Hi, I am Lucia Gugliuzzi
How can private lenders help?
There are circumstances when a borrower does not qualify for a traditional mortgage. It is common that a prospective borrower does not have good credit or does not qualify with the banks given their trade and proof of income, this is when the Private Lending comes in.
Getting a loan from private money lenders has its own pros and cons but the pros certainly outweigh the cons. For instance, you can avail yourself of a loan much faster from a private lender than you can from conventional banks. It is the best option for an average investor to give out a loan as Private lenders usually take risks that the banks and other institutions will not. Here is why people prefer private loans
- Speed: Turning to private money lenders is very convenient as they usually approve the loans within 2 days, unlike the banks can take up to 5 days for approval. Some borrowers seeking a mortgage, might need to buy a property instantly for which they require the capital. In such cases, time is valuable and private lenders can meet this demand much faster than other lending sources.
- Control: Those who have taken private loans have way more control than those who have taken it from the bank. The reason is that they work much faster and can offer a temporary solution.
- Lending based on assets: Private lending focuses more on the value of the subject property. It is not to be discounted that any lender wants to ensure that the borrower has the capacity and responsibility to make the payments. The borrower does not have to rely on credit score 100% when obtaining a private loan. As long as the mortgage is worth less than the amount being borrowed, for the most part we are good to go. Given the new mortgage rules in Canada, we help the client with improving their credit score and work on money management. In this way at the time of renewal, the borrower may have the capacity to work with the mortgage broker and get a better solution in order to pay down their mortgage faster. To make it simple, the less interest payments and options, the easier it is to pay down the mortgage and build equity.
- Guarantee: Independent investors prefer to have source of funds and should have a predictable income. This is why for the most part, they like to earn interest only and also charge a fee to the borrower.
- Shorter term loans: Since the loan duration of private money is shorter than the conventional loan, the chances of accruing late penalties are also less. They usually do not last more than 12 months. This is a win-win for the lender as well as the borrower. Note that it is important that the borrower works with the mortgage broker while improving credit score and income.
What documentation is needed?
This is perhaps the most important part of the process. It is important to have proper documentation in place for your private loan. The terms are somewhat different as compared to the loan from banks. The borrower has to sign a document that declares that he/she will repay the amount under the agreed terms and will have to secure it with a property (it will be used as a collateral for the lender). While this might vary from one private lender to another, here are the terms that are usually required by the lender in order to provide a loan.
- 1. Letter of Intent (LOI): This is essentially a document that has the terms of agreement written down just so that the lender and borrower are on the same page. An LOI is usually advised to avoid any sort of miscommunication and does not have to be legally binding. Once both parties agree, official documentation is prepared by the mortgage broker in order to proceed.
- 2. Appraisal: This is a report that is obtained from licensed appraisers and will confirm the value, condition of the property and comparable sales in the area. Most lenders will require it because they want the comfortability of the value of the security.
- 3. Personal Guarantee: The borrower has to put their real estate in the line to give a personal guarantee that they will be able to repay the loan. This is applicable in cases when the borrower cannot repay the loan.
- 4. Mortgage: This is a note that the borrower signs after the terms have been agreed upon and serves as a promise. At the time of purchase, usually, the seller wants a waiver signed. This will confirm that the borrower/ purchaser has obtained financing.
- 5. Disclosure to the borrower: It is important that the borrower has the terms of the agreement so that they analyze and feel comfortable with the terms and conditions of the loan. For example: The rate is usually much higher than the banks or mortgage companies. The loan is usually “interest only”. The borrower has to pay a fee to the lender, to the broker, legal cost and appraisal. The borrower is responsible with all costs associated with the mortgage. Furthermore it is to take note that in case of default, private lenders act very quickly to take possession of the home in the alternative that a solution has not been worked out very fast.
- 6. Title Search: This is a legal document that lists the history of the home. It checks whether the property will be eligible for selling and identifies any loopholes that might stop it from being sold. In order to be safe, It is important to have this report in place. Usually this is done by the solicitor undertaking the transaction.
- 7. Title Insurance: This is a document that will protect the buyer from anyone who claims the property to be theirs. It is usually mandatory as there is a lot of money at stake.
- 8. Proof of Insurance: A proof of insurance is necessary to avoid loss. Like any bank, you are required to provide proof of insurance while seeking a private loan. Lenders require fire insurance before funding the deal.
- 9. Exist strategy: A borrower and a lender should always have a plan to exit in 1 year time at the most. Private lending can be expensive to the borrower and plan with care and work should be made in order to increase the equity in one’s home.
What do private money lenders do?
