It might come as a surprise to readers conditioned to think about real estate investing in a certain way. Usually, it goes something like this: find a property, negotiate a price, ask your bank for a loan, and hope you can afford the down payment.
Yes, that pesky down payment. Only five years ago it was not much more than an afterthought, often five percent or less, or a couple of thousand bucks on a $100,000 house. But enter a little thing called the foreclosure crisis and suddenly your friendly neighborhood lender says you need to put down 20 to 25 percent in order to qualify for a loan. That’s upwards of $25,000 on that same house.
Millions of people quietly said “ouch” and shrugged their shoulders, resigning themselves to the idea that buying a house was no longer in the cards until the fundamentals of the housing market changed. But as usually happens when a need develops, enterprising individuals figured out how to fill it and make a little profit in the process.
We’re talking about OPM (Other Peoples’ Money). Private lending if you prefer that term. What it means is to go outside the traditional financial industry, find a private citizen with money to lend, and arrange your own lending/borrowing process that way.
We can hear the cries of dismay now. Get a grip, people. We’re not talking about loan sharking. Private lending has been around for a long time, it’s only recently that the financial media started to notice and talk about it.
A private loan works much the same as a bank loan except you probably won’t have to pony up nearly as hefty a down payment. The trade-off is that the interest rate will probably be higher. Sorry, that’s the way the world works. To get a little you have to give.
The broader point here is that potential real estate investors should not feel stymied just because their bank offers unacceptable loan terms. Do your research. Go outside the system if necessary. There is a growing pool of private citizenry with money to loan – Heroic Investing founder Jason Hartman is one who has done this successfully for a while now – and who are actively seeking borrowers.
And that’s how to build a portfolio without a bank (Top image: Flickr | taberandrew).
The Heroic Investing Team