In uncertain financial times such as during rolling lockdowns and when parts of the economy are shut down finding financial support can be difficult for individuals, entrprenuers, and small business owners.
Real Estate Investors in particular find themselves with banks no longer loaning to them. Resulting in them turning to private money lender to fund their real estate deals.
When a private individual or small business lends their own personal capital to another investor or investment company for investing objectives, this is known as private money lending. In real estate, it’s an alternative to using a regular bank or lending institution to finance an investment property.
For someone wanting a higher return on their money, there is no better time to become a lender to real estate investors and others in need. Those experience real estate investors, who have cash to buy are able to buy real estate property 40% to 60% of their original value. The private lender becomes the mortgage holder, on properties.
Private Lending Through Your IRA
Many people have started to leverage their IRAs, Self Directed IRAs, and Roth IRAs to provide these private money loans to real estate investors. While some will use their IRAs to invest in real estate themselves, others have chosen to leave the work to the expert real estate investors, while they provide the financing in the form of private money loans.
For example, a private lender can charge 6% to 8%, interest only, on a private money loan to a real estate investor.
This loan is secured by the property being used as collateral and the real estate investor makes monthly payments on the loan to the lender until the property is sold or refinanced by another lender. If the loan goes into default, the private lender’s exposure on the loan is only 65-75% of the value of the property.
Most of the time the property is already discounted having been acquired via foreclosure or short sale. This means the private money lender can sell the property if the borrower defaults and can expect a spread of between 25-35% once the property is sold. Using an IRA is a clever way to pull out this cash and use it to lend to savvy real estate investors on a tax-deferred basis.
And with annual returns hovering around 8%, private money lenders have discovered a way to diversify their retirement portfolios and take advantage of discounted real estate sales.
Top Benefits Of Private Money Loans
Private money lenders can be found in almost every state in the US, looking for a way to make a higher rate of return on their investments. With that comes the risk that a private money loan may not be re-paid on time or at all without legal action.
However, in the case of a real estate transaction, the lender can need a deed to the property in their name as well as insurance on the property, similar to what a bank lending money would require as collateral to help ensure they are repaid in the event of a loan default or property catastrophe. In that case the lender gets the property and can sell it to recoup their investment. In many circumstances, private money is supplied to clients because the banks believe the risk is too high.
Despite the risks involved, however, private money lending represents an opportunity for borrowers to obtain the financing that they need to purchase homes, and the flexible lending terms necessary to facilitate the process of rehabbing, or fixing and flipping properties for investment purposes.
Many private money investors specialize in providing loans to individuals where property condition or the purchase transaction is deemed to be high risk by banks.
Who Can Become a Private Money Lender?
Being a Private Money Lender is a perfect opprtunity for individuals who:
- Have money sitting around or a surplus of cash in a savings account earning little to no interest?
- Have a substantial retirement savings account, such as an individual retirement account (IRA) or 401(k), that they wish to increase over time.
- Are seeking for a way to generate passive income or engage in the real estate market without having to actively work in it.
How To Become a Private Money Lender?
- Make a decision about where the money will come from.
- Look for a good investment opportunity.
- Perform due diligence on the investment as well as the borrower.
- Determine the terms of the loan.
- Complete all of the necessary legal paperwork.
For both parties involved, private money lending might be an appealing option. Investors looking for alternative financing sources can benefit from a faster approval procedure and more funding options. Those who lend, on the other hand, may discover that they have exclusive access to potential investments and negotiations.
Private financing is a feasible alternative for extending your financial portfolio and building wealth regardless of which side of the transaction you are on.