Private money lenders are people who lend their money through professional brokers, investors or real estate funds while securing the loan with a mortgage for real estate. To put it simply, private money lenders are an alternative to money lending. Borrowers seek such private lenders when they need money. Gone are the days when real estate financing was limited to banks, insurance companies and pension funds.
The concept of private money lending has come into existence due to the strict requirements of the banks. Now, private money lenders have made it possible for an average investor to have a sustainable career. Since private lending is faster and look outside of the box than most of the banks, borrowers prefer them for a short term solution.
When someone finds a potential real-estate deal they definitely need capital immediately to seal the offer. Since they cannot wait for the banks to lend them money, they pursue private money lenders to make the most of the deal and secure the property. Thus, the need for private lenders is significantly increasing in the market. This constantly thrives on speed and debt consolidation solution.
There is a myriad of benefits to becoming a private money lender and you can avoid risk while maintaining your wealth. If you have extra money in the bank, then you should analyze your options wisely before investing it randomly. You can become a good private money lender if one of the following things apply to you.
- You are a lawyer, a professional, a doctor or CEO who has a surplus of cash or has a lot of money.
- You have a retirement savings account that is sizable.
- You have already retired and are looking for a passive income source.
- You own a trust fund or an estate.
- You own a successful startup and are making good money out of it.
- You have won a lottery and want to invest in something.
- You want to help out people with money and would like to earn out of it too.
What you need to know about private lending
Becoming a private lender essentially requires three things; a borrower, property to be mortgaged and a solicitor representing your interest. Private lenders help people by providing loans but differ significantly from the banks or other institutions. Private money lenders charge higher rates than the banks, but they also give loans that the banks might not. The transparency of the process, as well as the speed, is way better than that of banks in that they work with a mortgage broker, a solicitor and the borrower solicitor that will represent the borrower. Before you start on your journey as a professional private lender, you should do a thorough research of how it works and connect yourself with a reputable seasoned broker. This will help you in gaining the necessary means you will require to help you with due diligence as well as avoid being perplexed as to how to go about it. Becoming a Private lender for mortgages will require you to study the business. In time you will develop your strategies, your comfort level and will gain confidence in the market.
Types of borrowers a private lender is likely to encounter
Since private money is obtained faster, individuals prefer seeking private money lenders to get their work done quickly. As a private money lender, you will encounter different types of borrowers. Here are the four type of borrowers that you are likely to meet.
- 1. Debt consolidation or equity take out: These are type of borrowers that need solutions until their credit or income qualifications with the banks will improve. Additionally, as the mortgage rules have changed drastically, borrowers resort to private lending.
- 2. Sell: These are the type of borrowers who buy a property and renovate it with the intention of reselling it after the project is completed. These type of borrowers usually find private lenders attractive because banks are hesitant toward lending money for properties that are not in good condition. In such cases, turning to a private lender is time-saving and profitable.
- 3. Rent: These are the type of borrowers who buy a property and renovate it only to give it for rent. Doing so helps them build a cash flow system. In this case, too, borrowing money from private lenders is way more feasible than going to the banks.
- 4. Developers/Builders: Builders and developers purchase land with an intention to develop it for the commercial or residential purpose. Sometimes banks do not lend money for the full projects and if so, then the requirements are really strict. This is why builders and developers find it easy to opt for private money borrowing.
- 5. Commercial Investors: These are the type of investors that use the private loan as a bridge for a commercial property for which the banks will not usually lend money. They can borrow money from private lenders and accelerate the funding process.
How to determine if a deal is viable for your private lending business?
Since private lenders are in the business of making money, the top priority here is to mitigate all sorts of risks to get the best outcome. It is not about the number of deals you have but the quality of it. Ultimately, it is your business and you must evaluate each client and their situation before your lend money. A little effort made in the early stage will definitely go a long way. It is very important to associate yourself with a reputable mortgage broker for several reasons: :
- They care about their reputation
- They have the contacts
- They have the experience in lending and look at the file differently than an inexperienced lender would
- It does not cost you anything to connect with the broker
Here are the top factors that you should consider while evaluating whether a loan opportunity is feasible.
- Borrower credit
- Borrower character
- Pricing strategy
- Market value
- Borrower equity
- Additional collateral
- Lien property
- Due diligence
- Exit strategy
Before pursuing any loan opportunity, you must consider each of the factors mentioned above. It is imperative to navigate through the process with caution to avoid any bad repercussions.
With that being said, let’s dive into the pros of being a private money lender. If you have decided to become a private money lender then you must acquaint yourself with these pros that will perhaps keep you motivated through your journey.
- Proven Strategy: Private lending has been literally practiced for ages and is a proven method of making money work for you. Even in the bygone era, people would lend money to others and earn a handsome profit through the interest rates. However, the interest rates were quite high and have to have been brought down or outlawed. The stock market has also been a lucrative opportunity but it comes with the risk of losing a lot of money and this is when people started considering investing their savings and surplus cash in the private lending business. The chances of loss are really less and since the loan is secured through a mortgage it is just a matter of mitigating the risk.
- Predictable returns: When you invest in the stock market you are doing so by hoping for it to turn in your favor. However, more often than not, you might have seen people lose a lot of money in the pursuit of profit only to be disheartened. It is very unpredictable and while it can go well it might also go against you. Whereas, when it comes to private mortgage lending, this is not the case. When you lend money to the borrowers you have an agreement in place that ensures you that you will get your money within the said time. This does not mean that there are no risks. You need to properly construct your agreement for it to turn out profitable. But you can manage it well and have proper systems in place while making sure that you leave no stones unturned. Thus, with private money lending, the returns are quite predictable and safe.
- Dependable cash flow: Private lenders have a dependable cash flow that they can get through lending money to the borrowers. On an average, a private lender can earn returns of 8% to 10% or more annually. Moreover, depending on the loan, they can also earn interest. This is indeed a reliable cash flow that you can earn. Moreover, there are always people who are looking for options outside of the conventional systems like banks. If the interest rates of the banks go up then even your rates can escalate. Through these avenues, you can expect a certain amount each month that will add to your income. Again, there is no unpredictability involved like that in the stock market as everything is pre-defined.
- Diversification: Your portfolio will be diversified as a private money lender. You can diversify with a different type of assets in various locations. This will make you a reliable lender and you will attract more investors. You can practice with a myriad of assets like fractional real estate equity investment, a collection of peer lending loans, and a real estate bridge loan. The more diversified your portfolio is the better it is for you.
- Secured Investment: A private lending deal is structured such that it is secured with a property of the borrower. You have full rights to sell the property if the borrower fails to repay the loan. This makes the entire deal safer thus making it a good investment. The property that the borrower is using as a mortgage has to be worth more than what you are lending. You can take help of an appraiser to help you out in the process of evaluation. You should also check all the paperwork so that your money is safe. Unlike the stock market, this is a way better option of investing if you also thrive on security.
- Capital Preservation: If you are looking for ways to preserve your capital and even make some profit out of it, then becoming a private money lender can be a good idea as it is a safe way of keeping your money. When you invest in other popular options like the stock market, the chances of losing money is more than making it. But in the case of private lending, you can keep your money safe.
- Passive Income: Private money lenders make money work for them and earn a passive income by simply lending money to others. If you are looking for a method that can help you earn some money passively without having to do much work then this is for you. It will take some time to establish yourself as a Private Mortgage Lender but once you become seasoned, you can earn passive income on a constant basis.
Thus, you can avail all the benefits mentioned above by becoming a private money lender. If you are interested in starting a venture of lending money and making your money work for you then below are the steps that you need to take.
- 1. Qualification:Before you start your venture of becoming a private money lender, you should have the required qualification. For you to become seasoned, you should learn as to how you can become a professional. For this, you might have to invest actively and use the systems that are offered to you. It is important to understand the dynamics of becoming a money lender and it can help you embody the true values of the business. You should ask yourself whether you can support yourself financially while doing the business. It should be noted that this will require you to have as surplus cash set aside apart from your daily expenses and savings exclusively for the business. After gaining a complete understanding of the business and setting aside the necessary capital, you can embark on this business.
- 2. Picking an Angle: There are a lot of factors that you need to consider before you can pick an angle for the business. It depends on the amount of time for which you want your money to be tied, the number of funds that you have, and the time that you can dedicate for this business. You can either do this activity passively by putting in less time and earning passive income or you can take it up as a full-time opportunity. However, if you are doing it full time then it will require more capital as well as more time. You can either go for commercial properties or go for residential ones. Choosing a niche will help you become a master of it. Also, you must determine whether you want to do it for a short time or long time. This will determine what type of borrowers you entertain and how many clients you can handle at any given time.
- 3. Speaking with a professional: Lastly, you can consult with a mortgage broker that has been in the lending business for an extensive period of time and has had success with lending and exist strategies. This will help you in gaining some valuable insights and knowing in-depth about the prospects as well as the dynamics of the work. You can find someone who has a good track record of private lending and has a good experience in the field.
Thus, becoming a private money lender is indeed a very promising venture. If you have a surplus amount of cash that you wish to invest in an opportunity that is safe, then private lending could be a good option for you. However, you must acquaint yourself with the nuances of the business to develop a good understanding of it. It has a good prospect of making the money work for you and earning a profit and passive income. You can take it up full time as well and can choose your niche accordingly.
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