WEALTH IN PRIVATE LENDING. WHAT YOU NEED TO KNOW. People are starting to realize that the world of private lending (also known as lending with hard cash) is getting much better returns than investing with your bank or even a financial advisor for that matter. Investing in property, in fact, greatly minimizes your risk to lose money and gives you recourse in the event that things do go south. Private lending requires more than just trusting your financial advisor or bank representative to get you the greatest return. There are specific things you need to know. Once you master this type of investment, you can make extremely great and guaranteed returns which generate excellent monthly income and a steady cash flow. WHAT IS INVOLVED IN PRIVATE LENDING At the core of it all, investing in hard money mortgages is very much like investing your money into GICs, mutual funds, RSPs etc. For example, if you lend someone $100,000.00 at 8%, calculated monthly, not in advance, interest only, your monthly revenue would be $666.66 or $8,000.00 a year. Most private lenders, if not all, charge a lender fee at the time the mortgage commitment is signed which could be between 1% and 5% depending on the transaction itself. And if the borrower does not default, the loan will pay off at or before maturity and the original principal will be returned. The major difference between investing into hard money mortgages and GICs and mutual funds, is the fact when your money is not returned to you by way of default (the borrower doesnt pay), there is a recourse of action. You are in control. Here are some factors you should consider before lending out your money: Liquidity – Do not consider this type of investment should you require your money before the maturity date. Most private funds are subject to anywhere from a 6 month to 2 year term. Whatever term is agreed upon between you and the borrower, just be sure you do not require your money before that date. Collateral Valuation – The underlying collateral for a hard money loan is very important to the overall security of the transaction. Carefully evaluate the value of the collateral and use several sources to make your valuation. A common mantra among private lenders is to “drive the comps yourself.” That means do not just look at photos on an appraisal and assume you have an accurate value. Take the appraisal and get in your vehicle and drive to the subject property as well as each comparable and make the determination for yourself if you think the value is realistic. Consider multiple sources of value. In addition to an appraisal and driving the comps yourself, consider using an Automated Valuation Model or a Broker Price Opinion as well. Some properties are easier to comp than others. Do not invest in hard money loans without leaving yourself a cash cushion. Be conservative and leave yourself plenty of liquidity in your personal finances to handle unexpected circumstances. Title – Make sure you obtain title insurance which insures your lien position as a lender and offers fraud protection against forgery. Title insurance is not like homeowners insurance. If you suffer a loss with your homeowner policy, you submit the claim and get a quick reimbursement. Title insurance is an indemnity policy and as such you are reimbursed for a proven loss only and not the potential for a loss. The result may be that even though you will eventually lose money due to a title issue, you may not receive reimbursement for months, or even years later. Borrower Credit – Carefully reviewing the borrower’s credit application and capacity to make monthly payments is the key to a successful loan investment. Private money loans are often made based on the collateral, but the best loans are those that give equal weight to the borrower’s past credit track record and capacity to make payments and repay the loan when a balloon payment is due, or when the loan matures. Private Lender Insurance – You will need to make sure the property owner has appropriate fire and liability insurance in the amounts you desire as an investor. The insurance company must also be notified to include the investor as an additional insured on the policy so in the event of loss, the cheque is sent to you first. Documentation – Documenting the loan, creating the appropriate security documents and disclosures to the borrower is complicated and time consuming. Having a mortgage professional can help you through this process. I always advise my clients that investing in the mortgage business is an absolute MUST for financial gains. If you have any specific questions or would like to learn more, PM me.
Posted on: Sat, 27 Dec 2014 02:04:02 +0000
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