If you're going to be lending only within your own community, the best way to find potential investing opportunities is to be very well networked in your community. If you're interested in making loans secured by real estate, contact your local chamber of commerce to find local real estate attorneys, mortgage brokerage associations, and land developers and builders. All of these people and groups will know of individuals who are in a cash-flow situation in which they are looking for private loans from investors like you.
Once you find these organizations, associations, clubs, or other groups, go to one of their meetings. For example, you could go to a meeting of a local Real Estate Investor Association (REIA) or a mortgage association through which private investors lend people money. Let them know you're a private investor and that you'd like to learn about their programs and projects and get involved in using some of your funds to lend money.
Also, work with those individuals who are actively already making private loans, so you can learn how to do it yourself. If you're working through an investing group, if and when the group needs money, they will come to you. You then lend the group the money so that the group can lend money to private individuals.
You can also lend money directly to people, without going through this type of group. For example, you could contact local real estate brokers who can put you in touch with local mortgage brokers who have people who need a loan to facilitate a transaction to either sell their house or buy one.
It is not difficult to develop contacts. The most complicated thing you're going to need to worry about is the paperwork and making sure that the property appraises for what it needs to appraise for. Find a great attorney who knows the real estate business that you're interested in because your attorney will make sure you've crossed all the T's and dotted all the I's in your loan contract. Your attorney will also make sure that your loan is secured by real estate that has title insurance.
There is a wide range of places where you can go to find land deals. Throughout the United States, there are real estate investor associations and hard-money and mortgage associations that deal with private lending. All you need to do is join a local association. The association lends out its own money to individuals, and then the association looks to individual private lenders (investors) like us (the authors) to participate and pay us a return on our money. Here's an example that illustrates how this works.
We recently received solicitations from a company called UniTrust Mortgage and from a company called Dellovo Capital, which claims that it's been in business since 1986 and specializes in the placement of commercial real estate and business financing. We know nothing about either of these companies; they simply mailed us their solicitations, which are essentially marketing pieces. For example, one said, "UniTrust Mortgage has millions of dollars of private investor funds to place, in addition to its institutional loans." The company is contacting private investors, like us, with this pitch: "If you'll lend us $100,000, we'll put that money in a pool. We'll then lend this pool of money (including your investment) out to commercial properties, to apartment buildings, and to multiunit deals of five properties or more. We're going to do only larger deals with your money. We'll pay you 8/ percent a year on your money, and you have to do absolutely nothing. And you're secured by our company, so you can feel comfortable investing your money with us."
If you decide you want to find these types of companies, all you have to do is basically let your fingers do the walking through the Internet or join a local mortgage association. Anybody in the public can join a local mortgage association. But please do your homework first before you jump in, and make sure that the company is for real!
There are companies out there doing this right now, whether it's apartments, offices, retail stores, multifamily housing, mixed-use buildings, industrial and manufacturing facilities, resorts, land, or assisted-living or other medical facilities (health-care real estate is the new hot trend). In addition, there are companies using private investments to finance restaurants, hardware stores, churches, funeral homes, automobile dealers, franchises, gas stations—you name it. You will also find companies that are de novo capital companies or start-up banks: They handle only private placement and private lending to individuals or businesses that want your money. They'll put you in a pool, and you'll have nothing to do with the paperwork or with the decision on where the money is going—in short, you do none of the work.
We are not recommending any of these companies in particular. We're simply telling you that they're out there and easy to find. If you want to place money with companies that make private loans on a large basis, and if you want to use a percentage of your investing portfolio for private lending in these types of companies, you can easily find them on the Internet. Or you can join a local private mortgage association. You should understand that in these situations you're going to be earning a return on your investment of 7 or 8 percent, or maybe 9 percent if you're lucky, and that the company through which you're investing will be earning 12 to 14 percent. That company makes the spread, but if you don't want to do the paperwork yourself for this type of private loan, or if you're worried about getting ripped off or burned, this is a good way to go. You'll earn less interest, but you'll have less work to do, and you might sleep better at night.
You're going to see more and more private lending opportunities emerge as the economy worsens, as credit markets plunge, and as credit card companies start getting into trouble because people aren't going to be able to afford to make their credit card payments. The only way some people are going to be able to get money to fund anything is through private means. Private funding via both individual investors and small investing companies has already increased substantially in the last year. However, as we were writing this book, the future of owner financing and private lending can change with the proposed bill HR 1728, which has been approved by the House of Representatives but has not yet come before the Senate. The bill specifically deals with predatory lending, but it includes a clause relating to seller financing and private lending. Because the bill has not yet been passed, it isn't clear how it will affect the average investor.
Individual borrowers can use lending clubs for various things. Here are two that have been in business for a long time to start your research and understand what they are about:
These organizations lend money to individuals and small businesses. They often post their requirements for borrowers (in terms of credit scores and so on) on their Web sites. You can go through these organizations if you want to lend money to qualified loan applicants. Usually, the minimum investment for these types of companies is $5,000, but the amount varies depending on the company's pool and what the company is setting out to do. Again, you can either do the work yourself and make private loans directly to individuals or businesses, or you can lend your money through a third party.
Private lending companies have been around a long, long time. They offer alternative investments for investors wanting to obtain greater returns than they would get from the stock market, CDs, or mutual funds. In most cases, they deal in real estate. They like rehabs, foreclosures, and other distressed properties. They like the fix-up market because they understand it. But there are also companies out there that don't necessarily work only in the real estate arena.
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If You Are Someone Who Doesn't Want To Take A Share Of The Real Estate Pie, This Is Not For You. Do You Feel The Real Estate Market Is Where Your Heart Lies? Always Wanted To Be A Part Of It. But Were Super Confused And Didn't Know Where To Even Start? Looking For Someone To Hold Your Hand And Guide You? Fret Not.