Six Factors to Consider Before Making an Investment with a Private Lender
You may have watched a television show about flipping homes, or read about this lucrative business opportunity in a real estate magazine, and thought about taking on the challenge. However, the scripted shows and publications may gloss over the financing aspect of buying properties and selling them.
Banks will likely look at flipping homes as a risky business move, and turn down your application. All hope is not lost, thanks to private lenders. Lenders are an important part of the financial system in today’s society. Private lenders can offer you access to benefits that you wouldn’t receive when using a traditional bank, such as fast approvals, simplified and customized repayment terms, and more.
Getting a private loan without all of the hassle will give you more time to work on rehabbing a fixer-upper, remodeling the property, and selling the home, generally within 12 months. You can use a private lender to purchase some commercial real estate, or a single to multi-family home.
With this option, you don’t need to directly manage an investment property, nor do you need to take the financial risk. However, you can still add to your investment portfolio by taking the investment loan from a private lender.
Here are six factors that you should consider before investing in a private loan and adding it to your portfolio:
Do Some Research and Choose the Right Investor
If the deal is too good to be true, you should probably walk away from it. This doesn’t close the door on your dreams to investing in a private loan; it prevents you from choosing a lender with unreasonable interest rates and outrageous repayment terms.
Before you sign a legally binding agreement, conduct research on the lender. Vet their background and look for information pertaining to source deals, underwrites, and more. To boost your odds of earning a profit, choose a lender with a proven track record, experience in construction, and knowledge of the real estate market. In difficult times, such as a default, an experienced private lender will always protect your investment, even through a foreclosure or an active forbearance.
Experience the Process Without any of the Flipping
Again, watching real estate experts flip a home on the big screen makes for a great story, but it isn’t always as easy as it seems. The potential to earn a good profit is there, but rehabbing the home is not as rewarding to someone who is unfamiliar with the process. Flipping a home can also be a risky investment.
A successful flipper will go into business with a lender who funds flips, which could prevent them from actually doing the flipping. Keep in mind that you are still a part of the process, without needing all of the knowledge and expertise pertaining to construction costs, zoning permits, labor and equipment, home improvement materials, and so on.
You Become an Investor and a Community Builder
Investing your capital in a private lender means that you are investing in the community. The projects that you fund through a private loan could improve the property value in a neighborhood, create jobs for the community, boost the income of local areas, and strengthen other communities across the world. You don’t have to wait for long periods of time to see tangible results, especially if you opt to invest with a local lender.
Billionaire Status is Not Required
Investing in a private loan is risky, and many people want to avoid putting all of their funds in one basket. Emptying out your savings may not be appealing at first, but there are many advantages to this investment. There are many ways that you can get the funding to diversify your real estate portfolio, such as:
- Taking contributions from an IRA real estate lending fund or a self-direct 401(k)
- Use an annual bonus
- Seek funding from crowdfunding, which gives investors the option to put up small amounts.
Tangible Assets that Make Your Investment Even Better
Private loans are categorized by physical assets, which is the property tied to the loan and the renovation. You will have material assets behind your investment, unlike traditional real estate investments. There is generally a cushion because of the percentage that most real estate investors are required to put down, using their own equity. The upside to that is even in a bad economy and down market, a private lender can turn your underlying asset into cash.
Know what to Expect
When you know what your results should be, you can have a better understanding as to what type of return you should receive, relative to your risk. The riskier the flipping project, the higher the returns typically are. The more complicated renovation projects are similar to direct investments, and are more hands-off for investors. But, they can provide preferred returns with fewer risks.
Regardless if you invest directly into a project, or in a private lender’s fund, you can receive a monthly statement and decide if you want your dividends paid out or reinvested.
Ultimately, the decision to use a private lender will be up to you. Before you invest, look over the advantages and disadvantages, research the lender’s background, and determine how this investment will fit into your financial strategy.