Short-term loans to fins and homebuilders can generate strong returns for investors
If you’re looking for an investment vehicle that generates strong short-term returns without the volatility of growth stocks, private loans might be right for you.
Becoming a private lender is not as complex as it seems. All you really need is a comfortable amount of underutilized capital, zero risk tolerance, and access to a good real estate lawyer, because you’re going to be targeting real estate investors and finance their projects.
There are plenty of opportunities to get into the industry, especially when it comes to lending to those who are flipping their homes. According to data from Attom, 323,465 U.S. single-family homes and condos were returned in 2021.
Experts say there are two reasons why private lenders tend to focus on real estate.
First, from pinball machines needing money for renovations to commercial investors looking for bridge loans, there is a reliable and steady demand for cash from the real estate industry. While larger developers and builders typically have lines of credit in place to cover these costs, smaller businesses will seek cash in the private market.
The short-term nature of these investors’ projects means you can charge interest rates comparable to what they would likely be offered by traditional lenders. In the United States, an interest rate of 7% or more on private transactions is not unheard of, according to real estate experts, although it can typically range from 6 to 15%.
Second, because your loans will be secured by the real estate assets of your borrowers, the collateral involved will generally be worth much more than the amount you will lend. This helps control your risk.
As a private lender, your returns come in many forms. There’s interest, of course, but some lenders also charge exit fees or “points” – fees that are paid by borrowers in exchange for lower interest rates. Some lenders opt for profit-sharing on the projects they help deliver, but experts say such deals carry more risk due to the uncertainty around budgets, timelines and getting projects to market. a finished project.
Finding borrowers can be a challenge for new private lenders. You’ll need to get your name out there, so working on your social media feeds is a smart move. Joining a local real estate investment group or two will help you meet investors who are actively seeking cash. You can also build relationships with mortgage brokers who specialize in private lending.
But you won’t get far in the private lending business without an experienced, qualified real estate attorney in your corner to negotiate your offers and review contracts, experts say. A good real estate lawyer can also be a reliable source of leads.
As simple as private lending may seem – and it often results in surprisingly smooth transactions – there are always risks involved. A good strategy for your first deal is to start small and stay local. Meet the builders and developers you’ll be working with in person and ask them to tell you about their projects.
Work closely with your attorney to get a successful settlement or two under your belt. Doing these things will give you a clearer idea of the level of risk you are comfortable with and what you could gain.
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— With files by Samantha Emann
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.