19 Sep Marcelo Carvalho Cordeiro interview in Miami about Private Lending
Text By Marcelo Carvalho Cordeiro
Investing in real estate is essentially one of the smartest and safest strategies to promote wealth building.
With the proper foundation and knowledge, investing in real estate – or in this case, private lending – can prove to be highly lucrative for anyone. Of particular interest, however, is what an investor can do with the money they make from a profitable career.
Be smart with money
While a portion of profits will undoubtedly be allocated to the lifestyle of their choice, investors are advised to be smart with their money.
Of course you can reinvest your money into another property, but if you are looking for an alternative, there may be one option you haven’t considered yet.
Investors who have the funds to do so should consider becoming a private money lender.
Private money lender
For those of you who may be unfamiliar with the concept of a private money lender, these individuals lend their own capital to other investors or professionally managed real estate funds, while securing said loan with a mortgage against real estate.
Essentially, private money lenders serve as an alternative to the traditional lending institutions (big banks) people are so familiar with.
Leaving your hard-earned money in a savings account is no way to protect and grow your assets.
At the end of the day, you are securing a loan with real estate that is worth much more than the loan.
Private money lending can sometimes be less risky than owning real estate, if done properly.
In the past, real estate financing typically came from banks, government agencies, insurance companies, and pension funds.
However, with a nauseating list of strict requirements and a timeline that was not conducive to the average real estate investor, a need for an alternative lending source quickly developed.
It became obvious to those with the appropriate funds that their money could better serve investors than large institutions.
Now, private money lenders are a critical component to the real estate investment industry.
In fact, their presence makes it possible for the average investor to run and maintain a sustainable career.
In case you aren’t aware, there are several benefits to taking on the role of a private money lender.
Alternative real estate financing options
Subsequently, if done correctly, offering alternative real estate financing options can mitigate risk while simultaneously establishing true wealth.
Of course, this is not a path anyone can walk. You need to ask yourself if you can afford to do so. Having a little extra money in the bank doesn’t mean that you should throw it at the first investor that comes your way.
In fact, it is pretty straightforward: don’t become a private lender if you are not willing to take the time to understand the risks involved. However, if you are equipped to mitigate potential risks and take advantage of the opportunities that present themselves, becoming a private money lender may warrant your consideration.
While the concept of a private money loan is relatively simple, three elements are required for a loan of this nature to transpire: a borrower, a lender, and a lot of paperwork.
For all intents and purposes, a private money lender is an investor who makes loans secured by real estate. While they may serve the same purpose as a traditional lending institution, there are several key differences: private money lenders typically charge higher rates than banks, but will also make loans that the average bank would usually pass on. It is important to note the difference between the two. While banks and similar lenders may offer the most attractive rates, they do not provide the same combination of speed and transparency in the decision-making process.
The concept of a private money lender is relatively simple: without money, real estate investing does not exist. Money, like it is in every other industry, is the lifeblood of an investor. Real estate investors need to actively work on bringing in private money loans to fund their deals.
More often than not, the average investor isn’t capable of funding a deal with their own money.
Regardless of a particular investor’s situation, there is an increased likelihood of them needing private money assistance. Instead of having to pool money or stretch every dollar, investors are given more options to grow their business with the use of private money.
Perhaps even more importantly, is the speed and efficiency in which private money may be obtained.
The speed of implementation is critical to an investor, and can mean the difference between closing on a deal and losing one. Having the money in a timely manner make it that much easier to bring a deal to closing.
As a private money lender, you will be confronted by several types of borrowers. While each is unique, they are all looking for the same thing. Essentially there are four types of borrowers:
This type of investor will typically purchase a residential property and complete renovations with the intention of reselling it once the project is complete. Borrowers in this sector find private money attractive because conventional banks will often not lend on properties in poor condition. Perhaps even more importantly, access to private money is more conducive to a timely and profitable flip.
These investors typically purchase a residential property and complete renovations with the intention of renting the property for cash flow purposes. These borrowers find private money attractive for the same reasons as investors in the rehab/sell category.
Builders and developers will purchase vacant land to permit and develop into residential or commercial use. Borrowers in this sector are interested in private money primarily based on the speed with which the funds can be available. Also, many banks will not lend on speculative development.
This population of investors may seek to use private money as a “bridge loan” for a commercial property where a conventional bank will not lend on an un-stabilized asset.
Again, private money loans are going to cost more and are accompanied by more burdensome terms.
However, the few benefits of private money outweigh the negatives. Borrowing from a private money lender will result in a quicker loan, as you do not have to navigate the same process that comes with traditional lending institutions.
Moreover, private money lenders will take risks that most banks are not willing to. Private money, for all intents and purposes, is a fundamental tool to the average investor.
Not only are institutional loans lengthy and cumbersome, but they can also impede the progress of a residential redeveloper.
Conversely, private money can afford investors the ability to grow their business at a steady pace. The following illustrates the most important aspects of a private money loan:
Speed of Purchase:
On average, a private lender can underwrite and fund a loan in as little as 7-21 days. Banks can take up to 90 days to accomplish the same thing.
The timeframe offered by a private money lender is, more or less, conducive to the deals a typical investor wants to finance.
Asset-based Lending: Private lending is primarily driven by the underlying value of the subject property.
Therefore, a borrower does not need to rely on their credit to secure a loan.
Control & Profitability:
Borrowers receiving private money have more control over their loan. Borrowers of private money do not need to take on equity partners.
Shorter Term Loans: Private money loans typically have a shorter loan period than those of a conventional nature, which reduces the risk of accruing late penalties.
Guarantee of Capital:
Private money allows borrowers, independent investors in particular, to expand their business. A predictable source of funds is necessary for such an endeavor.
As with any new business venture, you will face both positive and negative circumstances, should you decide to become a private lender. Do the pros outweigh the cons for you?
Reliable Cash Flow:
While there are no guarantees, private money lenders can typically expect an annual return somewhere between 8% and 10%.
Depending on the loan structure, there may be other ways in which profits are realized, like interest.
In loaning your own money, your investment will be secured by a first position “priority” lean on the property in question.
Additionally, the loan-to-value (LTV) ratios are typically 60-70%, allowing the invested capital to be preserved in the event of foreclosure. Structured correctly, and your investments is very safe.
As a private money lender, you are encouraged to diversify your portfolio.
Loans are typically short in their length (usually nor more than 12 months).
Private money lenders earn relatively passive income, in that their money is working on their behalf.
The return on investment is not correlated to the amount of time they put in.
Marcelo Carvalho Cordeiro is an expert in private lending.
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