Private Loans versus Joint Ventures – which is better?

To be quite honest, we like both. 

Private lending has to be one of the best examples of a win/win.

We, as investors, are more than happy to pay a solid interest rate for capital that we can use for purchases and renovations of rental properties.

This strategy allows our lending partners to put their money to work. Most of our lenders either give us their savings or funds from a HELOC on which they pay around 3% interest.  

Unless we are flipping, wholesaling, or using another strategy that doesn’t require qualifying for a mortgage, we have two main options to continue buying real estate (there are others when buying bigger buildings but let’s keep things simple).  We either borrow money privately and use that capital to qualify for the purchase, or we bring in a joint venture partner, have them qualify for the mortgage, and split the profit at an agreed percentage rate (ie. 50/50%).

Discussions about the 2 options typically start when someone reaches out, shows interest, and asks how they can get involved.

As a next step, I share info about these options with them and lay things out as simply as I can. This includes presenting pros and cons of both options. You need to understand the goals of your lender/partner and ensure they align with your goals.

Option 1 – Lend us money privately. You will earn x % on your money, the length of the loan is flexible, the way we make payments to you is flexible. If I make 30% ROI or 50% ROI or 100% ROI on the project, you still just earn your agreed to interest rate.

Option 2 – We buy a property together (Joint Venture). We share in the profits of the venture. If the ROI is 30%, we each get 15% of that (if it is a 50/50 JV), etc. In the future, we can both agree to sell the property, or one of us buys out the other partner at the value of the property at that time.

In both cases/options, we have agreements that our lawyer has prepared for us and we encourage any lenders/partners to have their lawyer review these agreements as well. Doing due diligence up front will save you potential issues down the road.

Many active real estate investors prefer to seek out private loans so that they can own as many properties as possible on their own, 100%, with no partners to report to. Other investors have scaled to own many properties with JV partners. Both options work very well.

What questions do you have about private lending? Have you thought about lending your money before?