What is Private Mortgage Lending?

Private Mortgage Lending is simply a loan made BY an individual (or privately held entity) TO an individual (or privately held entity) for the purpose of purchasing, refinancing, or renovating real estate. If you’ve never made a private mortgage loan, it might help you to think of yourself as the “bank”, and your borrower as the “customer”.

When your banker makes a mortgage loan, these are the steps he takes:

1. He makes a call to order an appraisal to make sure that the property that will secure the loan is worth as much or more than the amount of the loan.
2. He makes a call to a title agent to order research to make certain that the title to the property is clear.
3. He makes a call to his attorney to order paperwork that documents the terms and conditions of the loan.
4. He sends funds in the amount of the loan to a closing or escrow agent to complete the transaction.
5. After the closing, the closing agent sends him a copy of the recorded mortgage (or, in some states, the Deed of Trust) and the note.
6. He sits back and waits for the payments to come in.

As you can see, mortgage lending is a completely hands-off transaction for your bank. In fact, your banker never leaves his desk. Creating a mortgage loan is simple, stress-free, and profitable for banks–that’s why they’ve been doing it for centuries! And you’ll find that private mortgage lending is the same for you.

But you’ll also find that you have many advantages over a bank when it comes to lending in mortgages. For one thing, your banker is handcuffed by bank policies, procedures, and rules that make it impossible for him to make certain loans that could be extremely profitable for the bank. You, on the other hand, have enormous flexibility in terms of how, when, where, and to whom you make mortgage loans. Since it’s your own money you’re lending, you can pick and choose the borrowers and the deals that work for you. You can charge more here and less there, depending on how safe you think a deal is.

How Big is the Demand for Private Mortgages?

If you’re not familiar with the real estate lending world, you might wonder just how easy it’s going to be to find borrowers like those described above. After all, keeping your money in these private mortgages is one of the keys to keeping this strategy profitable–your capital does you no good when it’s sitting in the bank earning 2%-4% interest.

Well, here’s the good news.

According to the National Real Estate Investor’s Association, about 3.5% of Americans own at least one investment property. This means that, in a metropolitan area of 1 million, there are 35,000 investors.

Even if you assume that just 10% of these real estate entrepreneurs meet the qualifications we discussed (active, experienced buyers and sellers of property), that’s 3,500 potential borrowers. And remember, each of these borrowers can buy 10, 20, or more properties each year...so you’re talking about upwards of 30,000 potential private mortgages per annum.

In other words, the potential national demand for private mortgages is in the billions of dollars each year! It’s so big that some private mortgage lenders have created entire full-time, million-dollar businesses doing nothing but lending private money–and they still haven’t made a dent in the demand. The possibilities are endless.