I know some people will look at the title of this blog and think to themselves, “what does that even mean?” In short, “holding paper” is simply a real estate term used to describe someone who holds the mortgage on a particular property. There are many experts and articles written about how to create and find “paper” in the realm of real estate investing. While I am not an expert in this area, I do have a good bit of experience working with private investors who lend money to other investors for short and medium term loans.
Many real estate investors get into private lending as a means of diversifying their real estate portfolio. While owning property is a great way to earn a solid return and build equity, it does come with its share of risks and challenges. Private lending can be a great alternative for those investors who are burned out on landlording or who want to balance out a higher-risk portfolio. Other investors (such as my Dad) are simply risk averse by nature and would rather be a private lender than take on the risks of owning investment real estate themselves.
While there are many avenues one can pursue within private lending, one such niche that we have recently discovered is lending to foreign nationals. Many people don’t realize the staggering number of foreign investors who are bringing cash into the United States to buy up real estate. The decline of the dollar worldwide combined with unprecedented real estate prices has created a buying frenzy from investors all over the world. With almost no opportunity to obtain financing, these foreign investors are forced to use cash to purchase investment properties.
We have found that because of the lack of financing options for foreign nationals, private lenders can offer very aggressive loan terms. While many investors will choose to pay cash over high-interest financing, others choose the leverage as a means of obtaining more properties. In fact, I know of private lenders who are getting 50% down and charging 5 points and 12% interest (and this is typically with amortization schedules at 10 years or less) While it’s true that the foreign investor would be hard pressed to create much cash flow with this type of loan, the ability to purchase 2 properties rather than one property is still very attractive – not to mention the rapid equity build-up that would occur (principle paydown and rising U.S. values)
From a private lenders perspective, this is about as low-risk as you will find. With so much down payment invested by the foreign national up front, the likelihood of default is greatly minimized. And even in the event of a default, taking back the property with that kind of equity could also be an attractive scenario for the lender.
I am a firm believer in creating win/win real estate transactions where all parties involved walk away having met their investing objectives. Private lending with investment properties is one area of real estate where this is often the case. For those investors interested in delving into this space, I would suggest exploring the opportunity to work with foreign nationals who can’t obtain conventional financing, but have the cash to put down on a privately financed deal.
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Great post, although I have to admit the thought that went through my mind was that I’ve got a Nigerian Doctor who wants to meet you!
Thanks for the great info Ken. This has been one of those ideas that keep popping in and out of my thought-train but I haven’t given it as much attention as it deserves. I’m moving this niche area of investing way up in my priorities.