Becoming a Private Lender
Today I want to talk about how to be a successful private lender. Many people think lending isn’t a great idea because of the amount of foreclosures going on right now. My response to this is that bad lending is a bad idea in any market- that’s what got people into this mess in the first place.
I know guys who were getting 110% loans. They would get money to buy the house, money for closing costs, and even some money for rehab. That all sounded great until the cookies started to crumble.
As a successful lender, I always recommend never lending more than 70% of the value of the property. That way you’ll have 30% in equity to work with. 7-10% return on investment always sounds nice until the payments stop coming. The result of this is that you’ll have to foreclose on the person and end up with a property- what banks call REO’s (or real estate owned).
When this happens to banks they don’t want the properties- they’re not real estate investors. They want their payment. Most private lenders feel the same way.
Private Lending Guidelines
It’s because of this potential outcome that you should never loan money for a deal if you don’t like the idea of owning it. If you’re prepared for this possibility and are ok with this outcome you won’t be so freaked out if that happens. As a matter of fact I have some deals where I think it would be kind of cool if I ended up with the property because it’s such a great house.
The secret is writing a good loan. Make sure you have a qualified investor- someone with experience.
Last week I met a guy in his 20′s who said he’d met a doctor who was willing to put up $1,000,000 up for him to invest with so he was looking for his first deal. I just thought how did you meet a doctor who was willing to give you a million dollars for your first investment? That’s great for the kid, but what was that doctor thinking?
Experience
When you’re a private lender you want to know how many deals the borrower has done. Associate yourself with successful people. I have a great team of successful people around me- attorneys, title companies- and you need to think that way too.
So again line yourself up with great investors and make sure the property isn’t one that you would mine owning in a worst case scenario. Also make sure your not lending above 70% of the homes value.