Professionals who buy, rehab and flip homes often struggle when pursuing project financing. It’s not that banks and traditional lending institutions can’t lend them funds. It’s because traditional institutions take so long to approve loans.
Unfortunately, in the time that it takes to approve a bank loan, property flippers have bought, fixed up, and sold properties. Then it’s time to start another rehab project.
So, what’s the alternative financing arrangement? Private Money Lenders (PML). This is where you come in. As a private money lender, you can invest in some of these amazing fixer-upper deals, and earn money in the process.
Becoming a private money lender is pretty straightforward. The largest requirement is direct access to capital. The capital could be in your savings account, an IRA, or a group of family, friends or colleagues combining investment funds in an LLC. As long as you can provide the funds, you can benefit from these opportunities.
And with house flipping projects at an all-time high, there’s no better time to get in on these opportunities. However, as with everything, there are pros and cons to becoming a private money lender. Let’s quickly examine them.
The benefits of becoming a private money lender are numerous. They include:
Flipping homes is at an all-time high, with over 207k homes fixed and flipped in 2017. These deals translated into a revenue of over $16 billion for all participants. And the numbers don’t seem to be shrinking either. If anything, the new robust economy is driving the growth of this opportunity.
The good news is private money lenders are leading the charge in these deals. They’re providing capital for rehab project success. And private money lenders are making good money on these projects too!
Investing in rehab projects is essentially low-risk and comes with high rewards. Profits from these projects typically exceed what a bank can offer the public for parking their money with them.
Interest rates on loans given to property rehabilitation entities are in the single to double digits. The going rates are between 8 and 12 percent. Some private money lenders are able to extract higher interest rates depending on the terms of the deal.
Many millionaires tend to trade in the stock market, in the hopes that they can get decent returns. And even then, those returns aren’t guaranteed. But, becoming a private money lender gives you an edge.
Not only will you be giving out secure loans, however, because of the property in question, your interest rates can also serve as a steady source of income. Your bank won’t give you these rates, neither will the stock market.
Say you lend five fix-and-flip entities $200k each, at 10 percent interest. If they sell the properties within a year, that would translate into a healthy $100k profit. That’s a six-figure income right there without lifting a finger. It’s a win-win for you.
If the entity defaults on their payment and you can’t reach an amicable settlement, you can always foreclose on the property. Private money lending entities hold on to the first deed of trust upon issuing the loan to the borrower.
You have ownership of a real asset that you can always seize and foreclose on should the real estate investor default on their payment. This is as low risk as it gets. At the end of the day, you basically have little or nothing to lose. In fact, all the risk is borne by the property rehab entity.
Fixing and flipping properties can come with a lot of headaches. A thousand and one things may go wrong. However, as a private money lender, that’s not your concern.
The private money lender lends the investor the money and the investor does all the hard work. It’s not the private money lender’s problem if the investor makes or loses money. All you’re concerned about is when the project is done and the sales closed, you get your cut and walk away smiling.
They, on the other hand, will end up dealing with unforeseen zoning issues, over purchasing, under budgeting and many other intangibles. And because most of these deals are short term, you have the opportunity to move money in and out according to your contract. For you, it’s really a win win all around.
Some of the deals don’t pan out. This doesn’t mean you don’t get paid though. It just might take a bit more time. Also, you won’t get to enjoy the perks of owning a property.
Rehabbers, on the other hand, can enjoy benefits like 1031 tax-free exchange, mortgage interest deductions and so on. But, that’s not why you become a private money lender. If you want those perks, you might as well become a real estate investor.
Also, it doesn’t matter how much you make from the deal, it will not appreciate at the rate an owned property does. So, if you lend $200k to a real estate rehab person at a 10 percent interest rate, you’re only entitled to $220k at the end of the deal. It doesn’t matter if the property sells at $1m, that’s all you get.
Most private lenders are fine with it though, seeing as some have blended investments in the form of owned properties and private money lending.
Of course, becoming a private money lender is worth it; particularly when you have a bunch of money lying around. You’re providing needed services and getting real rewards.
As far as we’re concerned, this is a fantastic feel-good business model. Everyone who participates wins. From property sellers, to real estate agents, to you the lender, and us, the investors.
If this is an attractive investment for you, contact us and let’s do business together. Landing Zone Homes has a great business model and we can put your funds to work for you today!