Private Lender Investing

Would you like to improve your financial position? Are you happy with your investment vehicles? There are many to choose from and most are well known but I would like to offer private lending for those investors who care to consider alternatives.

Private lending on real estate offers a relatively safe return on your money and the combination of safety and profit makes it the one of the best.

What makes a good investment for you? You certainly want to know if your money is somewhat safe and if the rate of return will be favorable. While no investment is 100% guaranteed safe, this vehicle is about as close as they come. If anyone guarantees you a totally safe return on an investment head for the door.

You want to know how much of your money will be required and what happens if an emergency comes up and you need to get your hands on your investment?

When you invest in the stock market or mutual funds you lose money if the bottom falls out, at least until you can sell. Precious metals right now are a great investment but you are still at the mercy of the market. You can sell and stop the bleeding but like stocks, any choice you make could be the one that loses money. Do you hold on and hope it goes up or sell and take a small loss to avoid the possibility of a larger loss?

As a private lender partner you have more protection and a firm idea of the return. Two legal instruments protect you. The first is a promissory note or a promise to pay, that your borrower signs and agrees to repay by the terms set forth. The other is a paper called a mortgage or trust deed depending on the state you are in.

The Deed of Trust is the document that gives the lender (you) the right to take the property back through the legal process of foreclosure. This form is filed as public record and tells the world that you have an interest in the property and title cannot be transferred without your knowledge and consent.

Banks made a huge mistake by loaning 95-100% of the value of the property, and in many cases, more! These high risk, sub-prime loans caused problems in the economy.

Private lenders don't take those risks because their money is protected by both the lien and high equity (30% or more). You are lending your money based on the equity in the house, a protection you wouldn't have with some other investments.

Some additional safety comes in the form of insurance. Title insurance tells the lender that the title is clear of other encumbrances. As first lien holder you would be paid before others. The borrower pays for this insurance to protect you against any other claims against the property. The title insurance company researches property's history to insure the title is clear and all previous liens have been cleared.

Conventional lenders always require property protection with hazard insurance in case of fire or other calamity. The investor will do the same for private money partners. With the lender named as the loss payee they are assured of getting their money back if the worst happens. In the event of loss, it is the lender that gets paid first.

How about the return? The question of yield opens the way for a lot of questions that have an effect on return, so let's go over them briefly.

Some people may be satisfied with CD rate of return but I believe most people are more interested in taking an active interest in seeing that their investment produces the best, secured return possible.

As the current 5 year CD rate is from  % to  % (source   ) and not expected to increase notably in the near future and sometimes that requires and extended dollar and time commitment.

If rate of inflation continues to climb as the government prints more and more money which they are doing as of this writing, when the rate of inflation is 6% and you are holding CDs at 3% you're losing money.

Can the government turn things around and control inflation? Of course they can. Will they? Who knows? My suggestion is to take charge of your own life so you don't have to be a prisoner to the government's agenda.

This is where private lending and its benefit for you, comes in. You can have greater control over your resources with lending than you would with other investment modes.

The length of time you choose to keep your money invested depends on your vehicle. For CDs, the bank sets the rate of return and time held. Shorter terms yield lower returns and longer ones offer higher. In private lenders some of the details are pre-established such as the overall program but the lender has total control over other aspects of the deal such as the amount of time their money is tied up. When you agree to become a lender that is one of the first things determined. If you decide you only want short term investments of a year or less, you establish that up front. Other items are also set by the lender such as type of property, use of the funds and repayment method. What works for you?

I want to reiterate that the lender makes most of these decisions before they even provide funding for any project.

Liquidity is important in making any investment decision. Can you access you money if an emergency situation arises. Normally real estate lending is not the most liquid vehicle to be in because of the time required for marketing the asset. That does not mean you cannot get you money out if necessary.

Many investments like stocks, mutual funds, bonds or money market funds (basically a savings account) are completely liquid if you need the money, but you may take a loss if you come up against an emergency situation in a down market.

Most borrowers do whatever they can to help alleviate problems for their lenders. It may require selling the property sooner than anticipated, refinancing or maybe even bringing in another private lender to take over your position. But all effort is made to help.

When you lend money to an investor the length of time he has your funds will be the determining factor of how the repayment would be structured. If you money is to be held for any period over 24 months that would almost always dictate a monthly or quarterly payment of principal and interest or interest only.

On the other hand if the hold time is less than 24 months, accrual of interest to be paid lump sum with principal is an option many lenders want.

All-in-all private lending has numerous benefits and few drawbacks. I hope this article has helped arouse your interest in private lending as a great addition to your portfolio. If you want an investment that is secured, insured, adaptable to your goals and which can provide cash flow with a high yield, private lending is one of the best investment vehicles you will find. 

Virg Collins  

For more information, please visit: High Yield Money Market