Let's talk about how to become a private lender with no money in the bank.

Before we get started, here's a video I made on six steps I think are crucial to making and not LOSING money as a private lender.

If you want to watch it from YouTube instead, click this link: 

With that out of the way, let's be clear: there's a lot of people that want to be private lenders that think they need to have the cash in the bank to lend, and that's not the case.

Note: Get guidance from an attorney and your financial adviser before implementing any of these strategies. The information I'm sharing today is meant to simply give you ideas that might be able to help you lend money, even if you don't have the cash in the bank. So let's get to it.

A self-directed IRA is a commonly-used tool to invest in real estate.
Self-directed IRA's are commonly-used to invest in real estate.


Related: How to Make Money by Lending Money for Real Estate Flips


Retirement Account

Self-Directed IRA's (SDIRA) allow you to invest in quite a few things, including real estate.

The downside (or good side, depending on your perspective) to SDIRA's, is that the funds, including your profits, have to go back into your IRA once you get paid from the borrower.

Another good thing, is that the money you use, as well as the profits you make from the money, are tax-deferred, so there aren't any penalties for using your IRA money to invest.


Pitch to People that Might Be Looking for Better Investments

Here's an idea. Learn all you can about the private lending industry.

Then position yourself as an expert in your geographical area on the topic of private lending.

From there, you could purchase lists that give you the contact information of people that live close to you that meet specific financial criteria.

How to Become a Private Lender With No Money in the Bank house

Introduce yourself.

Most of them probably won't be interested (at least right away), but that's fine.

That would just give you more time to focus on those that are interested.

Next, you could talk to them about helping them get higher returns on their money than they can get from most other securities, by becoming private investors for real estate deals.

At that point, you could then leverage their money to lend it out to real estate investors that you've screened and confirmed are trustworthy and know what they're doing.


Caution: If you're going to approach people about an opportunity like this, you want to make sure they meet the criteria required to be considered an "accredited investor" by the SEC.  Also, make sure you speak to a CPA and an attorney before you decide to do this.



Let's say your investor(s) invested $100,000, and the borrower (the real estate investor) agreed to pay 15% interest.

As a reward for the role you played in the transaction, you got four percent, allowing the money investors to earn the remaining 11%.

Warning: Again, if you decide to do this, be sure to seek the help of a professional, such as an SEC attorney, that can help you navigate SEC guidelines when it comes to providing investment opportunities.  

Next: More Ideas for Raising Funds for Lending

Become a Bank

I know it might sound ridiculous or absurd, but you really can create your own bank.

You can legally create your own bank.  (Image: Casey Serin/Flickr)
You can legally create your own bank. (Image: Casey Serin/Flickr)

This method involves setting up your own bank that operates just like the bank where your savings or checking account sits.

Just like a traditional bank, you get to make money lending other people's money.

In a nutshell, when people deposit money, you pay them interest for allowing you to use their money. You make your money by lending the money they lend to you.



Let's say someone deposited $20,000 in your "bank."

In-exchange, you'd pay them, say, 5%.

By law, you only have to keep 3%-to-10% of the money you lend out.  This is called a bank reserve.

So that means that you could lend $600,000 from the $20,000 they deposited.

So let's look at your profits.

If you loaned $600,000 out at 15%, you've just made $90,000. You only paid $1200 for that money, so your net profit would be $90,000 - $1200 = $88,800.

I know, it seems criminal, but that's exactly what banks do with the money we deposit in their banks every single day.

And get this.  Just like  a traditional bank, for a relatively small fee, you can pay the FDIC to insure the $20,000 they deposited.


How is this Legal?
It's legal, because the U.S. deregulated interest rates on bank loans back in 1978 via the "Marquette" Supreme Court decision.

In case you're interested, here's some more info on how you can start your own bank.


Peer-to-Peer Lenders

There are websites out there, like Prosper and Lending Club that allow you to get loans from other people.

The U.S. Supreme Court (Image: katmere/Flickr)
The U.S. Supreme Court (Image: katmere/Flickr)

So let's say you were able to get a loan for $50,000, at an 8% interest rate.

You could then take that money and lend it out to a real estate investor for 15%. You'd make the difference.

In this example, that would be a $3500 profit for you:

$7500 - $4000 = $3500

Of course, the lender(s) on the peer-to-peer site would need to be ok with you taking six months or more to give them their money and returns back, but in theory, it could work.

So those are some ideas on how you can become a private lender with no money.



How did you get introduced to the concept of lending money privately?  Friend?  Family?  Some seminar?  Just curious.  Leave a comment below!