Typically, our private lenders get between a 12%-18% return on their investment. The return is based on which state the money is lent, the investment dollar amount, type of property, borrower's experience, and resale plan. We are always looking for individuals and groups to privately lend on real estate because there is a growing need for this type of investor and the market timing couldn't be more desirable. Investors are buying as the market is slowly appreciating in value. This is an extremely favorable market position for a private lender. It is a great opportunity to achieve a higher fixed rate of return than on your present investment vehicles.
Most of the loans funded by our current private lenders are short-term bridge loans. The average term is 12 months. The loans are usually interest-only with no prepayment penalty which allows the borrower to easily resell or refinance out of the loan. Most of our existing private lenders require a 10% to 20% down payment by the borrower on the property being financed. This makes for a secure private loan position and requires the borrower to have some initial financial commitment into the property. Our private lenders, in almost all cases, are in the first position on the property being financed. Residential loans are only for non-owner occupied borrowers. This is a requirement because of state and local government restrictions and because all of our current private lenders do not want to ever have to be in the position to foreclose on an owner occupant borrower.
Most of our private lenders want to be assured they will make substantially more money investing in real estate loans than in their existing investment portfolio. Many of our private lenders also want to see their money being spent on properties and borrowers that will improve the community, thus targeting certain types of projects.
Philanthropy is an aspect that all our private lenders enjoy, some more openly than others. Most investors like adding this type of investment to their portfolio because they can physically see where their money is being invested every day. If they choose, they can observe the growth of that investment, not only in terms of profit, but also in the growth of the community in which they live. Investors achieve something rare in the world of financial investment and get one of the highest returns possible with minimal risk while observing in real time the improvement of their community.
A recent example of a private loan we were involved with was in Woonsocket, RI, a depressed community recently on the verge of bankruptcy. A nine-unit building was in deplorable, rat-infested condition and even had real grass growing out of a carpet on the third floor due to a hole in the roof. Copper had been stolen, boilers and heating systems were missing, and graffiti from previous tenants plagued the property throughout. The building had even been condemned by local building inspectors. This building that had been previously assessed by the city for over $400,000 was now being scheduled to be torn down, reducing the tax assessed value of the lot to around $40,000. One of our investors bought the property and one of our private lenders financed not only on the purchase, but the rehab as well. All of this was achieved from the date of the sales agreement to closing in less than two weeks. The investor refinanced out of this private loan in about nine months, freeing that private lender to lend again on another project and increase his rate of return on capital investment as well.
In this example, the City of Woonsocket benefited because the projected assessment is now in the $400,000 range. The property now provides much needed quality rental units for its residents. In short, the City of Woonsocket has been revitalized on a very small scale without the use of public assistance.
This is just one of the many examples where private investors have made a difference in their communities while achieving substantial profits and growth to their self-directed IRA's or other investment accounts. There are many more examples from Springfield, Massachusetts to Plainfield, Connecticut of investors purchasing properties and Private Investors contributing with purchase and rehabilitation funds to change the course of their neighborhoods.
Why Brokerage is the Way to Go for Private Lenders
- Screening Borrowers:
We spend a great deal of time screening Borrowers in the beginning of the process. This is why to a large extent we have not had one foreclosure in over five years on any of the almost 200 loans we have brokered. We don't just look at down payment as our criterion for private lending. We look at the investor's experience, motivation, rehab. plan and exit strategy. Many prospective investors do not go beyond this phase.
- Evaluate Pricing:
This information is not always readily available to our private lenders. As realtors, we have a better understanding of resale values than most investors or private lenders. Often investors tend to be overly optimistic in their resell values which can put our private lenders at greater risk.
- Evaluating Rehab. Budget and scope of work to be performed:
We look at the rehabilitation aspect of the loan to make sure it is realistic and under control. There are many investors who under-budget their rehab and therefore, they can't bring the property up to FHA standards for resale. There are many investors who over-rehabilitate their property forgetting that it is an investment on which they are to set make a profit. We assist investors them see from a realtor's prospective where the best use of their rehab. funds need to be. This is done to maximize their return with the results increasing their likelihood to sell the property faster thus paying off the private lender more rapidly. Why is this a good thing? If a private lender can re-lend their money once or twice within a 12 month period the return on their funds is increased significantly.
- Follow-up with the investor after the loan closes:
Many private lenders or other mortgage companies do not have the time, energy, or desire to work with the investor after the closing, but we do! We've had ZERO foreclosures on properties that have been funded by our private lenders. We help investors with buyer leads, contractor's contacts and realtor referrals (if needed), all in an effort to assist the investor in completing a successful rehab. project. Timely monthly payments and an early payoff of the private loan ensure success for both the investor and our private lenders. We tract all our private loans in terms of rehabilitation funds expended and timeliness of monthly interest payments. Many private lenders will call us to get involved with any late payments. We work with the investor and private lender to resolve the situation and to date we have 100% success rate. This is yet another reason we have a 0% foreclosure rate.