OfflineRecent articles around the Web have been discussing the options for private mortgage lending. Most explore it from the perspective of the private investor who wants to fund mortgages, especially from their IRA or 401k self-directed accounts. They present these private loans as providing attractive yields at lower risks because they’re backed by real estate. One quote: “One of today’s most straightforward investments is funding a private mortgage loan.”
This investment alternative is presented as not only attractive but providing many opportunities, as there are many investors and business owners who need access to capital but are unable to obtain funding in ways that were normal just a few years ago. The housing and mortgage crash took down a great many investors who were over-leveraged, and it’s become difficult to get normal financing due to stricter requirements.
Loans typically are approved at around 60 to 70 percent of the market value of the property, and have durations of one, five or ten years. If an investor is seeking this funding, they can use it to get into a property with little or no down payment if they can secure a bargain price well below market value. These investors funding deals will want an appraisal however, not just a rental investor’s market value analysis. Advantages touted for this type of investment funding include:
• Less volatility - unlike stocks and bonds, real estate is less subject to inflation and other forces that create volatility.
• Security - real estate is a hard asset that backs the loan, and proper due diligence helps to provide security.
• Shorter terms - with terms going out no more than ten years in most cases, these loans are good for those approaching retirement.
As an investor trying to secure funding of this type, you should know what these investors are being told to help them to reduce their risk. Here are some of the instructions in these articles:
• Choose properties with the greatest potential for resale, normally those at the lower end of the neighborhood price range.
• Get a current appraisal to confirm that there is plenty of equity to secure the loan.
• Assure clean title with a title search and title insurance policy.
• Be certain to be in a first lien position.
• Require homeowners insurance for all types of calamity that can damage or destroy the asset.
• Have an attorney review the documents.
With boomers controlling billions of dollars in retirement accounts, rental property investors may find them to be a funding resource to carry them to a point when they can sell the property or get a new conventional loan.
Think of hard money loans from private investors as loan sharks with better ethics. This type of financing comes from individuals who are seeking a high rate of return for their financial investment in your project.
PROS: These wealthy benefactors rarely care about the credit score or even the financial situation of the borrower, they are primarily interested in the return on the investment. Loans are closed in a matter of days (average 72 hours). Down payments are negotiable and 100% financing is often available.
CONS: The interest rate (10 – 18%) and closing costs (7 – 10% of the loan) are extremely high and will have an effect on the investors return. These loans are also very short (3 to 12 months).