Does it make sense to add “Private Money Lender” to your investment strategy? Most real estate investors take the direct approach, buying and then flipping or holding properties. But there are other, more indirect, ways to participate in the real estate investment game. One of these is to get involved on the other side of the investment table and become a private money lender. Why would you go this route? Some investors just don’t want the hassle of buying, fixing and selling or becoming a landlord. Others want to add some diversity and expand their reach.

What Does a Private Money Lender do?

You’ve probably heard of private money lending but just in case you are new to this term or want to know more about what they do, here is a quick overview. A private money lender, also known as hard money lender, is a non-institutional (non-bank) individual or company that provides ­loans to real estate investors (borrowers) for the purchase or construction of properties.

Private money lenders or hard money lenders focus more on “hard” assets (the real estate) when evaluating a deal. The loan is generally secured by a note and deed of trust. Hence the term “hard money”. In contrast, banks focus on the borrower’s ability to pay as indicated by income or credit score. There are many variations but these loans tend to be short in duration and used for residential properties that will be fixed and flipped.

Just like any other business venture, there are advantages and disadvantages to becoming a private money lender. Read more here.