Beginner Mistakes in Private Lending—and How to Avoid Them

Beginner Mistakes in Private Lending—and How to Avoid Them

Private lending can be a powerful way to grow your wealth passively, but like any investment strategy, it comes with its own set of challenges—especially for beginners. Understanding common pitfalls can help you navigate the lending landscape more confidently and protect your capital from unnecessary risk.

Mistake #1: Skipping Due Diligence
New private lenders sometimes get swept up in the excitement of potential returns and fail to do their homework. Always vet the borrower thoroughly, assess the value of the collateral property, and confirm that your loan is properly secured—typically with a recorded mortgage or deed of trust.

Mistake #2: Underestimating Risk
Even with a secured loan, there’s always risk involved. What if the borrower defaults? What if the market value drops? Set realistic expectations and consider worst-case scenarios. Make sure the loan-to-value (LTV) ratio is conservative, ideally under 70%, to give yourself a safety buffer.

Mistake #3: Poor Documentation
Verbal agreements and informal arrangements won’t protect you. Ensure every deal is documented with a promissory note, mortgage or deed of trust, and a recorded lien. Use a title company or attorney to handle the transaction professionally.

Mistake #4: Ignoring Exit Strategy
Before funding a loan, understand how the borrower plans to repay you. Will they refinance, sell the property, or use rental income? If the exit strategy sounds vague or unrealistic, consider walking away.

Avoiding These Mistakes
Private lending can be simple and rewarding when done right. Partner with experienced investors, work with legal professionals, and stay conservative with your terms. By avoiding these beginner mistakes, you can enjoy consistent returns while supporting real estate projects and helping others succeed.

Would you like to know more about investing passively from your IRA?   Contact Alex at [email protected] or call 501-580-2598

What we’re up to…

Well… I’m not a licensed Realtor yet, but I’ve started working through an associate who is—and together we’ve listed two properties that are currently in foreclosure. As an investor, these particular deals didn’t make financial sense to purchase, so instead, we chose to list them for sale.

I’m excited to share that one of those listings is now under contract, and we’re actively working to get it closed.

While listing properties isn’t as profitable as buying them directly as investments, it gives us the chance to help more people, offer more solutions, and still earn a living doing meaningful work.

Would you like to know more about how to grow your retirement nest egg? Contact Alex at [email protected] or call 501-580-2598