As we draw down to some of the final questions in our private lending FAQ series, you will very likely want to address the use of retirement funds as a source of your private lender’s money.
The question we answer is: Can I use my retirement accounts to do this?
The answer:
It is very likely that you can use your retirement account to do private lending.
While I am not an expert at retirement accounts, I do have contacts with third party faciliatators that are experts at using retirement accounts to make private money loans and I would be happy to refer you to them where they can discuss your particular retirement account and assist you with setting it up to do private money loans.
With the tax benefits offered by some retirement accounts, it makes putting private money loans in your retirement account an extremely attractive investment.
Until my next post,
James
Here’s another question that you will probably want to answer for your own private lender program. This is how I answer it from my own private lending FAQs.
The question is: How do I know the value of the property I am lending on? And my answer is:
First, if you want an independent third party certified appraiser to appraise the property, we can definitely provide that to you upon request. This is the same type of analysis that banks will typically do to verify value before they lend.
We can also provide you with recent comparable sales of other properties that are similar to that property and that are near that property. This can give you a very accurate idea of what the property is worth after all the repairs have been completed.
Should the property need repairs (and many do), we can provide you with a list of the repairs we plan to do on the property and what we expect those repairs to cost.
If there is anything I can do to help you feel comfortable about knowing the value of the property that is securing the loan you are making, please do let me know.
Until my next post,
James
Here is an extremely important question to address for your potential private money lenders. It is part of the private lending FAQs that I put together to address questions about our private lending program.
The question is: Is private lending really a safe investment?
Here is my answer:
There is risk with every investment from Certificates of Deposit to Stocks and including Private Lending.
There are real risks with private lending that we do insure against. As an example, if there was a fire (or other natural disaster covered by insurance) and the property was destroyed, we do purchase insurance for that.
Personally, I feel that lending money secured by real estate that is worth more than the loan itself is a safe investment since you could sell the property (like a bank would do with security on their investment). I feel that the lower the amount of the loan compared to the value of the property, the better secured the loan is and the safer it is as an investment.
As with everything in life, there is risk of the economic world completely falling apart and the value of real estate going to zero. I do not feel that it is likely.
Until my next post,
James
Today, we address an important question from the private lending FAQs that you will likely want to prepare as you put together your own private money program for your own real estate investing.
The question is: What is the minimum I can invest? Here is my answer to it:
Since we do not pool money from multiple private lenders together to do our deals, the deal itself and how much is needed to fund the deal will often dictate how much the minimum you can invest is.
With that being said, the minimum you might expect is probably around $10,000 as few deals that we would do would require less than that.
Until my next post,
James
This is the continuation of the frequently asked questions for working with a private lender in your real estate investing business. This particular question that we answer is: What type of interest rate do you pay?
Here is our answer:
We pay between 6% and 12% on money we borrow secured against real estate.
Why such a large range? Our most common loans are loans where we offer between 6% and 9%. These loans are secured by a first mortgage or deed of trust against the property. These loans typically have low loan to value ratios.
From time to time, we may also have other loans where we are looking to borrow money with a second mortgage on a property and for these we offer between 9% and 12%. These loans typically have higher loan to value ratios.
Until my next post,
James
The following is the frequently asked question answer to: Why would I consider lending you money to buy properties?
In our current financial markets you have several options for investing your capital to get a fair return and lending money secured by real estate may be an extremely competitive way to earn a return on your investment.
Let’s consider some alternatives and see how they compare to private lending.
Certificates of Deposit
Maybe you have considered investing in Certificates of Deposit (also known as CDs). The overwhelming majority of people would consider CDs an extremely safe investment with a very, very high probability of preserving your initial capital investment and relatively low return on your investment. CDs are also usually relatively liquid. This means that if you really needed access to the money you had in a CD, usually for a nominal penalty, you could access your capital earlier than the agreed upon investment duration.
Bonds
Or, perhaps you have thought about investing in Bonds. Each bond’s return, risk and likelihood of preserving your initial capital investment is different. Typically, bonds offering higher rates of return do so because they are considered to be a higher risk. While many people would consider bonds to have a relatively high liklihood of returning your full capitial investment, it is possible to lose money investing in bonds.
Stocks
Many investors are familiar with investing in Stocks (usually via the Stock Market). Unfortunately, history has shown the while the stock market as a whole has historically had an upward trend and there have been periods of amazingly high returns, there have been periods of extreme and significant losses of capital and sub par performance lasting many years. During periods where the stock market is going up, many people believe that the stock market is the place to invest. Stocks, as history has repeatedly shown, can also drop to fractions of their intitial value and even go to zero leaving you with a loss of capital.
Private Loans
Other investors have decided to lend money secured by local real estate as a Private Lender. In many ways, private lenders are acting just like a bank would except instead of agressively lending with very high loan to values, they insist on lending a smaller amount in comparison to the value of the property that secures the loan.
Just like most Certificates of Deposit, the notes that describe what you earn with Private Loans usually have a fixed return and a fixed duration. This is very different from investing in a stock where the return is dependent on the performance of the business (good or bad) and the management of the business.
How Banks Lend Money and Earn A Profit
Banks will often pay you a low return for depositing money with them and then turn around and lend your money out at a higher rate so their other customers can buy real estate. The bank makes a profit by paying you a small return and then lending money at a higher rate. With Private Loans you can become the direct lender of your money and earn the higher return directly.
Bad Bank Policy
Some banks were lending more than the value of the property they were lending against (loans with greater than 100% Loan To Value) and ran into significant problems with that strategy. Traditionally, banks would lend 80% and sometimes 90% of the value of the property knowing that in a worst case scenario they could sell the property that secured the loan.
As a Private Lender you act like the bank and get the same paperwork that a bank gets: a note that describes the loan and a security instrument that ties the loan to a specific piece of real estate. Plus, just like the bank, you are named as a lender beneficiary on the insurance policy which helps to protect your investment from things like fires and other natural disasters covered by the insurance policy.
Just like a bank, the paperwork and the actual distribution of the loan is handled by a third party: usually a title company or escrow company (depending on what is customary in that real estate market).
Until my next post,
James
