Private Lending Frequently Asked Questions
Why does it make sense to have passive investments in real estate?
What is private lending?
Can I use my I.R.A. or 401k to lend from?
Why would an investor be willing to pay such high returns?
Are high interest loans like this new to real estate?
How is the private lender protected when they lend money?
Who handles all of the paperwork?
Do I have to collect payments on these loans?
Do these loans pay down or are they interest only?
How long are the typical loans and how much do I need to invest?
Is private lending really a safe investment?
How do I get started?
Glossary of Terms
Are You Now Ready to Take Action?
Contact Us to Setup a Consultation
Why does it make sense to have passive investments in real estate?
Most people go through life letting others make decisions for them and they are not in control of how their money is invested or what it earns. That means they’ll never really know if what their investing in will give them enough of a return to take care of their future, their family, the kid’s college, or their retirement. Because of that, they’re playing guesswork games with their money and hoping they’ll get in or out at the right time and it’s virtually impossible to always make
the “right decisions.” By becoming a private lender who invests passively in real estate, you can get 7-10% fixed returns, safely secured by real estate. Since your returns are fixed, that means they never change. They’ll also be much higher than CD’s, money markets, commodities, and most stocks and mutual funds.
What is private lending?
Once we started making money buying, selling and holding single family houses, we realized we had a lot of friends and family members that were tired of the ups and downs of the stock market. We discovered a method of working with them as a silent partner on our real estate investments by putting their investment capital to use by lending it to us at much higher returns secured by the houses we were buying. We needed small amounts of capital to buy houses and do small renovations
so we could sell the properties and make a profit. You see we needed to act quickly to get good deals that came along every week and we didn’t want to deal with banks because they would limit the amount of deals we could do. Since our friends had investments that were getting low, inconsistent, risky and unsecured returns, it gave them an opportunity to make more money without losing sleep at night watching the stock charts. Investing with us, they had a completely “hands off” way of
earning 7-10% fixed returns, safely secured by real estate. Since their returns were fixed and never changed, it allowed them to plan and make better decisions with their future.
Can I use my I.R.A. or 401k to lend from?
Absolutely; in fact, that’s what most of our investors do. You must be in control over where your investments go from your I.R.A. or 401k, and you can take any old I.R.A. or 401k that you have and roll it over in to a self-directed I.R.A. There’s no penalty for doing this because you’re not taking a distribution, you’re simply changing the Administrator to one that allows you to self-direct where the funds go. Doing it this way, you can make all of your gains tax deferred without
counting on someone else to get you 7-10% fixed returns day in and day out. The company we use and most people use is Equity Trust Company. You can get a FREE Information Packet via their website at www.trustetc.com to learn how simple it is to do. You simply fill out a form and send them your last statement; they’ll do the rest and bring your funds to your new account. The entire process only takes approximately two weeks.
Why would an investor be willing to pay such high returns?
The availability of the short term capital was more important than the cost. We needed to move quickly to purchase from sellers who are willing to happily and eagerly give us equity in homes for FREE in exchange for peace of mind or debt relief and we didn’t have time to go through banks because the process just takes too long. Also, since we are buying properties with large amounts of equity in them, it allows us to give away a portion of our profits back to you through repaying
the original loan amount plus a generous interest on top of it. By the way, if you use a credit card, pull out the documentation and look at the interest rate you pay. Every time you use it and don’t pay off the balance within the grace period, you’re putting the availability of the funds ahead of the short term cost just like we do when we buy and sell houses.
Are high interest loans like this new to real estate?
Absolutely not! This is a multi-billion dollar industry that has been around for decades. There are companies out there like the Money Store, Household Finance, Beneficial, Ford Credit and numerous others. Their niche is to lend money to homeowners who typically use the money for home improvements or even loan consolidations. The loans are secured by a Second Mortgage on the property. Our niche is to borrow the money the same way, except we’ll use it only for the funding necessary
to buy, renovate and carry the property until we sell it; also secured by a mortgage against one property.
