As we’ve mentioned before, the concept of private money lending isn’t a difficult one. However, actually doing it can be highly involved and tricky at times. Learning how to utilize private money lending takes time, but once you fully understand it, it becomes very easy to see just why private money lending and trust deed investing is such a safe, consistent, valuable tool in any investment portfolio.

If you’ve made the decision to start utilizing private money loans as an investment vehicle, the next decision that you need to make is how you’re going to invest. We recommend that no matter how you choose to invest that you don’t go it alone. Like MMG Capital, there are many private money lending firms that you can invest with until a time when you feel like it’s appropriate to venture out on your own. However, if you’re not even planning on making a career out of private money lending, these firms can be an extremely valuable resource to you for years to come by providing private money lending information and opportunities for you to participate in.

These are the different structures that you will encounter when you look for private money investment providers:

Buy Existing Loans

Some private money lenders are actually private money brokers. Rather than making private money loans, they negotiate private money transactions with borrowers and then attempt to sell those loans to investors. In some cases brokers never actually make the loan. Instead, they hand the loan off to you to fund yourself. In other cases, the broker will make the loan and then “sell you the paper,” stepping out of the way so that you can step into the shoes of the lender. You can also buy existing loans from lenders that they need to get off of their books. These can be performing or non-performing loans. In addition, you can buy pools of loans which are typically distressed.

            Pros

There is less work to do and less uncertainly when you purchase a note that has already been originated. There may already be a history of the borrower making payments. There also may be an opportunity to purchase notes at a discount which can increase an investor’s yield.

            Cons

You run the risk that the existing loan was not originated or serviced properly. You also run the risk that a non-performing loan will require foreclosure, which can be an extremely lengthy, complicated and costly process – especially in certain states. You can perform due diligence to mitigate these risks, but your information is only going to be as good as the broker or current lender can provide you.

Invest in a Mortgage Pool

Some private money lenders will raise private investor funds in a single entity with the purpose of lending that money. The lender, or “manager,” makes all of the investment decisions and funds loans from the pool of investment capital. The aggregate return from all of the loans made by the pool are shared by the investors in proportion to the amount of capital that they contributed.

            Pros

Your investment is diversified among a wide variety of loans and you don’t have to make any individuals investing decisions because all decisions are made by the pool’s manager.

            Cons

By the same taken, you don’t get to make any of your own investing decisions and have to rely on a manager to properly secure your capital. In the event that the manager becomes insolvent or fails to manage the pool properly, you may be left with dozens or even hundreds of loans that have to be foreclosed on in order to liquidate your investment.

Fractionalized Loans

When a loan is fractionalized, multiple investors participate in a single loan and their ownership of the loan is recorded by a security instrument. For instance, 10 investors could each contribute $10,000 to make a $100,000 loan. All returns and rights of these investors are tied to a single note. In most cases, fractional note investors will create a single entity for the purpose of managing the note and designate a manager to make certain decisions.

            Pros

Investors can diversify by investing in parts of multiple notes as opposed to putting all of their eggs in one basket.

            Cons

Every investor that participates in the note must agree on foreclosure procedures and other important investing decisions if a manager is not given absolute control over. One investor that is in disagreement can cause significant problems to the group as a whole.