Frequently Asked Questions
General questions about our company, service, and properties we offer on this website:
- What is Private Lending?
- What Kind of Interest Do People Earn as Private Lenders?
- Why Would Anyone Borrow Money at 6% to 15% Interest When Banks Charge Much Less?
- What Additional Things Should I Consider When I Make A Private Loan?
Q: What is Private Lending?
A: In our case, we are going to be talking about Private Lending in real estate. So, that is when regular people like you and me lend our money to a real estate investor to buy a distressed property at a huge discount. The funds to close on the purchase and make repairs (your money) are secured by a 1st mortgage (lien) against the house that you and the real estate investor choose for your investment. Basically, Private Lending is your opportunity to become the bank and earn the high interest rate that the bank is earning on your money when you own a CD or have funds in a Money Market account. It’s your opportunity to eliminate the middle man and increase your returns.
Q: What Kind of Interest Do People Earn as Private Lenders?
A: Well, it depends a little on you, the lender and the real estate investor that you lend your money to. In general Private Lenders are paid anywhere between 9% and 15% interest for the money that they lend, depending on whether you, the lender wants to receive payments monthly, quarterly or upon the sale of a property.
Q: Why Would Anyone Borrow Money at 6% to 15% Interest When Banks Charge Much Less?
A: Real estate investors commonly borrow money at these rates. Why? Well, because it’s not the cost of the money that is inherently important to successful real estate investors, rather, it is the speed and availability of the funds. Here’s what that means.
Real estate investors buy distressed properties at steep discounts for profit. Many times the properties purchases are so distressed that banks take a long time to evaluate a loan package. This usually kills the deal. Speed is a real estate investor’s best friend.
The best real estate deals are made when the real estate investor can close fast and pay cash. So, when banks delay and are too slow to fund, real estate investor lose great deals. Because real estate investors buy for profit, paying a high return on money borrowed is really just akin to giving a little profit away to the lender that helps get the deal done.
It’s a win/win opportunity for both lender and borrower. The lender (you) gets the opportunity to earn high returns secured by great real estate deals and the borrower (the real estate investor) gets to keep their business profitable without the limitations and delays usually imposed by traditional bank.
Q: What Additional Things Should I Consider When I Make A Private Loan?
A: There are two basic things to consider as part of your funding package aside from the LTV that is securing your loan.
First, when you fund the loan, you should receive a Lenders Title Policy. This protects you and your loan against defects in title. Because all of your private loans will be funded at an attorney’s office or title company, getting a lenders policy is a very simple process. Simply ask the real estate investor to include this as part of the funding package. You can read more on this under the Title Company section below.
Second, you should be named as Loss Payee on the real estate investor’s property casualty insurance. This protects you in the event of an insurance claim loss. In order to claim the loss and cash the check from the insurance company, the real estate investor will need your signature. Ask the real estate investor make this a part of the closing packet with the
insurance company.