HOW YOU CAN INVEST YOUR MONEY IN TODAY S MARKET THROUGH PRIVATE MONEY LENDING

Transcription

1 HOW YOU CAN INVEST YOUR MONEY IN TODAY S MARKET THROUGH PRIVATE MONEY LENDING

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3 Table Of Contents: 1. Introduction 2. What Is Private Money Lending 3. A Recent Case Study 4. Rules To Follow When Investing 5. Rules To Follow When Selecting A Borrower

4 Introduction: If you re not consistently getting a favorable return on your current investments such as your IRA, Savings Account, or other investments, you re about to learn an alternative way to invest your money in today s market. This method is very common and has been used successfully for years by investors who have learned how to utilize real estate to make favorable returns on their money. If you have funds to invest but are looking for a lower risk solution than the stock market and other traditional investments for your money, consider the world of private lending as an alternative investment tool. Private lending offers an alternative way to earn a favorable return on your investment and is backed by real estate, which, unlike investing in the stock market, is a tangible asset. The best part is you will most likely be involved when it comes to agreeing to the terms and interest, so you have some control over how your money is being invested. The first question is to whom would you be lending your money? Your borrowers are real estate investors who buy and sell real estate for a profit. Oftentimes, these properties are in need of repair before they can be sold to make a great profit. This is called rehabbing. Most rehabbers choose not to go with traditional lenders for various reasons. Instead, they choose to use private money from lenders like you who understand the real estate business and

5 can fund deals quickly. Because they need funds quickly and for, often, a short amount of time these rehabbers are more than happy to accept loans with interest rates and terms that favor the lender. This works out to your advantage because being a private lender allows you benefit from the tremendous opportunities that are available in the real estate market without leaving the comfort of your home. In this situation, you are positioned as the bank and they have all the big buildings for a reason. As a private lender, you are lending money just like a bank would, and your money is invested in a tangible asset. Typically, rehabbers borrow around 60-70% of the property s after repaired value to fix it up. The worst-case scenario if your borrower defaults on the loan would be you owning a deeply discounted house. Since you choose who borrows from you and you can decided whether or not to lend on a particular house, you have a good amount of control over where your money is going. Because you are only lending out a maximum of 70% loan to value ratio there is a good layer of equity to work with if you ever end up with a property that you need to sell. Most real estate investors only need to borrow funds for short periods of time to fix and resell or refinance. They do not need 30-year mortgages and, with banks tightening up their lending laws, it s much harder for real estate investors to use traditional banks for their real estate investing needs. Therefore, you re in a great position to lend your capital for short periods of time at favorable rates of return.

6 In fact, it s up to you to decide if you want to invest in a particular property. The only decision you really need to make is whether or not this is where you want to put your capital. You then agree to the terms with your borrower. To make sure this process is solid you re going to want to make sure an attorney, Title Company, or Escrow Company handles all the paperwork on your behalf as the closing agent. The good thing about this is traditionally you can have the borrower pay all the costs involved out of their proceeds. Never sign a check to the real estate investor yourself, make sure everything is handled through a professional third party. To further protect your investment you ll also want to make sure the real estate investor gets title insurance and property insurance with your name as the loss payee to protect your investment. After closing and providing the funds, the closing agent will send you all the paperwork including the mortgage or trust deed with you as the first position mortgage holder. This strategy of investing can also be used to earn a return for your retirement plan to grow taxdeferred or tax-free using a self directed IRA. As a private mortgage lender your money is working for you and growing in a way that most people don t know exist. This is a great time for you to take advantage of the growth in real estate investing by offering investors short-term loans and competitive rates, which yield you a nice return on your investment.

7 What is Private Money Lending? First off, let s start with some definitions. What is private money lending? Private money is a very common term used in reference to the act of lending money to a company or individual by a private person or organization. This is very useful to people and organizations that have nontraditional qualifying guidelines. There are risks associated with private money lending for both the lender and borrowers. There are also a lot less restrictions and qualification is frequently done with a conversation and a handshake between lender and borrower. Private funds are an age-old way to purchase real estate. It is very lucrative right now because single-family homes and investment properties are still quite low in price. A couple years ago, you would have to invest thousands of dollars in rentals just to make them cash flow. Now though, an REO, short sale, and many a motivated seller are available for those smart enough to see the opportunities. The hard part right now is being able to get a bank loan. Banks want to see at least 20% down and you have to have excellent credit, traditional employment, and no longer are there No Doc Loans for those people who are self-employed. Also if the property you want to purchase has any problems, like a torn carpet, FHA will not lend on it. You have to get a conventional loan, where the rates are typically higher, and more money is required to put down. For those of us that usually invest our money into the stock market, this time also opens up a golden opportunity to instead invest in real estate by being a private money lender. It is not nearly as difficult as it may seem on the surface. Think about the last month of your life. Have

8 you come into contact with someone who was thinking of buying a house, or talked about refinancing their mortgage? That is one of the best ways to find the properties and people you want to invest in. If you are someone who would never lend money to your friends and family, don t worry, because there are plenty of opportunities to invest and remain unknown to the borrower.

9 A Recent Case Study If you know today s current real estate market and lending situation you can probably guess the frustration, and heartache of buyers trying to conform to the bank s frequently unusual and confusing list of rules and regulations. Here s a perfect example. Let s call our buyer Carol. Carol is an excellent buyer. She has worked at the same job for 10 years and has been in the same field for over 20 years. When she went to Bank of America, who is stringent on their guidelines, she was an instant approval. Unfortunately, the house was not. It was built in 1947 and was lacking a crawl space and vapor barrier underneath it, along with many other small easy fixes in order to qualify for a loan. It was the only house that she could afford in the town where she grew up. Carol was devastated to learn that she would not be approved for a loan because of the minor issues with the house. Just about this same time, another couple sold their huge 65-acre property to downsize into a smaller residential home. They had made some money on the deal and wanted to invest it. They arranged to tour the home that Carol wanted, and agreed that it was a good property and a very good investment. They knew that if they invested $90,000 that $70,000 would go toward the purchase of the

10 property, and $20,000 would go toward repairing the property up to bank standards. They agreed to an interest rate, payment, and terms that made both parties happy. Six months later Carol completed the required work and is enjoying a wonderful home. She was smart and made the changes before she moved in. Now the house is completely ready to refinance into a traditional loan. Carol improved the neighborhood by saving an older home from being demolished, was able to move into the home that she wanted, and her investors are making a good return on their investment. This situation is a win for everyone! Now, you re probably wondering what the worst-case scenario is when it comes to being a private lender. The worst case would be that the borrower stops paying the mortgage and you are stuck with a property that you don t want and now have to maintain. The good news is, most borrowers come into the deal with some money invested. When you are loaning on these properties, keep the loan to value in your favor. This will allow you to hire an agent to take care of selling the property if necessary. It is typical in today s market to loan anywhere between 65-75% of loan to value depending on the area, property type, and market conditions. For instance, a home that is currently on the market for $100,000 may be worth $120,000 but the property is an REO and requires new paint, new flooring and needs a general clean up. The cost of paint, flooring and cleaning comes to $1,200. So if you pay $100,000 for the property and invest $1200 for repairs, you will have $18,800 in equity in that property. You could put the house on the market for $120,000, which gives you $18,800 to pay a real estate agent and cover utilities.

11 And because you improved the property, your agent may recommend raising the price to reflect the improvements. There are some important things to look out for when choosing your investment property, and important steps to take when choosing a borrower.

12 Rules To Follow When Investing: Ø Must have instant equity. Make sure the property has plenty of room between value and price. You must protect your investment so avoid risking it on a property that is priced at or above market value. True you will be paid well in interest, but if you do NOT want to manage a rental, choose properties that can easily be re-sold. Ø You must have a clear and concise plan of action. Put everything involved in the deal on the loan papers. If the borrower is required to put a certain amount of the loan into fixing defects on the property, include these requirements on the loan documents and specify the date the work is to be completed as well as the consequences of not adhering to the terms. A late charge, increase in interest rate, or calling the loan due and payable are all examples of possible ramifications of not adhering to the terms. If the borrower is not able to come up with the whole amount you can foreclose and take the property back citing specific performance. The point is that it s in your best interest to keep excellent track of who is supposed to do what in the transaction, and make very sure it is clear and admissible in court. You want it clear enough that you can show a judge and they will understand exactly what was agreed to. Ø Must be able to be financed by a traditional mortgage broker or directly from a bank. It is ok if you finance a property that needs work. In fact that is one of the best ways to get an excellent deal. I highly recommend doing any large jobs before the borrower moves in. For example, if the property needs a foundation, that is not something that can easily be done later and is required for a traditional mortgage. Make sure to factor that in to the deal. If the property needs paint or general cleanup, don t worry about it. The borrower will paint and clean as they go, and would probably need to be done before the sale

13 anyways. Complete any large projects first to keep your options open. If you are able to market to both investors and owner occupied buyers, your chances of reselling the property will increase and, likely, so will the purchase price. Ø Don t let your emotions get in the way! The only numbers that matter are the comparable sales, comparable listings, and the amount of money you are making on the deal. Don t let attachments to the house or the borrowers get you into financial trouble. Ø Always use an escrow officer!! I can t stress this enough. For the couple of hundred dollars it will cost you, not only will you have a professional handling the closing of your investment you will have title insurance! Then you can be sure the property you are buying has a clean title, doesn t have past liens or encumbrances, and all the paperwork is structured exactly how you and the borrower have agreed upon. Then there is no confusion. Ø Always use a neutral party to keep track of payments made. An escrow company usually has the option of having all payments the borrower makes go into an escrow account, then they are released to you, either on a set schedule, or can be accumulated in that fund, which ever you prefer. It is very cheap usually under $5 per month, and it keeps everybody on the same page.

14 Rules To Follow When Selecting A Borrower: Following these simple rules when selecting your borrower will keep your investing headaches to a minimum. Possible unfavorable scenarios could include the borrower defaulting on the loan. The good news here is you have collateral (the house) because you would have a 1st lien against the property and will then take ownership of the property. However, repossessing a property can be a huge hassle and very time consuming. By following these simple techniques when selecting your borrower, you will stay out of a courtroom, and still make lots and lots of money for your time and investment. Ø Know your borrower. At least the basics. Find out what kind of job do they have, how long have they worked there, and how long they ve been in that field of work. I don t focus too intensely on credit, but I always do a credit check. A few minor dings don t send me running in the other direction. I also always recommend doing a background check on every borrower. This holds a lot of weight when it comes to deciding about whether or not to invest in this person. Ø Know their plans for the property. If it is to be their primary residence they will have much more at stake than if they plan to use it as a rental property. If they plan on flipping it, I like to include a provision that they provide me with a detailed plan of how they intend to accomplish this goal and exactly what they plan to do if the property does not sell within our agreed upon time frame. Are they willing to be landlords? If not, how do they intend on paying the mortgage every month? Very important questions to be

15 answered, and if they lack the necessary knowledge to respond to these questions with a well thought out and precise answer, it is better not to invest with them. You will end up doing most of the work because they lack the expertise to do so. Remember, there are lots and lots of opportunities for private money investors to make money through real estate. There is NO Reason for you to put your money at risk unnecessarily. By following these simple guidelines you will likely be a very successful private money lender.

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