Private Lending Questions

[Anthony Freeman]

Say I wanted to refinance my primary residence to private lend. Do you think my monthly payments will be too expensive to make a profit from a 10% return on my investment.

[Jeff S.]

You presented no numbers, @Anthony Freeman, so it’s hard to be specific.

In general, if you refinance your house at the current 7% ballpark, and then lend the money at 10% plus a few points per year, that’s a 5% annualized spread. If you are in the 40% tax bracket, it will leave around a 3% return. This assumes you are loaned out 100% of the time, which is impossible.

Then consider what would happen if a borrower runs into trouble. Depending upon your state, it could take months to years to foreclose and recover your money. Could you afford to make your loan payments to the bank over this period?

The giant hard money lenders can spread hundreds of millions of dollars or more out over many loans and do well with a 2 or 3 % spread. Of course, most sell their loans. The days of taking out a 3% HELOC and lending the money out at 12 – 15%, which we did for years, are probably gone forever.

Lending is still a great business, but unless you have cash in the bank such as savings or retirement money, or you want to accept investors and run a fund, borrowing money against your home to lend is not only unviable, but it’s dangerous .

Really, you should run the numbers and you’ll get your answer.