In the interest of property redevelopment, a private money loan is a loan that is given to a real estate investor, secured by real estate. Private money lenders are given a first or second mortgage that secures their legal interest in the property and secures their contribution. When a developer has isolated a home that is well under market value, they can give a  private lender an opportunity to fund the purchase and rehab costs of that home. Through that process, the lender can yield extremely high interest rates – 4 or 5 times the rate of return on bank CD’s and other traditional investment plans, while forming a relationship with a redeveloper that yields regular lending opportunities. Sources of private money include 401Ks, self-directed IRA accounts, profit sharing, personal savings, trust funds, and many are tax deferred profits.

Essentially, private money lending is an opportunity for an individual to become the bank, reaping the profits just like banks do. It’s a great way to generate cash flow and produce a predictable income stream – while at the same time, enjoying a level of security uncommon with traditional investment vehicles. You can do what the banks have been doing for years…make a profitable return on money backed by real estate. There is no other investment vehicle like it.

How the Process Works The process is simple. Once a property is located, an individual who’s shown interest in lending would receive a deal analysis detailing the purchase, redevelopment plan, and exit strategy. Once the lender gives the green light, the funds are deposited in an escrow account and the property is purchased. At closing, the lender receives a mortgage on the home along with other important documents. Next stage is the property renovation. Once the renovations are complete (typically 3-6 months depending on the size of the project), the property is listed and sold. When it’s time for closing, the lender receives their principle plus 10% annual interest payment. It’s just that simple! The goal is to keep making substantial profits, so the lender keeps coming back to lend the next and future projects – building a long term mutually beneficial relationship between the lender and investor.

Investment Deal Scenario Here’s what the numbers would look like on  a typical renovation project, with a 6 month hold (including rehab, & re-sell time) with a private lender annual return of 10%.

THE BENEFITS OF BECOMING A LENDER The private money lender can benefit greatly from investing their capital. A real estate mortgage/deed of trust provides them with security instruments not typically provided by other investment vehicles. There are also added layers of protection because of how property redevelopers buy, and because the lender has recourses available to them in case of a default on the loan.

Investors buy 30-40 percent below a retail buyer – that creates instant equity at purchase. Also, in a typical transaction many  middleman cost are avoided, such as: commissions, mortgage broker fees, and loan fees. Because of this buying strategy, redevelopers are able to offer the end buyer a fully renovated home at or below everything else in the neighborhood. Investors commonly walk away from hundreds of “close” deals that do not meet specific buying criteria, and simply won’t buy homes unless they make sense for everyone involved. There are many reasons private lending is so compelling, here we list a few:

• Passive income (minimal time involved)
• No manual labor renovating properties
• Short-term use of lenders money
• Sense of security that money will be coming back soon
• Secure collateral position in marketable and liquid real estate
• Borrowers do the HARD WORK of finding the collateral
• Borrowers put THEIR MONEY and LABOR into lender’s collateral
• Borrower takes majority of the risk
• If lender must foreclose, lender makes even more money
• Multiple loans can be made at one time
• You make money while you are sleeping

 LENDERS ARE PROTECTED Lenders can put themselves in the position of the bank by directing their capital, including retirement funds to well-secured real estate mortgages. Mortgages offer the banks solid, long-term, fixed returns. Mortgages have ultimate safety because if default occurs, the bank can recover its investment as the first lien holder on the property.

Reputable redevelopers will put every property through a rigorous evaluation process in order to assess the profitability before the property is ever purchased. It is important that the analysis is shared with the lender before funds are designated. For the protection of the lender, the following documents should also be provided to secure the lender’s capital:

Promissory Note:  This is collateral for the investment capital

Deed of Trust/Mortgage  This is the document that is recorded with the county clerk and recorder to publicly secure the loan against the real property provided as collateral

Hazard Insurance Policy:  This is where the private lender would be listed as the “Mortgagee” for protection in case of fire or natural disaster, etc.

The property redeveloper should also pay for a title search as well as a title policy on the home just as would be done in a typical transaction. For a rental investment with a long-term note, there should also be a valid hazard insurance policy on the property to protect against causalities. The lender would be named as a mortgagee and notified if the insurance is not kept current. In the event of any damage to the property, insurance distributions would be used to rebuild or repair the property or used to repay the lender.

HOW PROPERTY REDEVELOPERS BENEFIT FROM PRIVATE LENDING Private money lending bring speed and efficiency to real estate transactions, and the leverage is far greater when homes are  purchased using private cash funds . Often, for a variety of reasons sellers are in need of a quick sale – within 10-14 days.  A traditional bank requires 30-45 days or more to close a loan. Many traditional home sales fall out of contract because of financing issues.

Being able to offer a fast closing with private funds motivates sellers to accept offers at a much lower price than they might from a conventional buyer. Also, lending guidelines are continually changing requiring extensive applications, extended approval processes, junk fees and strict investor guidelines.  They also limit the number of investment properties that can be purchased by one company. On a new home purchase requiring renovations, private lender funds will be allocated to the purchase price, renovations, carrying costs, cost to resell and a small buffer for unexpected expenses.

GETTING STARTED

If you haven’t already reached out to a property redevelopment and investment company interested in working with private lenders, it’s important to sit down and discuss all these details in person.  They will need a clear definition of what your goals are, i.e. long term or short term, and the amount you are comfortable initially lending.  At that point, they should present you with any current opportunities that meet your goals or contact you as soon as they have a property that fits your criteria. If you would like to learn more about private lending, please contact us via email: sell@realtywithrich.com, or call (760) 991-9500. You can also download our private lending brochure by clicking the button below.