Financially independent investors swear by this 1 overlooked passive-income stream as they age. Here's why some call it 'easy’ money

But how exactly does private money lending work, and is it right for you?

Benefits and risks of private money lending

Think of private money lending as short-term, high-interest loans for real-estate deals. In this case, a private lender isn’t an institution like a bank, credit union or government-backed mortgage provider; it’s an individual or business that lends their own money.

Because they aren’t regulated like traditional banks, private lenders have more flexibility and they often focus on the value of a property instead of a borrower’s credit score or employment history. (1)

Flippers, renovators, and buy-and-hold investors often need to close quickly, sometimes faster than a traditional bank will allow. So they borrow from private lenders instead, and pay for the privilege.

A recent Business Insider article shared the story of Carl and Mindy Jensen, an early-retired couple who built a $5 million net worth. They’ve dabbled in different investment strategies, but one of their favorites is private lending. (2)

“Private lending generates such a nice return that it's difficult to be like, ‘No, we don’t want the easy money,’” Mindy Jensen told Business Insider.

Another real-estate investor, Josh Lupo, was also featured in the article and said that interest rates of 10 to 12% are considered “normal” and 12 to 15% is common on shorter loans of around three to six months. The lender typically sets the terms.

"It takes us 30 minutes driving to the bank, wiring the funds, and then the investor that is borrowing the money sends us updates, and that's the extent of it,” Lupo told the website.

Benefits

High returns. You’re not pulling 12% from even the best high-yield savings accounts, and most rentals aren’t a short-term cash infusion. Private lenders like Lupo routinely see 12% on six-month loans or 15% on three-month deals, often backed by real estate.

Hands-off investment. Private lending is an attractive option for older investors who’ve paid their dues unclogging toilets, replacing water heaters, and dealing with tenants. They still want real-estate-style returns, but without the headaches. Private lending keeps them in the game without the stress of being landlords.

Quick turnaround. Real-estate investors love private lenders just as much. Speed is everything in the real estate game. Investor Mike Gorius told Business Insider he can close in eight days with private lenders compared with 30-plus days and a stack of paperwork when dealing with a bank (2).

Risks

Risk of default. If a borrower stops paying, you’re on the hook. Even though the deal is backed by real estate, there’s no guarantee you’ll recover your initial investment, especially if the borrower bails mid-project. You may also have to manage the foreclosure process.

Property-value risk. Private money loans may be secured by a house or building, but if values dip, the collateral may not cover what’s owed. In markets where After Repair Values (ARV)s get overly rosy, lenders can get left holding the bag.

Liquidity and timing headaches. These deals are short-term, which means the borrower has to repay or refinance fast. If the market slows or a project hits delays, your money is stuck. And you can’t just sell your position since once that cash is in, it’s basically locked up. (3)

How to get started

If you think private lending is for you, you can get started using this roadmap:

Build capital first. Private lending requires cash, and while there’s no minimum, you’re looking at an average of between $50,000 and $250,000. (4)

Whether it’s through house hacking, a rental or two, side hustles, dividend investing, or just saving aggressively, you’ll need to have some money ready to lend to get into the game.

Get involved in your local real-estate scene. Relationships are key. The more investors you meet, the more deals you’ll be exposed to. Attend meetups, local investor events, and flip/wholesaler gatherings.

Start small, scale smart. Most savvy private lenders grow by starting with a small loan, getting a good experience under their belt, lending again to repeat borrowers, and gradually levelling up to bigger deals. (5)

That said, if you want property exposure without the property headaches, private lending isn’t the only option to explore: