Key Benefits to Lending Private Money on Real Estate

Lending to real estate investors offers the Private Lender many benefits not otherwise enjoyed through other means. Before we get into the benefits, let us briefly explore what Private Money Lending is. In the real estate financing industry, private money lending refers to the money an individual, not a bank, lends to a real estate investor in exchange for a pre-determined rate of return or other consideration. Why private loans? Banks do not typically lend to investors on properties that require improvement to attain market value, or ‘after repair value’ (ARV). Savvy people with available cash in a broker account or self-directed IRA, realize that they can fill the void left by the banks and attain a greater return than they may be currently getting in CD’s, bonds, savings and money market accounts, or even the stock market. So a market was born, and it has become essential to real estate investors.

Private Money Lending would not have become popular unless Lenders saw a tremendous value in it. Let us review key advantages to becoming a Private Money Lender.

Terms are negotiable – The Lender can negotiate interest rate and possible profit share with the borrower. Additionally, interest and principle payments can also be negotiated. Whatever agreement that suits both parties to a private loan is allowable.

Return on Investment – Current interest rates charged on private money loans are generally between 7% – 12%. These rates, as of April 2018, are currently greater than returns from CD’s, savings and money market accounts. They also outperform the 4.7% the stock market has produced, inflation adjusted, since 1/1/2000. That is over 18 years.

Collateral provided – Real Estate property serves as collateral for the loan. Most real estate investors acquire their properties at a significant discount to the market. This discount provides the lender with quality collateral should the borrower default.

Choice – The Private Money Lender gets to choose who to lend to, or what project to lend on. They can get detailed information on the project, the investors experience, and the kind of profits normally made.

No Effort – The Lender only worries about the loan. The Investor takes all the other risks and does the work to find, purchase, fix and sell the property. The Lender just collects the interest.

Stability – Real Estate does have ups and downs. But its volatility is nowhere as pronounced as the stock market. Additionally, when purchased at a proper discount, the property provides a cushion against the ups and downs.

Tax Free/Tax Deferred – A Private Money Lender can lend on real estate from a self-directed IRA. The gains achieved can grow either tax-free or tax deferred helping to build the retirement nest egg faster than ever.

Diversification – Lending on real, tangible, brick and mortar assets provides additional diversification to a Lenders portfolio to provide protection in the event of a down period.

If you have the desire to invest in real estate, but don’t want to take on all the associated risk, or get your hands dirty, private lending could provide a wide range of opportunities and benefits in growing your wealth and providing for your retirement.

How to Acquire Rentals

A lot of investors ask me how best to acquire rental properties. Typically, finding investment properties isn’t the issue, it’s financing the properties that is.

The main difference between buying “hold” properties (rentals) and buying investment properties to rehab and resell is the financing. For flip properties, you only need to borrow for 6 to 9 months typically. For rentals, your financing will be the traditional 30 years.

When we started investing in 2005, banks would make up to 8 mortgage loans per qualified borrower. So, I got 8 mortgage loans in my name, then Jim got 8 in his.

Today, large financial institutions still offer the cheapest long-term funding available so I recommend you start there. Check with national lenders, local banks, and don’t forget credit unions. See what financing they offer, how many rental loans they will do, and how you qualify.

If your goal is to own a lot of rentals, don’t pay cash for the properties – it’s best to have a mortgage. There is 10, 15, and 20 year funding available, but go for 30 year mortgages. Keep your monthly payment as low as possible in order to get all the cash flow you can at the beginning of your ownership. Once you have a large enough portfolio and enough funds coming into your business, you can always pay the loan off early but you can never ask for a reduction in the amount of your mortgage payment.

Another advantage to the mortgage balance is that you can claim the interest deduction on your taxes. Rentals offer so many tax write-offs which you especially need if you’re doing flips and wholesale deals.

You need available cash to qualify for additional mortgage funding, so don’t sink more than necessary into any property you plan to hold. For years we flipped every property that we put much money into, anything that needed rehab, and kept only the properties that had very little of our own money tied up in them.

Eventually, you’ll use leverage to build your portfolio, borrowing against the equity you build up in your rentals over time. We’ve borrowed against our properties more than once to get the funding we needed to acquire more.

How do you find the funds to acquire rental properties? Do you plan to pay them off early, or wait and let your tenants pay the full mortgage over time?

My name is Karen Rittenhouse and I’ve been investing in real estate full time since 2004. We currently buy about 60 houses per year, 80 percent of which we wholesale.

Common Mistakes When Making Offers to Buy Real Estate

Probably one of the toughest parts of real estate investing is deciding what to offer for the property.

Offer too little, and you lose the deal. Offer too much and there is no profit.

Whether buying to renovate the house and resell; to keep it as a rental; or to sell it wholesale to another investor, these mistakes are often made by both novice and even more seasoned investors.

If I’m completely honest with you – I catch myself still starting to make some of these crucial errors. Make sure you are informed and armed against these deal killing mistakes.

Top Mistakes

Not dealing with a motivated seller – If the seller is not motivated – even desperate to sell – then you will never be able to negotiate a price that works and you are just wasting time and frustrating yourself for no reason.
Too much emphasis on seller’s desired price – Investors often start with the Seller’s desired price as a benchmark and attempt to work the seller down from there. What the Seller wants for the property is irrelevant to what can be paid. Use a formula you trust and determine your price first. Begin your negotiations with a number below your top price and negotiate up from there. If the seller is not remotely interested, then they are not motivated.
Using comps that aren’t really comps – Although appraisers can use houses that are as much as a mile away and sales that up to a year old, it is better to use comps that are less than six months old and less than a quarter mile away (even up to ½ mile). Make sure the comps truly are similar houses, in similar areas. Lately, many wholesalers are using comps from neighboring areas that are within the desired distance, but completely different type areas. The house and the neighborhood must be similar to be an accurate comp.
Not determining your highest price before starting negotiations – Before you even start to negotiate with the seller you need to determine your maximum profitable offer (MPO). This is your drop dead point – the deal breaker price over which you will not pay. You must know what that number is.
Changing your highest price offer after negotiations start – It is not uncommon for an investor to become so excited by the negotiation that they start to adjust the MPO figure they calculated prior to negotiations. They justify why the figures can be adjusted. Don’t do that. You were sane when you calculated the MPO, and the thrill of the negotiation makes you insane. Don’t listen to your insane mind!
Not including margins for your (or your investor buyer’s) buying/selling/holding costs – These costs are often forgotten yet represent anywhere from 12% to 20% of the final value of the property. This one figure can be the difference between profit and loss on a deal.
Forgetting to add profit for both you and your investor buyer – Seems crazy, but YES! this is a common mistake – especially among rookie wholesalers who either forge to include a margin for their Assignment Fee or forget to leave a profit for the investor buyer. That’s why it is so important to follow a formula.
Not stepping back to look at the house/street/neighborhood through your buyers’ eyes – There’s more to a good deal than just the numbers. Literally stand back and look at the property from your end buyer’s (whether owner/occupant or investor buyer) and see what they’ll see. Is the house on a busy street? Is there a cemetery next door? Does the back yard have a steep cliff that presents a danger to children? Is there a highway behind the house? Do trains pass right by the house? All of these are real examples I have faced. They don’t necessarily kill the deal, but they do require the numbers to be vastly adjusted.

Making profitable offers that are accepted by prospective sellers is an art more than a science. There is much to consider – and if you were to make one of these common mistakes, you could be creating an unprofitable deal.