The tenants across the street turned their rental into a disaster zone, and their departure was no less chaotic.

One evening, they hurriedly packed everything into a moving truck and vanished within hours, leaving behind a yard full of trash, broken furniture, and an old fridge on the driveway. They left windows open and didn’t bother to close the front door. I called the landlord, John, to inform him of the situation.

As John’s truck pulled up, I went over to greet him.

John: “You think they’re really gone?”
Me: “I’m certain.”
John: “Let’s take a look.”

Approaching the front door, we were hit by a stench of urine. The tenants had several pets, poorly trained for bathroom habits. The first sight inside was a pile of animal feces in the hallway. The smell was unbearable, and feces littered the entire house. The animals had treated the house like a giant litter box. The laminate flooring was warped from urine, and all carpets were ruined. Trash was everywhere.

Observing these tenants, I knew they were avid Craigslist users. I saw them bring home old TVs, car parts, appliances, carpet rolls, and broken motorcycles in their pickup truck. When they left, they left everything behind. The landlord had to clean up the mess. Guess who didn’t get their deposit back.

This debacle illustrates why some people are hesitant to become landlords. Successfully managing property requires a unique temperament. The good news is, you don’t have to directly own property to invest in real estate. Today, I’ll introduce you to private lending and crowdfunding through real estate investment apps, my two favorite strategies for investing in real estate without owning property.

Private Lending

I love real estate. I’ve owned rental properties and flipped houses for a substantial profit. Currently, I don’t own rental properties and am not flipping houses. The local real estate market is too competitive, and I’m avoiding bidding wars. I’ve recently discovered another way to invest in real estate through private loans.

I lend money to investors to buy properties. I’ve issued a total of $255,000 in loans across three separate deals. These loans generate over $2,000 in interest income per month. My experience with private lending has been positive, and I’m looking to invest in more deals.

Private lending allows me to diversify my portfolio into real estate without the hassle of managing properties. I earn a healthy interest rate while helping investors meet their short-term capital needs.

When I first heard about private lending, my main question was:

If someone has good credit, why would they borrow from me at rates as high as 10% or more? Why not go to a bank?

Investors turn to private lending for several reasons:

Properties must be rent-ready: Most traditional lending institutions require a year of rental history before issuing a loan. Private loans fill this gap.
Short loan terms: Flippers often aim to enter or exit a property within a few months. Dealing with banks isn’t worth the hassle for such short holding periods.
Immediate funding: Banks can take weeks or even longer to release funds. Private lenders can often provide funds within days.

Understanding why investors need private loans made me more comfortable with the idea. Here are some key considerations:

First lien position: The worst-case scenario for a private lender is the borrower defaulting. Always ensure you’re in the first lien position so you can foreclose on the property if payments stop.
Loan-to-value ratio: In case of default, you want to be in the best position to recoup your funds. I require a loan-to-value ratio of no more than 70%. For a property worth $100,000, I wouldn’t lend more than $70,000. This allows me to sell the property below market value to quickly recover funds.
Interest rates: Rates typically start at 10% and can go as high as 18%. Many lenders also charge 1 to 10 points. A point is 1% of the loan amount.
Credit scores: This isn’t as important as you might think. Because you’re in the first lien position, the deal is secured by the property.
Tax advantages: Self-directed 401(k)s allow you to issue private loans from a tax-protected account. If you have self-employment income, consider this option seriously.

Evaluating Deals:

Experience: Has the borrower completed at least ten deals, or is this their first? Do they have organizational skills and professionalism? Did they write a business plan? Is there an estimate for repairs?
Crunch the numbers: The property might not be in your backyard, which is fine. But you need to ensure the numbers are solid. Request pictures of the property and research home sales in the area.
What’s the plan? How will the borrower handle the property:
If it’s a flip, do they have a contractor? If they’re doing the work themselves, do they have experience? Is it allowed by local regulations? Are permits required to be pulled?
If the property will be rented, and the owner plans to refinance, what’s the timeline? What happens if the borrower can’t refinance? Do you have the option to continue financing the property for a longer term?
For more insights from the borrower’s perspective on private lending, see this BiggerPockets article.
Where to Find Deals

Private loans usually happen between parties with an existing relationship. The borrower might be a friend, family member, or someone you’ve done business with.

I also encourage building connections outside your normal network. A great way to do this is by being active on BiggerPockets forums. While you need to register an account, membership is free.

Pros and Cons of Private Lending

Private lending is a fantastic way to build wealth. Just remember to do your due diligence. Thoroughly understanding the deal before taking action is crucial. Do your homework!

Pros

Healthy interest rates: Short-term loans (1 year or shorter) start with interest rates climbing from 10%. I’ll never complain about earning a 10% interest.
Control: The investment is directly under your control. You choose whom to lend money to.
Collateral: If the borrower stops making payments, they lose the house and assets. This is a powerful deterrent against defaulting.

Cons

Upfront research: Private lending requires homework. You need to evaluate the deal and the borrower.
Putting all your eggs in one basket?: Diversification is important for any portfolio. Ensure a single loan doesn’t consume a large portion of your investments.
Liquidity issues: While private loans are short-term, your funds are tied up for the duration of the loan.