Private Lending…A Fit for your Investment Portfolio?

After picture of kitchen renovation in Lacey using Private Money.
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Submitted by Dan Martinez, Keller Williams Realty South Sound

 

Before pictures of a kitchen renovation in Lacey using Private Money.
Before picture of a kitchen renovation in Lacey using Private Money.

The stock market is at all-time highs.  The economy seems to be on the mend.  You are feeling better about your investments but historical events still make you wary about future growth or the next crash, so you have reluctantly kept a good portion of your savings in low interest securities to avoid significant losses of your hard earned dollars.

However, you know you are losing ground to inflation and wonder if there is a better way to get a higher return without being exposed to significant risks.  If you have funds that could use a higher return and you understand real estate, Private Lending could be a strategic part of your portfolio.

What is Private Lending?

Private lending is a loan,usually given to a real estate investor, which is 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 investment. When a property is found, private lenders are given the opportunity to fund the purchase and/or rehab costs of the home. Through this process, the lender can yield interest rates several times higher than the rates available on bank CD’s and other traditional investment options.

Essentially, private money lending is your opportunity to operate like “a bank”, collecting interest on a secured property. It’s a great way to generate cash flow and obtain a predictable income stream, while at the same time, provide security and safety for your principle investment. Like a bank, you can make a profitable return on investment backed by real estate.

Sources of Funding for Private Lenders

  • Cash
  • CDs and Money Market Funds
  • Home Equity Line
  • Retirement Accounts
  • Liquidated Securities & Investments

How the Process Works

 After picture of kitchen renovation in Lacey using Private Money.
After picture of kitchen renovation in Lacey using Private Money.

The process is simple. The investor finds a property, which meets specific yield  requirements, and sends the proposal  to the Private Lender for review.  The investor borrows the funds from the Private Lender to purchase and renovate the property. 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 agreed upon  interest payment. The goal is to keep turning that money so it continues to work hard for you.

Is it Really Safe?

Obviously, no guarantees can be made about investment safety and returns.  However, real estate provides safeguards that are familiar and understandable to most people.  In this scenario, the investment  properties are purchased at below market value so they typically come with equity.  You get to decide which properties you want for your investment.  Market risk is minimized since funds are commonly on loan for less than 6 months.

For your protection, there are three primary documents securing your investment.

Promissory Note:  This is your collateral for your investment capital

Deed of Trust/Mortgage:  This is the document that is recorded with the county clerk and recorder to publicly secure your investment against the real property that we are providing as collateral

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

In addition, investors will be working hard on your behalf since they don’t make any money if you don’t make money.  They also want to gain your trust and confidence in developing a long term relationship for the opportunity to borrow funds on future projects.

real estate agent olympia
Dan and Peggy Martinez share their knowledge about private lending and real estate with area investors.

Does Anyone Really do This?

I’m glad you asked!  I am currently investing in real estate as a Private Lender using three different strategies.

  1. First, I have a personal loan secured by promissory note and property lien, which is paying interest each month and will return principal amount when the home sells. My company, M3D Real Estate, LLC entered into a joint venture for another renovation and will receive a fixed return on the sale of the property.  More like a profit share arrangement. Finally, I used my self-directed Roth IRA to assist in the rehab of a third property for a fixed monthly interest rate. This income will be tax free.

Do your Homework

As with any investment, you need to educate yourself and consult professionals such as real estate attorneys and CPAs to determine if private lending is an appropriate strategy for your portfolio.  However, with some effort you can get “lazy” dollars working much harder for you and achieve your financial goals sooner.  There are many online resources and books available to assist you in learning how to lend safely and profitably.  Your local Realtor® will likely know of investors who are familiar with the private lending process and willing to pay a higher interest in order fund more projects.

Best wishes in your all of your investing endeavors.

Resources

Private Lending 101  – a good place to get started learning more.

 

 

 

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