategy is essential.
2. DON'T: Ignore the Risks
Private lending comes with its own set of risks. From default risk to potential legal repercussions for non-compliance with lending regulations, it's important to recognize these risks and develop strategies to mitigate them.
3. DON'T: Forget to Consult Experts
Whether it's a lawyer to help with legal aspects or a financial advisor to assist in assessing a potential deal, don't hesitate to seek expert advice.As we've discussed in ourarticle on the advantages of becoming a private money lender, private lending can pave the way to significant financial returns. However, as highlighted in our nightmare stories article, wielding the right knowledge and mindset is essential to avoid pitfalls in this journey.Remember, navigating the world of private lending requires careful and deliberate steps. By following these guidelines, you can ensure that your journey in private lending is a successful one. Stay tuned for our next article in this series, where we'll delve deeper into the world of private lending, providing you with more tips and insights.
