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The Turtle and “The Rocket Ship”
The Yin & Yang of Getting Started in Private Lending

(Once you get a reputation for delivering on your claims of superior investment returns, investors will begin knocking on your door)

You can actually consider three totally different approaches to Private Lending if you would like to pursue this fast growing profit center as a loan professional.

Have you noticed an avalanche of offers on your fax machine from “hard money lenders” lately? These companies are your first approach and logical place to begin. They are sourcing their funds from private investors and local or regional banks. Usually these “banks” are chartered as thrifts (savings and loan) which carry a different mandate and regulatory requirements than actual commercial banks.

With this type of charter, they can operate in this lucrative space. If you can find the bank source, you can go direct, but there are still several disadvantages to your operating in this introductory model.

The secondary market for the product that these banks are funding has dried up at the moment, so use caution. They can make these loans, but they have to place them in their loan portfolios. The bank can’t grow deposits very fast, so the only option for sourcing new funds is to wait for payoffs, then continue funding.

You’ll also find these banks have “relatively conservative” underwriting habits, but the major disadvantage to working this way is that there are too many hungry loan pros eating from the same pie! Traditional wholesale channels don’t exist in the way you’re used to.

The transaction originates and funds the same way a “broker-to-broker” loan does. The fees are large when totaled, but everyone wants their cut of the pie. And let’s face it, you’re in this game for the bigger slice, right? If you’re serious about making money in this market, you should move up the food chain and take responsibility for raising the funds yourself, but just for your own originations.


Because you may not yet have your own investment funds, begin this advanced approach by advertising for investors while you design your marketing for clients. Now you have made the leap to facilitating the advanced approach to Private Lending. This may require special paperwork and requirements of the investors, depending on your location and regulators.

This will likely take a slightly larger commitment to get your business rolling, but it will produce great long term benefits. This is a more typical hard money model because it provides substantially more control of your business. Your structure functions much more like a real business too; you act less like a distributor, less like you used to when you were just a regular mortgage broker.

Once you get a reputation for delivering on your claims of superior investment returns, investors will begin knocking on your door. Treated right, your investors will stay with you. They’ll want to continue making those attractive returns after their first loan has been paid off. They’ll be even happier if you provide servicing and accounting for them.

In California, if you construct your note correctly, it’s possible to charge 15.99%, ten points, no prepay with a 10% late fee. The broker typically keeps most or all of the origination points. If you think there’s no demand for money at these rates, you would be mistaken.

Although this isn’t always the case, your typical client profile …and I do mean “client,” is one who is usually under attack from their creditors, and their often deteriorated financial condition is near desperation leaving the borrower’s emotional state in disrepair as well. These borrowers are fragile – handle with care; listen to their story, and try not to be callous. It’s easy to do when you hear one terrifying story after another.

Before discussing the expert approach and final business model of Private Lending, let’s not forget referrals are our primary source of business – this may be a surprise to most of you!

During that ride of helping their home ownership dreams come true, most of us have experienced that emotional connection with our client. When the opposite occurs, and clients are trying to avoid their worst nightmare, the same type of emotional bond is established when you help these clients avoid a catastrophe. However, your dialogue and positioning at this juncture is very important to your success.

When you’ve successfully completed a transaction and created a new relationship based on trust, you will have earned your clients’ future business and referral business. The works the same way as it would in any other niche. Superior client contact and database systems will help nurture more of these opportunities, and you will be shocked and amazed at the repeat clients you’ll get, even at these rates and fees in this niche.

Consider how many credit reports you have seen with multiple accounts from the same institutional finance company. As a private lender, you’ll have that same opportunity to help your client again and again.

Next week, our discussion will reveal the expert approach, the final business model to Private Lending. These are the methods used to propel your new business straight past the ozone layer and into “Hyperspace.” I’ll show you the Optimal Income Strategy or OIS. This model is Private Money Lending on Steroids