There has always been a huge demand for private lenders amongst real estate investors, but the demand has hit record levels as more traditional lending sources continue ot dry up.
I know that there is still some confusion as to exactly what a private lender is so let me explain it here. A private lender is just that: a private individual who is willing to make real estate loans. Their goal is to earn higher than market interest rates on their money with a safe, secured real estate loan. The difference between them and a hard money lender (HML) is that the HML is in the business of making real estate loans to investors and typically charge higher rates, they charge points; and they loan to anyone who meets their criteria.
Any savvy investor realizes that the true profit margins come from leverage. Leverage a small amount of your own money to purchase large amounts of real estate. As the traditional sources of leveraged loans dries up, investors are turning more and more to private lenders for their financing needs. The secret here as an investor is to not let your private lender realize how much demand is in the marketplace. How do you accomplish that? By treating your lending well and never force them to go out shopping for a new borrower. Keep their money in use. Don’t let it sit for long periods of inactivity. Provide them plenty of safeguards: title insurance; hazard insurance; and a reasonable Loan-To-Value (LTV) ratio (70% or less of the ARV).
If you don’t currently have a portfolio of private lenders you need to build one as soon as possible. You don’t find them in the yellow pages or on Google. They are every day individuals who currently have their money invested in low yield vehicles like CDs or IRAs. The advantage you offer is a much higher interest rate yet with the security of real estate. With the demand for these lenders continuing to increase, you need to build a relationship with potential lenders as soon as possible before someone else beats you to it. Once you have them, treat them like gold because they literally are like gold.
For those of you who have money invested in low yield vehicles like an IRA you definitely need to consider the profitable world or private loans. Most people don’t realize that the IRS allows you to make real estate loans with your IRA if you have a Self Directed IRA. If you don’t it’s easy to rollover your current IRA to a self directed one with a company like Equity Trust (www.TrustETC.com). Once you have a self directed IRA and start making real estate loans, you’ll easily earn 4-5 times the interest you’re currently earning in your regular IRA.
Whether you’re an investor borrowing private funds; or an individual making real estate loans you will profit from the experience. That’s the definition of any good deal, right? When both sides win!
Expect abundance,
Lou Castillo
