10 Questions You Should Ask Before You Consider Private Mortgage Lending
Updated: Feb 26, 2019
Are you looking for an alternative investment strategy that has the ability to bring in 2-3x the returns your traditional investments can?
Well if that is the case... Private Mortgage Lending may be just for you.
Sadly, one of the main reasons that many investors are unaware of this strategy is because their investment advisors typically do not reap any benefits of pointing their clients this direction. This means that there is nothing in it for the middleman.
As an investor myself, I am looking for a place to put my money with limited downside, high returns, and control over my investment.
When you invest your money through traditional mediums, such as:
You can be exposed to volatile markets and risk if there is a downturn. The worst part is you do not have much control or most times the knowledge to make an educated decision on when to become liquid in the market. To me, this is a very poor way to invest your money.
In real estate and specifically Private Money Lending, you will be exposed to risk but you will always be secure by the real estate and have collateral based on the property's value, if your borrower failed to make payments.
There are many alternative forms of investing, such as:
Real Estate (own)
Foreign Currency Trading
Private Mortgage Lending
All of these strategies have their pro's & con's but for today's discussion, we are going to focus on PRIVATE MORTGAGE LENDING. In our opinion one of the best ways to diversify your money and benefit from .
With any investment, you should have a great understanding of how this vehicle works, concepts you should understand and key terms needed to make wise investments.
Let's get going and learn some of the question's you should be asking yourself before taking the leap into private mortgage lending.
1) What Exactly Is Private Mortgage Lending?
In the eyes of "Webster Dictionary" “Private Mortgage Lending is the lending of a "private" individual’s money to a borrower(s) who pledge(s) real estate for the loan by way of a publicly recorded mortgage. The publicly recorded mortgage secures the loan that is evidenced by an original promissory note. The recorded mortgage secures the promissory note in the event of a default by the borrower.”
So in basic English terms, what does this mean?
You, the lender decide to loan money to Dan, the buyer who issues you a promissory note (promising to pay back the debt on the terms associated with the loan) and he grants you security on the loan in form of collateral on the home (or a lien against the property).
The lien on the property is known as the mortgage.
In simple terms, you will take the place of a bank but you will garnish 2-4x the return that a bank would receive on their loans.
The two most important documents for you as the lender are:
The Promissory Note - Evidence of the debt
The Recorded Mortgage - Security for for your funds
We will touch on these 2 documents in more detail later on in this post.
2) How To Become A Private Mortgage Lender
There are no business regulations, guidelines or requirements that you need to work off of in order to lend on real estate.
These mortgages that you are going to lend on are going to be with real estate investors.
Buy & Hold Investors
You will have to find real estate investors in your area (successful real estate investors) who are purchasing properties at a discount and are looking for money to help scale their operation.
If you want to fund a new (original) mortgage, let's remember a couple things.
A) You set the rates & terms of the loan
B) The rates & terms that are set will determine your return for the subject mortgage
C) You are in control as to when the mortgage is due
D) You determine the LTV (Loan to Value) that you are comfortable lending up to.
However, as an independent private mortgage lender, you will need to structure your deals around the exit strategy your borrower is using. If you are dealing with buy and hold investors, then the loan terms will be different than if you are dealing with a house flipper.
3) Why Would Someone Borrow Money From A "Private Mortgage Lender"
I am sure you are wondering why a real estate investor doesn't just go through a traditional bank to get financing for the property and rightfully so!
The answer is that in most cases, the borrower must turn to a "Private Mortgage Lender" for several reasons:
A) Typically the real estate investor needs the money fast to close and since these are cash funds, closing can happen very fast
B) The borrower may have been turned down by the traditional bank (for several reasons)
C) The real estate (property) being lent on does not meet the bank's requirements (banks will not lend on a property that is not in livable condition)
There is a lot of red tape when it comes to traditional mortgages and getting approval on real estate investments. The process can take a tremendous amount of time and as a real estate investor, time is of the essence. This is why private mortgage lenders get such great rates on their money.
For a real estate investor, having the ability to build relationships with "Private Mortgage Lenders" gives them the ability to improve and scale the business. Allowing them to do more deals, make more money for the lenders and their business. If these deals are structured properly, a win - win situation should be created for everyone involved.
4) Why Would An Individual Choose to Invest Their Money in Private Mortgages?
If you have not already seen the great benefits of becoming a "Private Mortgage Lender", we are going to give you some more reasons why this is a great alternative investment vehicle.
There are 3 main reasons that an individual would choose to lend their money on real estate backed securities:
A) Secured Investment - collateralized by the subject property