A private money loan is a loan that is given to a real estate investor, secured by real estate. Private money investors are given a first or second mortgage that secures their legal interest in the property and secures their investment.
As real estate investors, when we have isolated a home that is well under market value, we give our private lenders an opportunity to fund the purchase and rehab of the home. Through that process, the lender can yield extremely high interest rates – 4 or 5 times the rates you can get on bank CD’s and other traditional investment plans.
Essentially, private money lending is a lender’s opportunity to become the bank, reaping the profits just like a bank would. It’s a great way to generate cash flow and produce a predictable income stream – while at the same time, provide excellent security and safety for your principle investment. You can do what the banks have been doing for years…make a profitable return on investments backed by real estate. There is no other investment vehicle like it.
HOW THE PROCESS WORKS
The process is simple. The Residential Redeveloper (RR) finds an extremely undervalued property to purchase – and once lender gives the green light, the RR borrows the funds to purchase and renovate the property. At closing, the lender receives a mortgage on the home along with other important documents.
Next stage is the property renovation. Once the renovations are complete (typically 3-6 months depending on the size of the project), the RR will list and sell the property. When it’s time for closing, the lender receives his principle plus 10% interest payment. It’s just that simple!
The goal is to keep turning that money for the lender and keep them making substantial profits so they keep coming back – building a long term mutually beneficial relationship.
HOW THE LENDER BENEFITS – FROM PRIVATE LENDING
The private money lender (PML) can benefit greatly from investing their capital. A real estate mortgage/ deed of trust provides them with security instruments they would not get with other investments. The PML also has added layers of protection because of how the RR buys, and because the PML has recourse available in case the RR were to default on the loan.
RR currently pay 4-5 times what a typical bank CD is paying. Rates may fluctuate some, but not much, depending on the purchase price and rehab involved.
The lower the price the RR pays for a home, the RR can pay a little higher rate to make sure the lenders make it worth their time. Private lending means the PML can relax while the money is in a truly safe place, working for them.
Done correctly, equity is built in the purchase of the home, educated RR are buying 30-40% below a retail buyer – that creates instant equity at purchase. Also, in a typical transaction, RRs cut out the middleman cost, such as: commissions, mortgage broker fees, loan fees; and attorney costs are also lower because there is less work for them to review.
An experienced and educated RR is able to offer buyers a fully renovated home at or below everything else in the neighborhood. The goal is to buy right so you can attract a wide variety of PMLs for your projects….keep in mind, RR make money when we BUY.
HOW PRIVATE MONEY HELPS AS A RESIDENTIAL REDEVELOPER (RR)
Private money lenders bring speed and efficiency to the RR’s transactions, and their leverage is far greater when they purchase using private cash funds. Many of the homes RR purchase are in need of a quick sale within 10-14 days. A traditional bank requires 30-45 days to close a loan. Many traditional home sales fall out of contract because of financing issues. Using quick cash as leverage allows the RR to negotiate a much lower purchase price and reduce risk.
Being able to offer a fast closing with private funds motivates sellers to take the RR’s offer over the competition, and entices them to take a much lower price than they would from a conventional buyer. Also, lending guidelines are also continually changing and are requiring applications, approvals, junk fees and strict investor guidelines. They also limit the number of investment properties that can be purchased by one company.
On a new home purchase requiring renovations, private lender funds will be allocated to the purchase price, renovations, carrying costs, cost to resell and a small buffer for unexpected expenses.
PROTECT YOUR LENDERS
Mortgages offer the banks solid, long-term, fixed returns. The PML can put themselves in the position of the bank by directing their investment capital, including retirement funds to well-secured real estate mortgages. Mortgages have ultimate safety because if default occurs, the bank can recover its investment as the first lien holder on the property.
Each property acquired should be put through a rigorous evaluation process in order to assess the profitability before the property is ever purchased.
Also, for the PML’s protection, the PML should be provided these documents to secure their investment capital:
• Promissory Note: This is the PML’s collateral for their investment capital
• Deed of Trust/Mortgage: This is the document that is recorded with the county clerk and recorder to publicly secure their investment against the real property that the RR is providing as collateral
• Hazard Insurance Policy: This is where the private lender would be listed as the “Mortgagee” for their protection in case of fire or natural disaster, etc.
The RR would pay for a title search as well as a title policy on the home just as would be done in a typical transaction.
For a rental investment with a long-term note, the RR always keep a valid hazard insurance policy on the property to protect against causalities.
The PML will be named as a mortgagee and notified if the insurance was not kept current. In the event of any damage to the property, insurance distributions would be used to rebuild or repair the property, or used to repay the PML.
ABOUT THE AUTHOR:
Bruce E Dinger is an Investment Advisor for private qualified clients and also a world-class educator in the stock and options market. Be sure to register for a live webinar or upcoming event at www.KTCashFlow.com
Mr. Dinger has spoken on some of the largest stages around the globe, including CNBC, BusinessWeek, SuccessMagazine, The Women’s Financial Conference, Rich Dad’s, On-Line Trading Academy, Success Resources, and many others. He has one of the best reputations in the financial markets for helping students achieve their goal of becoming an independent trader or investor.
Kennsei Trading Inc. is a Registered Investment Company – specialzing in buidling wealth through the financial markets, including the stock and equity markets, and the real estate market. The firm is lead by CEO Bruce E Dinger, who has over 20 years experience as an investor. Kennsei Trading Inc. has an extensive network of private money investors and understands the thought process of a savvy investor and what they look for in any investment prior to the deployment of their capital.
