Putting your cash to work – a Private Lending Primer

Putting your cash to work – a Private Lending Primer

Well, it certainly has been a roller coaster ride lately, but what the media is not telling you is what's really exciting: there is a lot of money being made right now. We get to hear all about unknown currency values, the stock market dropping like a stone, hedge funds derivatives not giving the returns they used to, inflation and deflation, etc. Given the volatility in all these markets, it makes sense to put your money in something much more stable, and that's where the smart money is going.

8-15% ROI
If you are serious about your money, how does 8-15% or more on your money sound, secured against first mortgages (trust deeds) on real property? That's not an estimate, it's a range of interest rates you can charge people to borrow your money – in some markets you can start with as little as $25,000, and loans for $100K -$150K are pretty standard.

Consider a Self-directed IRA
Don't have all that cash in your checking account? What about in an IRA or 401K – if you take about a month to transfer it over to a self-directed plan, you can loan it out just as you would your cash, and the profits will help to grow your IRA. http://www.empowerediras.com/

Use a Strong System
But how to protect yourself? You may have even heard a story about people having to foreclose, and then ending up with worthless property, but it's easy to avoid these missteps. The trick, like everything in business, is to use a strong system. First, decide how much you have to lend. Set your parameters, just like the bank – after all, you are the bank in this case.

Here are some questions you should ask before you get into lending to individuals:
- How high will you lend against the value of the house?
- What locations do you want to loan in? Does it need to be near you, so you can view the property yourself, or can you trust someone local in another area to view the property and send you pictures?
- Would you prefer a short-term loan, where you can get additional points each time you lend your money, or a long-term loan, where you will just collect a payment each month?· How long do you want to loan your money for?
- Who will work with you on setting up the loan docs?
- Is there rehab involved?
- What are the minimum criteria for your borrowers – credit score, assets, etc.
- What type of property do you want to make loans to? Single family? Multi-unit? Apartments?

Structuring the Loan
You, a title company, and/or an attorney can set the loan up fairly easily, and the rules are, you get to make the rules. By answering the questions above, you can decide how the loan should be structured, and what payment schedule will suit you and your borrower best. Use your title company or attorney to guide you on what is standard in the state you are in, and then decide whether you want to make it easier on the buyer than the banks would, like offering to fund at a slightly lower credit score, or making interest-only payments on the loan to keep the borrower's payments more reasonable.

Skin in the Game
Decide how much "skin in the game" you want from the borrower – how much do they have to put down? Several hard money lenders I know insist on 10-20%, but if your borrower has good credit, and since you will have strong equity in the property, this is a personal decision. We often matchmake 100% financing loans, even in today's market, because at 65% loan to value there is not much risk to the lender, who can always sell at a profit in the unlikely case they need to take the house back.

Inspection Protection
If you do have rehab involved with the property, always get an inspector to look at the property and determine that there are no "gotchas" like vital repairs being needed that no one told you about. The objective is to limit your borrower's chances of walking away from the loan, and make sure you are getting what they tell you. But if the property includes rehab, you will want several inspections (these costs can be passed on to the borrower as part of the loan). Get a baseline inspection up front, and have your inspector compare it to the contractor's bid. Then only pay the contractor on approved "draws." This means they have to submit a definite request for payment – like, "Kitchen complete, $10,000", not, "Kitchen 50% complete, $5000" - after all, 50% is subjective, but done is done. This will ensure a smooth process on the rehab, and allow you to keep tabs on it even if you are across the country.

Loan Servicing
Once your loan is in place, consider using a loan servicing company to fulfill the payment monthly. They will only charge a small percentage of the loan fee each month (you can build this cost in, too, if you like) and will calculate the interest due and bill the borrower monthly. One thing to remember, banks typically use 360 days, not 365 days, as a basis for interest calculation, and you may want to do the same just to be fair.

Consider Partnering
If you can set your system up, you can loan your money, over and over again if you like, and make things easier for a qualified borrower who can't meet today's overly stringent bank requirements, while earning a great return for yourself. Best of all, it's an arm's length transaction, and you never have to deal with the house or the landlording yourself. If all this sounds like a lot of work, consider partnering with a company who will screen the borrower and property, set up the loan, and monitor the rehab for you, anywhere in the country. East Coast West Coast Solutions can handle all this for you, so you can spend more time making money, and your money can spend more time earning you interest. http://www.ecwcsolutions.com/

No matter what you decide to do, now is the time – this is an unprecedented market – don't miss out on this amazing opportunity to cash in on it.
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Copyright 2008 Halle Eavelyn, Manager
East Coast West Coast Solutions at http://www.ecwcsolutions.com/
Empowered IRAs at http://www.empowerediras.com/
LinkedIn Profile: http://www.linkedin.com/pub/0/12/209
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Published to the Business Connections Network blog at OCBusinessConnectionsNetwork.blogspot.com.
Ole Cram and Marcobe Investments, Inc. are not responsible for the accuracy of claims made in this article. Article is provided for informational and sharing purposes as one of Ole Cram's business connections on LinkedIn (see blog site for more information).