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Many investors dismayed by the stock market and burned by falling home prices may not be aware that there is a world where investors are still making returns of 12 to 18 or better by making private hard money mortgage loans and that recent economic conditions have actually increased the demand and need for these types of investments. In many instances, these investments are also eligible to be held on a tax deferred or tax free basis inside of your self directed individual retirement account (IRA) or retirement plan.
While you may have heard about trust deed investing, private mortgage investing is not only the buying and selling of mortgages at a discount. It includes the activity of directly lending your private money to individuals and businesses and securing that loan with a deed of trust or mortgage against real property. If you are disappointed with the stock market and are looking for a secured investment with cash flow than trust deed investments may be for you. You may ask, “What about the declining values of home prices”? Most properly structured private loan investments are typically only made at a loan to value of 40 to 65 providing a significant equity cushion. Investments can also be secured against commercial properties and are not limited to residential real estate.
Private mortgage lending involves an individual investor or property owner taking on the risks and rewards typically held by mortgage lending institutions. This type of lending can offer good returns and low risk if properly structured because unlike a stock investment the mortgage loan is secured against the subject property.
Private mortgages have numerous benefits to borrowers and investors. They allow borrowers who may not qualify at traditional lending institutions to get mortgages elsewhere. Investors holding private mortgages can receive interest rates significantly higher than standard rates offered by banks because they offer greater speed and flexibility than traditional lending institutions.
A private lender should think the same as a mortgage company, and should demand everything that a good mortgage company would require when deciding whether or not to make a loan investment. They should also get an interest rate, which justifies the risk. While the investor must be aware of usury laws, it should generally be at least 50 higher than traditional bank rates.
In general private mortgages are structured like hard money loans with short terms and based on the property’s equity value rather than traditional underwriting criteria such as credit and debt to income rations. While these factors may be considered, the equity in the property is usually the determinant factor. In general, our private mortgages hover around 45 and 65 percent loan to value (LTV), at Northwest Capital Advisors, Ltd., a real estate investment fund in Seattle, Washington.
The lender should be sure the LTV is not less than 65/35 so there is an equity cushion if the mortgagor defaults, and lenders should perform due diligence on the borrower and property.
Private Lenders should not jump into private mortgage investing without doing any research. Investing in mortgage notes takes significant real estate and financial knowledge and investors need to align and consult with a network of professionals and advisors. Investors must also be aware of the regulatory requirements surrounding mortgage note investments.
Investors in private mortgage lending used to consist of sellers or friends helping each other with financing. However, as the profit potential in private mortgages for the lender and the benefits to the borrower have become more clear it has helped this investment strategy gain notoriety in the investing community and many funds are now being structured to capitalize on the greatest buyer’s market in real estate history. There is a plethora of opportunities in the marketplace to capitalize on.
The private mortgage lending business also known as trust deed investing has become quite profitable for private investors over the past several years, and more investors are entering this field once they learn about it. Mortgage brokers are also doing more in this arena now as traditional lending institutions affected by the credit crunch have turned off the flow of funds. Successful mortgage and real estate brokers are bringing individual investors and borrowers together more than ever to close deals!
Author Resource:- Mr. Barth is a licensed real estate broker and notary public in Washington State. Mr. Barth holds a Bachelor of Science in Business Administration and has held the NASD Series 24, Series 66, and Series 7 securities licenses. http://www.northwestcapitaladvisors.com http://reobpo.blogspot.com
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