If you invest in real estate, you need cash to buy
houses. Even if you have a full bank account and great credit, you’ll
eventually run short on funds - or short on time to obtain a loan - for
the next deal. Private lending is the answer. It is a bottomless pool
of readily accessible funds: whether you have great credit or poor;
whether you have cash reserves or not.
“Private Lending” refers to the process of
borrowing real estate investment funds from private individuals at
rates higher than these lenders can normally achieve in the
marketplace. The attraction of private lending is the speed and ease of
funding a deal.
Here’s how it works…first you find or do marketing
to find individuals interested in earning 10-12% interest (or whatever
you deem affordable for you and attractive to others) on investments
secured with real estate. You’ll find these prospects everywhere. They
belong to your local investors association, your church, your civic
club, they’re your friends and family, your neighbor next door. You’ll
be surprised how easily you’ll locate them, and soon, they’ll be
searching you out. Just let everyone know that you pay high interest
for their loans on your real estate projects.
As prospects express interest explain that the
investments are secured by real estate and do not exceed 75%
loan-to-value (LTV) of the after repaired value of the home. Each
investment is based on a specific property, and they can decline any
property with which they are not comfortable. All you require is that
they approve quickly (within 48 hours), and can fund within 7-10 days
or less.
Once they have approved the investment, the funds
are wired to the closing attorney to be held in escrow. After the
closing, the lender will receive a Promissory Note from you (either
personally, from your business entity, or both), a Deed To Secure Debt
(mortgage) on the property, lenders’ title insurance, and listed as a
mortgagee on the hazard insurance policy.
If no single investor can fund the entire
investment, then piece several loans together by providing the largest
investor with a first position mortgage, and each smaller investor a
progressively subordinate (2nd, 3rd, etc.) mortgage. Typically, we pay
an additional percentage on the interest rate to entice investors who
accept subordinate positions.
The advantages of private lending are that there
is a minimal approval process, and so availability of funds is quick.
You pay interest only, instead of also incurring a loan origination fee
commonly known as “points”. You are never constrained by arbitrary
rules as to how many mortgages you can have in your name. In fact, none
of these mortgages ever show up on your credit report. In turn, the
private lendor receives a higher interest rate with a very secure
investment. Everyone wins!
Now you may be wondering how many people you know
really have $75k -$100k -$150,000 just lying around ready to invest.
More than you think - and most of them don’t even realize it! That’s
because the money is tied up in their IRA’s which they believe can’t be
accessed until retirement. That’s only half true. They can’t personally
withdraw the money without suffering penalties; but they can invest
their funds (and receive your interest tax-fr ee! if it's a ROTH IRA)
if they rollover into a self-directing IRA.
A self-directed IRA is administered by a third
party institution (we recommend Equity Trust Company in Ohio
www.trustetc.com ) and allows the IRA owner to make decisions relative
to the investment of the funds. In other words, the IRA owner can
decide to use his IRA funds to make a real estate investment in your
property. Most people do not even realize this as a possibility. They
believe their money must stay tied up in an IRA until retirement
earning nominal interest. Imagine how thrilled they are when you
provide this alternative! Imagine how much money is currently sitting
in traditional IRA’s that you could tap into. There are more funds
available than you can use. Isn’t that a nice problem to have?
Since Equity Trust Company has all of the forms on
their website, I ensure that making a loan is as simple as possible for
my private lenders. I prepare all of the required documents so all they
have to do is sign and fax to Equity Trust. From that point on, the
private lender has nothing else to do. Simple. Easy. Their next task is
approving the payoff when the loan is re-paid. Because the loan process
is so simple, and the interest rate so favorable, investors are always
begging to re-invest. This truly is a bottomless pool of investment
cash.
Don’t forget that if you have cash in an IRA, you
can also increase the interest you’re earning by becoming a private
lender. You can not invest in any property or company in which you or
your family have a vested interest, but you can invest in the projects
of other investors which you know and trust. It’s a great way to leap
frog your IRA.
Have a rich week,
Lou Castillo
About The Author
Lou Castillo
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