Every now and then we deviate from the obvious swank factors in life to bring you a little something not everyone else and their brother has already thought about. Here’s a little test. Does the phrase “private money lending” set your heart a-racing and fill every fiber of your body with excitement? No? How about if we told you that some investors were using it to generate returns of over 12% making short-term loans to property rehabbers and house-flippers? Even that additional information might not be enough to make you turn a cartwheel but it’s at least worth your attention for a few moments.
Private lenders, sometimes called hard money lenders, operate in the area of the lending industry outside where traditional banks and mortgage companies choose to go, for whatever reasons. And in an economic climate where it’s getting harder to secure financing for a real estate purchase, individuals and small companies with money to loan have stepped in to fill a niche. From the lender’s (investor’s) standpoint, the upside to making loans is what we’ve just mentioned. Interest rates paid are much higher than the pitiful few points generated for banks by traditional loans.
Most people assume, and they wouldn’t be wrong in all cases, that private loans are riskier, with an increased chance of default. In some cases that’s true but not all. While the mainstream media likes to portray hard money lenders as little better than loan sharks preying on the desperate, there are some instances where private money is a source of last resort not because of financial desperation but rather due to excessive red tape and restrictions that accompany traditional loans.
Take the case of rehabbers and house flippers. Most banks classify such properties as “transitional” and refuse to loan money on them. Enter the private money lender. Flippers don’t mind paying a higher rate of interest because their business model thrives on being able to speedily buy, rehab, and sell a property. Banks work at their own pace, one normally too slow to fit a rehabber’s plans.
The bottom line is this. If you’re dissatisfied with your stock portfolio’s performance, or have money sitting idly on the sidelines, why not think about becoming a private money lender? A Google search on the topic might provide interesting results.
The Swank Life Team
Flickr / cupcakes2