The term “private money lender” confounds many people. They are unaware that they may make a lot of money by participating in “hard money lending”, another name for private money lending. An individual or group that negotiates directly on a personal basis to lend money for real estate ventures is referred to as private money or hard money lender.
The funds are provided through personal assets and can also be money saved in a savings account after a while. The funds can now be utilized for rental real estate venturing or acquisition or to augment bank-loan funds for down purchases, which is called a bridge lending program in Houston. Basically, a private money lender replaces the bank.
What Are the Accrued Benefits?
Hard money and private money loans generally provide an annual return on investment of about 10%. This implies that if you can get a fix n flip loan in Houston to invest in a real estate property for as little as $35,000 every year, you would receive a $3,500 return on your initial investment, which equates to around $292 per month. Compound that over a $200,000 investment, and you could easily earn $1,670 per month just for engaging in private loan lending. And this is with a relatively low 10% interest rate.
Is it safe?
Because all investments entail some level of risk, you must examine your position financially to determine whether private money lending is a boon for you. Generally, investing in real estate secured loans provides a better rate of return while incurring less risk than the stock market. There are no upfront costs or commissions, and the borrower is obliged to get hazard insurance on the property, with you listed as the mortgagee on the insurance policy.
Many times, the borrower is compelled to cross-collateralize an extra piece of property, providing them with even more incentive to repay their obligation on time. Essentially, you are investing in real estate without the hassles of being a contractor or landlord.
Advantages of Engaging in Private Money Lending
Practically no one would have gotten interested in this kind of money lending unless they recognized they could benefit enormously from it financially. Below are the primary benefits of becoming a private money lender:
Return on Investment (ROI)
The current interest rates imposed on private money loans range between 7% and 15%. These rates are now higher than CD, savings, and money market account yields. They are almost at par with the stock market’s inflation-adjusted average return of 10 percent.
Lending on tangible physical structure assets diversifies a lender’s portfolio and provides protection in the case of a market downturn.
There are ups and downs in the real estate market. However, its volatility is far lesser than that of the stock market. Furthermore, when acquired at a reasonable price, the property acts as a buffer against market volatility.Fix or flip loans in Houston generally have little or no risk.
Real estate property acts as loan collateral. The majority of real estate investors buy properties at a considerable discount to market value. If the borrower defaults, this discount grants the lender high-quality collateral.
The lender and borrower can agree on an interest rate and profit-sharing. In addition, principal and interest payments can be arranged. As with standard bank loans, only when the arrangement is considered acceptable to both parties will it be tenable/permissible.
No Extra Effort
The lender is only concerned with the repayment of the loan. The investor assumes all additional risks and works to identify, acquire, repair, and sell off the property. The Lender collects interest and principal.
The lender can choose what project to lend to or who to lend. They may obtain extensive information on the project, the investors’ expertise, and the typical earnings made from similar projects before making a decision.
Where do I start as a Private Money Lender?
The most critical step in becoming a private money lender is to ensure that you have the necessary funds. You should have at least $20,000 to lend out, and it should not be connected to anything other than investing. You must then be able to loan this money promptly and not require it for at least a year. You must convert it to a “self-directed” IRA with a third-party custodian if you have an IRA.
If you’ll love to invest in real estate but don’t want to take on all of the risks, private lending as an option can offer a variety of opportunities and pros for increasing your wealth and saving up for the future.