Private money lending

[Marilyn Bredar]

I'm new to RE investing!  I have an opportunity for private money lending.  What would be a reasonable rate of return?  Also, is there any downside to my borrower stretching out for 20 plus years.   I'm so grateful for any and all responses.

[Malcomb Stapel]

Quote from @Marilyn Bredar:

I'm new to RE investing!  I have an opportunity for private money lending.  What would be a reasonable rate of return?  Also, is there any downside to my borrower stretching out for 20 plus years.   I'm so grateful for any and all responses.

 Reasonable rate would depend on your goals. But for short term 1 year or less you could be anywhere in the 10-15% range depending on the deal/risk. Research predatory lending rates and make sure you don't break any rules going too high. As for your second question, yes, 20 years is too long unless it's some sort of slam dunk deal that you can live off of the interest and you don't need to invest the money elsewhere. 

Think about your money as more transactional, you are lending it out, and you want to see it back in 12 months or less with X amount of return. Your time value of money is important here. 

[Doug Smith]

You bet...do a 12-month balloon to force the refinance to recoup your money quickly and protect you from interest rate risk in a relatively volatile market. We charge from 10%-12.9% right now depending upon the borrower, project, location, and time frame for us to recoup our money. Of course, you could always turn to a good, experienced lender and broker deals through them with our capital. You can let them originate, underwrite, create the docs, and close the deal and then sell it to you. Many individuals who get into lending miss things in the process and get themselves into trouble. It's how we grew a robust lending practice and it gives the investor/lender a better loan that's more likely to pay and meet their yield expectations. Good luck to you. 

[Chris Seveney]

@Marilyn Bredar

Just remember if you lend for 20 years basically that money is illiquid for twenty years

Key to private lending is the term and rate. Biggest mistake peopke make is charging low or below market interest rates. Then they realize they need money for something else and try and sell the note only to find they are offered 50 cents on the dollar because the note was written at low interest rates.

[Marilyn Bredar]

Quote from @Malcomb Stapel:

Quote from @Marilyn Bredar:

I'm new to RE investing!  I have an opportunity for private money lending.  What would be a reasonable rate of return?  Also, is there any downside to my borrower stretching out for 20 plus years.   I'm so grateful for any and all responses.

 Reasonable rate would depend on your goals. But for short term 1 year or less you could be anywhere in the 10-15% range depending on the deal/risk. Research predatory lending rates and make sure you don't break any rules going too high. As for your second question, yes, 20 years is too long unless it's some sort of slam dunk deal that you can live off of the interest and you don't need to invest the money elsewhere. 

Think about your money as more transactional, you are lending it out, and you want to see it back in 12 months or less with X amount of return. Your time value of money is important here. 

Thank you for your response Malcomb,  I appreciate your time.   I sent you a separate text to chat further.

[Marilyn Bredar]

Quote from @Chris Seveney:

@Marilyn Bredar

Just remember if you lend for 20 years basically that money is illiquid for twenty years

Key to private lending is the term and rate. Biggest mistake peopke make is charging low or below market interest rates. Then they realize they need money for something else and try and sell the note only to find they are offered 50 cents on the dollar because the note was written at low interest rates.

Thank you Chris,  I understand this money would be illiquid, but couldn't I still borrow against it?

[Marilyn Bredar]

Quote from @Doug Smith:

You bet...do a 12-month balloon to force the refinance to recoup your money quickly and protect you from interest rate risk in a relatively volatile market. We charge from 10%-12.9% right now depending upon the borrower, project, location, and time frame for us to recoup our money. Of course, you could always turn to a good, experienced lender and broker deals through them with our capital. You can let them originate, underwrite, create the docs, and close the deal and then sell it to you. Many individuals who get into lending miss things in the process and get themselves into trouble. It's how we grew a robust lending practice and it gives the investor/lender a better loan that's more likely to pay and meet their yield expectations. Good luck to you. 

Thank you Doug,  You've given me some things to think about.  It's all pretty confusing at this point and I see I have much more to consider.

[Chris Seveney]

@Marilyn Bredar

Chances of borrowing against it are almost zero. No bank will lend against it so you would need to find a private deal which may be higher Interest then you are getting and it would be a short term loan / balloon

[Marilyn Bredar]

Quote from @Marilyn Bredar:

I'm new to RE investing!  I have an opportunity for private money lending.  What would be a reasonable rate of return?  Also, is there any downside to my borrower stretching out for 20 plus years.   I'm so grateful for any and all responses.

I think what I didn't clarify is that I will be the private lender.  In doing so, I would be taking out a loan, and the buyer will be paying the mortgage with an additional monthly cash flow to me.  It looks good on paper, but I know I'm not seeing the whole picture.

[Chris Seveney]

@Marilyn Bredar

You are doing subject to is what it sounds

If that person defaults then you are stuck holding the bag because the loan is in your name.