5 Ways to Scale Your Private Lending Practice

The first time I funded a private loan, I knew I was hooked. I loved the art of underwriting the deal, I loved that it was backed by real estate (something I knew more about than the stock market) and I loved how little I needed to actually do after my loan funded in order for my “mailbox money” to appear each month.

Little did I know I was in for the adventure of a lifetime. I had absolutely no idea the need for private lending opportunities was so massive. Truthfully, I didn’t even know what private or hard money was until my boyfriend at the time (now my husband and business partner) told me about it. The supply and demand was huge and our ability to quickly establish ourselves in the Greater Seattle market was easier than expected. But with success comes more obligation. And, of course, the need for more capital.

Not wanting to turn away good deals which needed private funding, we started organically taking on new investors who wanted to lend their own money safely as we had done. But just as more capital from our friends and professional acquaintances came in, we quickly deployed it and the loan dragon was hungry again.

Our story isn’t unlike other private lenders who get the taste of passive income and are in a position to scale because of network demand for both private loans and secure places to invest passively. But some private lenders, like myself, don’t exactly have a plan for growth. I sure didn’t. I had to learn the hard way, taking on new business without a detailed strategy or any systems in place. This is a good problem to have but if you can plan ahead before your funnel gets too big, you’ll be poised for a smoother journey.

If you are interested in learning how to scale your private lending into an active business, here are some ways (in descending order from easiest to deploy to most difficult) to grow in a systematic and calculated way so you don’t get too stressed out along the way.

Use OPM to supplement your borrower demand

The most obvious way to grow your private lending practice would be to start with other people’s money, or OPM, as Warren Buffet calls it. Through word of mouth, rather than cheesy sales pitches and advertising, we were able to slowly grow our investor circle by funding good deals in individual trust deeds (also known as whole notes, which provide a seemingly safer investment option to pooling money into a mortgage fund) and providing white glove service. Our reputation started to proceed us and it was never difficult to get new investors to lend their money through us. In fact, we have never once in 7 years advertised for investors.

Pro Tip: Grow your investor base slowly and methodically, making sure you can care for each one of them as if they’re the only one. This will ensure referral-based leads continue to come to you. Bring on too many investors without the deal flow and it can hurt you more than help when you have investors on the bench waiting to deploy funds immediately.

Broker your loan fallout to larger lenders

One of the best ways to scale beyond your own private funds is through brokering. I like this strategy a lot for new private lenders because there is absolutely no overhead involved. Any deals that come your way which don’t fit your lending criteria are likely good candidates for another asset-based lender. Get to know the local hard money lenders in your market and become familiar with their lending guidelines and processes so you can easily pitch deals over the fence for a small broker fee. We still employ this strategy for our fallout; either loans that are too large for us to take on or too risky for my investors to fund.

Pro Tip: Start a competitive intelligence matrix in excel or another format where you can track your local and regional lender competitors’ lending programs, rates and terms. This will help you determine which lender would be the right fit for any loan which you are not able to fund. We track about a dozen lenders and their rates, terms, processing fees, extension or draw fees, and other costs. We also track qualitative data like what asset classes each lender will fund, whether or not 3rd party appraisals, credit checks, income or bank verification is required, etc.

Start a private money fund

Another way to scale that is successful for a lot of small and growing private lenders is to start a fund. In short, it’s a business structure allowing investor funds to be pooled for the purpose of funding private money loans (and potentially other real estate investments). There are several flavors of funds to choose from (Reg A, Reg D, and Reg CF, just to name a few) which all come with pros and cons depending on what your business needs and allows. While this can be a strong way to grow your business, the set-up costs are not cheap and the administration and management of a fund requires significant education and support. Even after you get the fund set up, finding investors to place into your fund and doing so legally and in compliance with securities regulations is no small feat. And making sure you have a strategy in place for capital deployment is a giant responsibility not fit for novices in the business finance arena.

Pro Tip: The American Association of Private Lenders (AAPL) has a Certified Fund Manager (CFM) course offered annually in person and on-demand for a small cost. This full day course will provide you with the 100-level information you need to determine if launching a fund is right for you.

Sell your loans on the secondary market as a correspondent lender

All of the scale strategies mentioned thus far require little set up overhead (except for a fund) and are a relatively easy way to grow slowly. But eventually you will need more capital sources if your pipeline continues to grow. One way to achieve this would be to sell your loans on what’s commonly referred to as the secondary market. This is the act of assigning your loan over to a capital partner wanting to earn the interest rates you’ve garnered on a specific loan or loan tape (multiple loans). This can help free up your own capital or money tied up in loans from your fund allowing you fund new deals and potentially keep a portion of the interest as residual monthly income.

Pro Tip: Most lenders who want to purchase your loans will likely have pre-determined and very specific credit guidelines and underwriting requirements. For example, if you currently don’t do 3rd party appraisals or credit checks now, as I don’t require of my borrowers, you will likely need to find vendors to support these needs and implement them into your loan processing steps or you run the risk of not being able to sell the loan to a capital partner.

Apply for a warehouse line of credit

You need to be at a fairly significant volume before this option comes into play. Most banks or institutions offering such a line will need to see a high transaction volume in qualifying loans and assets. For example, my company does over 50% of it’s volume in junior lien loans. I don’t think I’ve heard of a single capital partner who’d be willing to look at these loans when taking our loan volume into consideration. We also directly place our trust deed investors into whole note private loans making us the de facto broker. Without the loan being named in our company entity or ourselves individually, these loans also do not count for balance sheet consideration of a warehouse line. Aside from experience required to obtain a line, there are costs associated with this type of capital, too.

Pro Tip: Make sure you have a very solid and continuous deal flow to accommodate the costs associated with having a warehouse line. As with a private money fund, there are monthly and annual costs associated with using this type of capital in your private money lending strategy. If you don’t have enough of a pipeline built up, you could quickly land yourself in the red.

There is so much more to be said about how to scale and additional considerations to understand before picking any one strategy to move forward. One way to learn more about growing your private lending business or just staying on top of your small practice you’ve already built, would be to join the AAPL as a member. This organization provides a ton of resources and information to private lenders of all shapes and sizes. After being in the industry for 7 years and growing exponentially in that period, I’m still learning and benefiting from the networking opportunities.

I’d love to hear about your journey as a private lender; how you started, where you want to be as a private lender in the future, and what challenges and successes you’ve had along the way. Drop me a comment below or email me at beth@flynnfamilylending.com to tell me more about yourself and let’s start the conversation!

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