Private Money Lending – is it right for you?
So, you want to be a private money lender, and use your money you have sitting in your self-directed IRA.
Before you jump in and risk your hard-earned dollars, here is what you should be asking:
How do you start the vetting process of the person that you're going to be lending money to?
o Questions to ask: How to do you know them? Are they a friend, family member and are they a new or seasoned investor?
PRO TIP: If this is their first investment, please consider not lending, the risk might be too big with your dollars!
What is their track record for paying their bills, level of real estate investing, and can they provide names of other people they have borrowed money from for a real estate deal?
o It's okay to do a credit report if you want to see how “credit” worthy the borrower is. Most of the people that lend money to me do so because they know that I'm a seasoned investor, I have a track record of paying people back, and they are comfortable with the terms we negotiated, and the deals I get under contract.
PRO TIP: Private money lending is based on relationships. My deals typically have 30-40 percent equity, so my private money lenders have a secure asset when they are looking to loan.
What does the deal look like?
o Can you drive to the property? What is the repair estimate and who will be doing the repairs? What is the After Repair Value, and what percentage of that dollar amount are you willing to lend on?
PRO TIP: Do not lend 100% of purchase and repair costs. The right real estate deal is the key component, you don’t want to leverage all of the equity of the property against your funds.
If you're brand new to private money lending and you don't know the person, then don't lend money to them because it's risky. There is a risk in any real estate venture, but you just want to make sure that you minimize your risk by doing your due diligence.
What are the terms – what is your money going to be earning, and how long will the borrow need the funds:
o Typical terms I use: 2 points and anywhere from 7-10% interest. Points are the origination fees that you as the private money lender charge to a borrower.
o Have your borrower pay your “transaction” fees – the fees the custodial company charges to “take-out” your funds.
PRO TIP: One of my number one takeaway is that if you are not in first lien position, then do not do the deal. Now I have, when people have worked with me multiple times, they have been in second lien position. But if you're just starting out or you don't know the investor, do not do anything but first lien position.
Bottomline, when you are a private money lender it is up to you to vet the borrower AND vet the deal!
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