Private money lending for real estate
Most people have been conditioned to believe that earning double-digit returns is only possible for those willing to take large financial risks. I am here to tell you that it is not true. I know this because my private money lenders earn these types of returns, while being exposed to risks far less than what I believe the stock market offers. Our private-money lenders have their loans secured by actual real estate assets. In the “worse case scenario” (the occurrence of a major, unexpected problem), the principal can be recovered thru the foreclosure process.
How does the process work? There are 3 steps we follow in California:
1. Bridge Equity Group and their private money lenders come to an agreement on terms. These are typically loans for 12 months with no pre-payment penalty. In most cases, loans are paid back in less than 6 months.
2. Once a house is in contract, the borrower signs a promissory note (legal document that defines all terms of the loan) and a deed of trust (legal document that secures the loan against the house). At close of escrow, the title company records the deed, which places a lien against the property. With a lien recorded against the property, it cannot be sold until the loan is paid in full.
3. Property is the rehabbed and sold, at which point the lender is paid back their principal and all accumulated interest.
The key is to work with borrowers who have a successful track record, experience, and integrity. I recommend that you always check references. In addition, there should always be adequate equity in the deal to allow a cushion for things to go wrong (they never go perfectly to plan). In order to protect our lenders, we never borrow more than 75% of ARV (after repair value). By sticking to this ratio, there is still enough equity in the property to cover all financial obligations if things go bad.
I will re-iterate here that the integrity of the rehabber/borrower is very important. In a business where things can and often do go wrong, you want to be confident that even if the project loses money, you will still be paid all that is owed. Any rehabber who is in this business for the long-term will find a way to service all of their debt, even if they lose money on a deal (you can be sure that just about any rehabber who has been doing this business for long has lost money on at least one deal), I lost $13K on a deal in 2014 and my lenders made a total of $54K on that project (100% of what they were owed). This is what I call safe, high-yield returns.