Private Lending Frequently Asked Questions
Why is Private Lending a good strategy for an investor?
The traditional lending middlemen (banks, credit unions, finance companies, investment managers) are eliminated in a Private Lending scenario. Private Lenders receive the full proceeds of their investments (collateralized by real property) without sacrificing (often significant) portions of their returns to other institutions and organizations. This enables the traditional risk / return results to better favor the investor. Additionally, the Private Lender is relieved from day-to-day involvement in the construction, rehabilitation or management of real estate, thus freeing their time and energy while maximizing their investment return with one or more passive income streams.
Why is Private Lending a good strategy for a borrower?
Generally speaking, the borrower is attracted to the speed and ease of funding offered in a private lending scenario. The demand for non-traditional loans arises in those gaps that exist between traditional institutional lenders and a given real-estate marketplace such as the need for speedy property acquisition (foreclosed, estate settlement, liquidation, auction) or when the characteristics of the purchase do not allow for traditional lending.
How is the Private Lender secured?
A Private Lender is secured by mortgage and note on the property which is serving as the foundation for the transaction. The emphasis in non-traditional lending is on the collateral, therefore measures are taken to protect the interests of the lender in a given property or project.
What are the components of Private Lending transaction?
A private lending transaction should generally include the following elements:
- Promissory Note – defines the terms and conditions under which the private lender is willing to lend money and under which the borrower agrees to repay.
- Mortgage – conveys an interest in specified property as security for the repayment of the money borrowed.
- Deed in Lieu of Foreclosure – enables the Private Lender to expedite possession of collateral real estate by pre-arranged voluntary agreement.
- Title Insurance – protects an owner’s and/or a lender’s financial interests in real estate against loss due to title defect, liens or other challenges
- Hazard Insurance – safeguards the interests of the Private Lender.
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What sources of funds should one consider for Private Lending?
Traditionally, lenders use savings, lower-interest lines of credit, and self-directed Individual Retirement Accounts (IRA’s). Many lenders have found it advantageous to divest of non-performing and/or low-performing assets as they seek to maximize their investment returns.
What is the standard loan term?
There is no standard loan term, but most average 12-18 months. The term of a loan is often determined by a number of variables including scope, complexity, market conditions and planned exit strategies.
What is the standard loan amount?
Again, there is no standard loan amount. Typically, a Private Lender will need $100,000 to begin investing, but the amount varies greatly and is primarily dependent upon the scale of the property or project offering.
What types of investors are best suited for Private Lending activities?
Surveying a room of Private Investors, one would find both professionals and non-professionals, both wealthy and those of modest means, both aggressive and conservative investors, both highly educated and self-taught. Most Private Lenders, however, begin their participation with a desire to maximize results and minimize effort, most understand the importance and value of their own time and most realize that an alternative to retail / traditional investment deserves their attention.