As a private money investor, there is a large potential for good returns with minimal risks. Private lending typically has higher returns than other forms of investment including stocks, bonds and mutual funds. But success in private lending requires that you take the right steps to work with the right borrower, protect yourself against inherent risks and get maximum returns from your investment. The following tips will guide you through the process of becoming a private money investor, and a successful one at that.
The Lending Process
The most important part of private lending is to find a good borrower. After all, this is the person behind your investment. There are several important things to remember before you sign the loan away.
1. Protect yourself first. Things go wrong and preparing yourself for the worst is a necessity. Firstly, consider whether you comfortably loan that money away for the length of the loan period. If you think you will need the money sooner, it is better to avoid lending. If you decide to go ahead and lend, ensure that you are left with enough liquidity to cater for any emergencies.
2. Determine what kind of borrower you want. Some borrowers are property flippers. They want money to renovate and then sell a property. Others are looking to renovate and rent. There are also developers who buy land to build new property. Finally, there are commercial borrowers who turn to private money when traditional banks are unavailable to help them. Determine which borrower you are most comfortable with.
3. Do a thorough valuation of the collateral. You cannot determine the value of the collateral at a glance. Make a physical visit to evaluate it. Use different valuation sources including comparisons with similar properties. The collateral is your sole loan security. The last thing you want, in the event that the borrower defaults, is to find out that is worth much less than the value stated on paper.
4. Check the borrower’s credit. The credit rating of a borrower will indicate his or her ability to repay the loan in full and on time. It is especially important in providing the confidence that regular payments will be made. Having collateral is a good start; a good credit rating in additional to it is a huge bonus and a better guarantee for full repayment.
Other important things to consider include a private lender insurance, title insurance and fire and liability insurance for the properly. All these are to ensure that you get your money back in case of a loss of property or when the borrower defaults on payments.
Another very important aspect of private lending is documentation. Every little piece of agreement you have with the borrower should appear in written form. This protects all parties throughout the deal. Find a good lawyer who is experienced in private lending to help you through the process of full documentation, ensuring that all laws and regulations are followed.
Before lending your money, you have to agree on a structured repayment plan. Unlike traditional financial institutions, private lending allows for a wider variety of repayment options. So explore your choices until you can agree on one that is ideal for both parties. You may decide to go with the usual monthly payments. Alternatively, you can ask for an interest-only yearly payment where the borrower makes payments only for the loan’s interest. At the end of an agreed period, a one-off payment for the principal amount is made. Still, you might opt for one full payment (interest plus principle) made after the property is sold. This often works best when you are dealing with flippers.
The Benefits of Private Lending
Getting into private lending has its risks. But the rewards are much bigger than anywhere else and with some diligence, you can keep the risks at a minimum. The hustles associated with private lending are few. You deal directly with the borrower and do not have to bother yourself with property buyers, tenants or inspectors. Private lending also comes with a higher level of flexibility. Essentially, both parties set the terms as they see fit. Bank loans do not provide such flexibility.
One thing you can be sure of is that there will never be a shortage of borrowers. The work will be in deciding which borrowers to go with. Hopefully, the above tips will prove helpful.