How is the private lender protected when they lend money?
First off, your money will never be pooled; you’ll have one mortgage secured against one property. That means there will always be a very large hedge factor between what you loan and the available profit or equity in the house. We are serious investors who have been certified with over 750 hours of training on Buying and Selling Houses, Marketing, and Business Management. In addition to that, there are also four key items that secure your investment each time you lend:
1. A promissory note which states the exact fixed return that you will receive. Whatever the note says is what you’ll receive.
2. A mortgage (security deed, deed to secure debt, or trust deed) will be created by the real estate attorney, Title Company, or escrow agent to put the property as collateral for your loan. That means you will have a lien on the property and I cannot sell it without paying you off.
3. A Lender’s title insurance policy will protect you against any title issues or claims that may arise.
4. A Hazard Insurance Policy will be in place for your protection in case of an unexpected catastrophe or problem.
Also, since there is such a large hedge factor in the amount of funds that you lend versus the equity in the property, even if something happened to us, you can always sell the property and make more than you’d make off the interest.
Who handles all of the paperwork?
A Title Company or Escrow Agent will handle all of the paperwork. You’ll send your funds directly to their office and make them payable to them. The Closing Agent won’t disperse any funds until all of the documents that secure your investment are in place and signed off on. They’ll create the promissory note that states the terms of your loan, the mortgage instrument that gives you collateral, and the title insurance policy. We’ll also send you a copy of the Hazard Insurance Policy.
It is customary that we, as the Borrower, will pay for all of the closing costs to secure your investment. It is usually just deducted from what you lend us. You’ll get the original note signed off by us, your Borrower that day, as well as a copy of your title insurance policy. You’ll receive a copy of the mortgage that day, and then once it is filed in the county and recorded in the Deed Books; you’ll get a stamped copy in the mail a few weeks later. By the way, the only person that
needs to sign anything is us, as the Borrower, so you do not even have to go unless you want to. Keep in mind that you’re always welcome to go to closing if you want to.
Do I have to collect payments on these loans?
No you don’t. When you tell us that you’re ready to make more money, we’ll ask you the following: Are you looking for the highest growth return possible, or are you looking to get cash flow from this investment? If you are looking for the highest return possible, then you can agree to just let the interest accrue every month. That means there will be no interest payment until the house is sold. Then you will receive the original loan amount back plus all of the interest. If you are
looking for cash flow, I can set it up where an escrow company collects and tracks the payment for you. It is customary that I pay for the Escrow Company and not you. By the way, if you use the self-directed IRA through Equity Trust, they can collect payments for you for a small monthly fee that I as your Borrower will pay.
Do these loans pay down or are they interest only?
Typically the loans are interest only. That means none of the monthly interest goes towards your principal loan amount and you earn interest on top of interest every month. If you want to, you can do an amortizing loan where some of each month’s payment goes towards the principal balance and the rest goes towards interest. You’ll make more money if you do interest only.
How long are the typical loans and how much do I need to invest?
The length of the loan and the amount you invest are what you say. You get to create the rules since you are the Lender. Typical loans range from 6-60 months and all of them are due upon the sale of the house where a new buyer gets a new loan. You can invest as little as $10,000. Most loans range from $10,000 to $100,000 depending on the property. By the way, if you ever lend and then need to pull your capital back out, there are no fees for early withdrawal. Just tell us that you
need to get out and give me 45-60 days to make it happen. We’ll either cash you out ourselves, or we may replace your private loan with another one. When you get your money and interest back, you’ll have to sign a Satisfaction and/or Quit Claim Deed to clear your lien against the title.
Is private lending really a safe investment?
