What Are The Risks In Private Money Investing?
There are many rewards in investing in private money loans and hard money loans for an investor. Investing in hard money loans can offer extreme handsome returns that are secured by real estate. Many private money investors get double digit annual returns which is securitized by real estate in prime areas. You do not need hundreds of thousands of dollars to invest in private money loans or hard money loans. You can start with less than $50,000 and you, as a private money lender, can opt to choose whether a deal is comfortable for you. For example, there are many private money loan borrowers who need $50,000 or less to purchase a property, do rehab on them, and flip them after the rehab is done. A property may be listed for $30,000 and the rehab may require $30,000 and after the rehab is complete, the property may be worth $100,000. The hard money borrower may have $30,000 in cash to purchase the property but may need the $30,000 cash to do the rehab work. On a case like this, the hard money lender will escrow the $30,000 construction budget and pay it as the rehab progresses. However, with any other investments, there are risks in private money investing.
How To Filter Out Risks In Private Money Investing
This is a question many may have as to how to filter out risk factors that could affect their ability to earn income fairly uninhibited.
Firstly, realize that as a private investor you are responsible for your investing activities and you really need to understand risk factoring as a number. When bank look at DCR or Debt Coverage Ratio they look for a fairly high number like 1.2 and up; the higher the number the better. This number could mean a lot when it gets up into the 3-5 range. Usually if you come to a bank with a number as high as 2, you are pretty much calling the shots. They know after seeing how numbers have been run that the risk is so mitigated that they would be foolish to not participate.
Choose A Reputable Experienced Hard Money Lending Consultant
For you however, there are other things to consider unless you are a multi millionaire that can handle losing money on an opportunity. If not, You need to understand a bit more. Or, you need a broker that can vet the deal for you and show you what the real risks are and what you can do to further mitigate them or the broker has already set up the opportunity with risks mitigated to an acceptable level already.
So what are these factors? Here’s a list of things to watch for:
- Regional condition / market conditions
Does the proposed property sit in an area that is being redeveloped? Is it in a hard hit neighborhood? Are there redevelopment plans that the active borrower is utilizing to mitigate some of the risk? Does the After Repair Value come through well enough to show there will be good equity when it’s time to sell? Are the rents in the area justifiable? Can they cash flow well enough to make that opportunity work and get refinanced?
- Borrower condition
Do they have decent credit? If not, are they going to get it fixed? Do they have skin in the game? Are they looking to fix & Flip? Or are they going to buy and hold and if so, do they currently have the credit or will they within 6 months to a year’s time? Can they run a project efficiently? Have they done other projects like this? Or is this their first time? Do they seem to demonstrate good numbers when they propose their project?
There are always going to be these weird things that will pop up. Question is can you see them before they do? Could be a title issue, could be a foundation issue that wasn’t disclosed to the borrower. This isn’t their fault, but is there enough in their budget to cover for surprises like that? Just things to take note of.
Competitive Market Analysis
When you see the Competitive Market Analysis, what is the median sales price of other similar properties in the area? Just because you have a broker that can get all the paperwork done, doesn’t mean they will see everything. Sometimes we miss too; which is why we have two or three sets of eyes check on things. We want to be sure when we present you our investor with an opportunity, you get to see those things, an d we explain what has been arranged or done to mitigate risk so it’s much more secure. You don’t have to hope and trust our word, you will see what is real and possible.
Risks Versus Rewards
Then it becomes a choice of whether or not you are willing to take that risk and become a private lender, or pass on that one for now. There will always be more.
The biggest thing we can encourage you to do, is get tout there and find something that feels right and get going. Don’t wait. Analysis Paralysis isn’t good either. If you think it’s not for you, pass. If it is, raise your hand and get in there and make your interest income.
Questions about how that can work for you? Let us know by calling Michael Kaleikini at 702-902-3120 or email Michael at firstname.lastname@example.org We will be happy to discuss opportunities lending with us.
About Michael Kaleikini
Michael Kaleikini is the President and Chief Operating Officer of Hard Money Capital Group. Michael Kaleikini is a veteran hard money lender and has extensive experience in originating, processing, underwriting, funding, and servicing hard money loans. Michael Kaleikini is a real estate expert and has funded thousands of hard money loan transactions in his 20 plus years in the real estate and mortgage business. Michael Kaleikini is close and friends with all of his private money investors and is available 7 days a week to answer all of their questions.
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