Work with an experience private money lender who can help you select loan investments which meet your yield expectations and risk tolerance. Private money lenders look for long term win-win relationships with their investors. Find a private money lender who’s incentives are aligned with yours and has experience in the area in which you choose to lend. Thorough research is imperative to establishing a successful relationship and profitable investment. The Private Money Lending Guide Directory of Loan Investment Advisors is a great place to start your research. With thorough research you will find that hard money lending or investing in hard money loans isn’t that hard at all.
Perform your own due diligence. Carefully evaluate the underlying collateral and terms of each note investment. There is no substitute for your own carefully completed research as opposed to relying on the opinion of others. While multiple points of input regarding value such as an appraisal and a broker price opinion are an excellent start, it’s always wise to inspect the property and the comparable sales/listings cited in the value reports to make a final determination. See Appraisals the Private Money Way for a detailed list of considerations when evaluating collateral.
Analyze each note investment carefully. Use Internal Rate of Return and Net Present Value analysis to review the financial return on your note to make sure the loan meets your criteria. See “Financial Analysis for Note Investing” and “How to Calculate the IRR on your Note Investment”.
Seek outside advice. While a private money lender’s incentives may be aligned with yours, it is always advisable to have independent experienced counsel evaluate your investment. Additional information can be found in the article “Working with Attorneys”.
Require personal guarantees. While it is common to lend to legal entities as opposed to individuals, without a personal guarantee from the borrower you may limit your ability to fully recover your investment in a foreclosure situation. Private money lenders and attorneys will be able to advise you on what type and when a personal guarantee should be required.
Carefully Review Title Endorsements. Obtaining a title policy without endorsements is like driving a car without air in the tires. Work with your counsel to carefully review the loan transaction and select title endorsements that work for you.
Diversity. Do not put all your eggs in one basket. It’s best to diversify the amount you have allocated for note investing into several manageable investments.
Choose the right loan servicer. Do not assume that “anybody” can service your loan investment. There is so much more to servicing loans than just collecting a payment. Excellent recordkeeping, compliance and communication with both you and the borrower, and vigilant oversight of the property’s tax and insurance status is vital to keeping your investment on the right track. While many private money lenders offer loan servicing, make sure you are comfortable with their procedures and services.