In our opinion it’s much safer than the stock market because you have no ups and downs to worry about. You might make money in the stock market one month or one year, and then get wiped out the next. When it’s all said and done most people get returns that barely keep up with inflation. By investing in real estate, you won’t be gambling on Companies that you have no control over or know little about who is running them. Your investment loans are safely secured by real estate, you’ll
get fixed returns of 7-10% that never change, there are no fees or commissions, no early withdrawal penalties, and there will be large spreads or hedge factors of equity versus your investment. You’ll just need to use common sense and take a look at what the property is worth, what’s owed and what you’re lending. Remember, you don’t have to put all of your investment funds into real estate; but it’s a great place to get consistent, predictable and reliable returns.
How do I get started?
Just contact us and tell us when you’re ready to get started making more money. We’ll take you to lunch or dinner and discuss the amount you have available to lend, the interest rate, and the length of the loan. Our job will then be to go out and find a property that matches your needs. When we do, you’ll arrange for the funds to be sent to the attorney or title company. A closing will be set up at the attorney or Title Company’s office and you can sit back and watch your investment
grow. You’ll get fixed returns that never change, that are safely secured by real estate.
Glossary of Terms
Loan-to-Value (LTV):
A lending risk ratio calculated by dividing the total amount for the mortgage or loan by the appraised value of the property. Ex.) Holding a mortgage for $70,000 on a home appraised at $10,000 would be a 70% LTV.
After Repaired Value (ARV):
The worth of a property after all identified repairs have been completed.
Promissory Note:
A document signed by a borrower promising to repay a loan under agreed-upon terms. This can also be referred to as a note.
Deed of Trust:
The document used in some states instead of a mortgage. Title is conveyed to a trustee rather than to the borrower.
Title Insurance:
Insurance to protect a lender or owner against loss in the event of a property ownership dispute.
Hazard Insurance:
Insurance that covers property damage caused by fire, wind, storms, and other similar risks. Sometimes earthquakes and floods are also covered, while other times they are not.
Mortgage:
A loan to finance the purchase of real estate, usually with specified payment periods and interest rates. The borrower (mortgagor) gives the lender (mortgagee) a lien on the property as collateral for the loan.
Second Mortgage:
A mortgage on real estate which has already been pledged as collateral for an earlier mortgage. The second mortgage carries rights which are subordinate to those of the first.
Lien:
A legal claim against an asset which is used to secure a loan and which must be paid when the property is sold. Liens can be structured in many different ways. In some cases, the creditor will have legal claim against an asset, but not actually hold it in possession, while in other cases the creditor will actually hold on to the asset until the debt is paid off. The former is a more common arrangement when the asset is productive, since the creditor would prefer that the asset be
used to produce a stream of income to pay off debt rather than just held in possession and not used. A claim can hold against an asset until all the obligations to the creditor are cleared (a general lien), or just until the obligations against that particular assets are cleared (a particular lien).
Concluding Comments
We hope that you have found this guide helpful and that we have demonstrated the benefits of the awesome power of making private mortgage loans. If it appeals to you, you can get started right now. While most people are complaining about the low rates they are getting on their CD’s and other low paying investments, you could be receiving a return of
7-10% all of the time…..
Are You Now Ready to Take Action?
Don’t let other people control your money so you only get a return that barely keeps up with inflation. Take control and make sure that when you get ready to retire, you can do what you want without worrying about money, and if you are retired, squeeze every interest dollar out that you can. Private lending is an incredible way to build wealth in a hurry that most people aren’t aware exists. If you have more questions please give me a call. Perhaps we can get together for lunch or
just chat on the phone. Partners In Freedom, Inc would love to work with you to build a long-term partnership to fulfill your investment needs. Do not hesitate to contact us if you have additional questions or if you have suggestions for future editions of this guide.
Contact Us to Setup a Consultation
Discuss your investments goals and objectives with Randy King or Andrea Trout who can help you structure a private lending solution that best fits your needs at
Randy@partnersinfreedom.com or (719)
243-0092
M-F: 9:00am—5pm MST*
Andrea@partnersinfreedom.com or (719) 338-3838
M-F: 9:00am—5pm MST*
Note: Evening / weekend appointments are available upon request
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