Risks In Private Money Investing On Real Estate Transactions

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Risks In Private Money Investing On Real Estate Transactions

This BLOG On Risks In Private Money Investing On Real Estate Transactions Was Written By Michael Gracz of Gustan Cho Associates

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
  • Investors do not need hundreds of thousands of dollars to invest in private money loans or hard money loans
  • Investors can start with less than $50,000 and they, as a private money lender, can opt to choose whether a deal is comfortable for them
  • 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
  • The rehab may require $30,000
  • 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, the investors are responsible for their investing activities and 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 borrowers come to a bank with a number as high as 2, they 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

Borrowers however, there are other things to consider unless they are a multi millionaire that can handle losing money on an opportunity.

  • If not, borrowers need to understand a bit more
  • Or, borrowers need a broker that can vet the deal for them
  • Also to show what the real risks are and what they can do to further mitigate them
  • Or the broker has already set up the opportunity with risks mitigated to an acceptable level already

Factors Of Things To Watch Out 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?

Unknowns

  • 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 On Risks In Private Money Investing

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, and we explain what has been arranged or done to mitigate risk so it’s much more secure
  • Investors don’t have to hope and trust our word, they will see what is real and possible

Risks Versus Rewards With Risks In Private Money Investing

Then it becomes a choice of whether or not investors 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 investors 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 investors think it’s not for them, then take a pass
  • If it is, raise your hand and get in there and make interest income

Questions about how that can work for you? Let us know by calling Michael Gracz at 630-659-7644 or email Michael Gracz at MGracz@gustancho.com  We will be happy to discuss opportunities lending with us.

About Michael Gracz

Michael Gracz is the National Sales Manager of Gustan Cho Associates Mortgage Group.  Michael Gracz is a veteran mortgage industry professional. Mike Gracz has extensive experience in originating, processing, underwriting, funding, and servicing commercial and residential mortgage loans.  Michael Gracz and Gustan Cho are real estate experts and investors. Both Gustan Cho and Michael Gracz has funded thousands of mortgage loan transactions in over 20 plus years in the real estate and mortgage business.  Michael Gracz has a national reputation in lending and real estate and has extreme close relationships with all of his private money investors and is available 7 days a week to answer all of their questions. Over 75% of Mike Gracz’s borrowers at Gustan Cho Associates are folks who could not qualify at other mortgage companies due to their lender overlays. Michael Gracz has a national five star reputation for not having any overlays on government and conventional loans.

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