Real estate investing does have its risks, but with a properly structured deal, the risks can be kept to a minimum, making the return on investment reach maximum potential. A private lender should never allow their investment to be the down payment on a property. Instead having a seller held second if a down payment is still needed is a better option, but it should not be lender money. A second position is riskier than a first position but a down payment position, the money is not secured by the asset and possibly not collateralized.
There can also be a primary position coupled with being an equity partner. As an equity partner, a private lender will contribute to the down payment in return for a percentage of equity in the property. This strategy tends to lessen any down payment issues since it’s shared, while reducing risk of the down payment money by having an equity partnership in the property.
Syndication is also a possibility if you have a group of people wanting to invest and everyone in the group is contributing varying amounts of capital. If an equity position is also in play, then the syndicate would be the equity partner, not just a few of the members.
The other consideration for impact on your return of investment would be fees. Fees accompany many investments such as CD’s, Stocks, bonds, etc. Those fees can cut into your final profit. With private lending, secured by realty, there is a tendency to not have maintenance, origination, or any other type of fees involved.
In conclusion, as a private lender, after being presented with a deal, then checking the numbers for yourself, remember to keep in mind:
- The cost of money
- The impact the cost of money will have on your profit
- Level of risk
- Covering the downside if the loan should go bad
- The profit/ return of investment
These are just a few tips for being a private lender in real estate with minimal effort. Keeping these tips in mind may aid in the reaping of the rewards on your investment. [contact-form]
