Mortgages and Notes

Private Lending Basics – An Introduction

August 13, 2014

Guest article by Augie Byllott:

In the world of investment real estate there are myriad ways to buy, sell and finance real estate. The following information is about a particular segment of the business, private lending and most specifically targeted toward the financing of non-owner occupied real estate. With the enactment of the Wall street Reform Act more commonly known by the name of its authors, Dodd-Frank, lending to owner occupants has become a potentially hazardous business fraught with, as of this writing, many unknowns that could negatively impact small lenders.

For many years, private individuals seeking better returns have provided the fuel that keeps investment real estate viable for many small developers, builders and those who buy, fix and sell foreclosures, short sales, probate properties and junkers that are not considered financeable by banks. Their funds have facilitated the acquisition and renovation of literally millions of single family homes, helped small builders to create new housing stock and kept many trades people employed. In a nutshell, private money lenders help the economy while earning above market returns on their capital.

During my first 15 years in the banking industry I had never even heard the term private lending let alone knew what it was, then, I was approached by a talented young builder who had acquired enough property to build 15 houses but needed capital. His plan was to build and sell one house at a time and use the proceeds to repay the loan plus interest that was at least 5 percent more than I could earn at my bank. After reviewing his plan, some of his previous work and the blueprints of what he was going to build I developed a comfort level.

We documented the arrangement and he was off and running. I am happy to report that a formerly vacant piece of dirt now has 15 families living in homes each worth over $500,000 today! That was about 20 years ago. Oh, I more than doubled my original investment in a few short years so I was pretty happy too!

Private individuals seeking to avoid the volatility of the stock and bond markets may find the safe haven they are looking for in the world of private lending. This is sometimes called hard money lending though the two can be somewhat different. If you are prudent and diligent, you can earn solid returns while minimizing risks as a private lender.

Like any business venture private lending requires specialized knowledge; higher and more predictable returns can result when investing in private money loans but it also requires more effort and patience than that needed to push a button and execute a buy or sell order for a stock.

WHAT’S INVOLVED?

At its core, investing in private loans is a lot like investing in a bond that pays a fixed rate of return and pays off at maturity. If you make a loan to a borrower for $100,000 at 8% interest, and require interest-only payments, you’ll earn $8,000 income each year. And when the borrower fulfills their obligation, the loan will pay off at or before maturity and the original principal will be returned.

Liquidity – Do not consider becoming a private lender if you need the money before the maturity date. Even though most loans payoff, many do not pay off as expected. You can sometimes sell loans using an online loan exchange, or broker them to another private investor via a hard money loan broker. But even performing private money loans are typically sold at a discount. If you want to sell notes, even if they are performing, be prepared to take a little haircut.

Collateral Valuation – The underlying collateral for a private loan is very important to the overall security of the transaction. Lenders should carefully evaluate the value of the collateral and use several sources to confirm their valuation. A common practice among private lenders is to “drive the comps yourself.” That means do not just look at photos on an appraisal and assume you have an accurate value.

With the appraisal in hand get in your car and drive to the subject property as well as each comparable property and confirm for yourself that the property value is realistic. Consider multiple sources of value. In addition to an appraisal and driving the comps yourself, consider using an automated valuation model or a Broker Price Opinion (BPO) as well. Some properties are easier to comp than others.

Advances On occasion loans require the investor/lender advance additional funds for a variety of reasons. Advances may be required to cure delinquent property taxes, cure a senior lien position, hire an attorney, pay to defend bankruptcy claims, or even remodel a property if a foreclosure takes place.

Title Be sure your borrower obtains a lender’s title policy that will insure your lien position as a lender and offers fraud protection against forgery. Title insurance is not like homeowners insurance. If you suffer a loss with your homeowner policy, you submit the claim and get a quick reimbursement. Title insurance is an indemnity policy and as such you are reimbursed for a proven loss only and not the potential for a loss. The result may be that even though you will eventually lose money due to a title issue, you may not receive reimbursement for months, or even years later.

Borrower Credit – Carefully reviewing the borrower’s credit application and capacity to make monthly payments is the key to a successful loan investment. Private money loans are often made based on the collateral, but the best loans are those that give equal weight to the borrower’s past credit track record and capacity to make payments and repay the loan when a balloon payment is due, or when the loan matures.

Private Lender Insurance You will need to make sure the property owner has appropriate hazard and liability insurance in the amounts you desire as an investor. The insurance company must also be notified to include the private lender as an additional insured on the policy so in the event of loss, the check is sent to you first.

Documentation Documenting the loan, creating the appropriate security documents and disclosures to the borrower can be complicated and time consuming. There are a myriad of state and federal regulations to be followed, and a violation of these regulations could invalidate the loan and result in lost interest and/or fees. Consulting an attorney or mortgage professional can help you do things right.

SERVICING YOUR LOAN

Once a loan has been originated, payments need to be collected from the borrower, and various tax, regulatory and informational statements need to be sent regularly to the borrower. Lenders can do this themselves or hire a loan servicer to collect payments and provide reporting for a fee.

PRIVATE MONEY AND FORECLOSURE

If a borrower fails to pay as agreed, lenders must be prepared to foreclose on their collateral. This can be an arduous and time-consuming process that requires a significant amount of expertise and expense.

There are also alternatives to a foreclosure; among then are for the lender to accept a deed-in-lieu of foreclosure or a short sale of the property whereby the lender agreed to allow the property to be sold for less than the loan balance.

GETTING STARTED

As you can see, investing in loans is not as easy as it may seem on the surface and certainly more involved than buying a publicly traded security like a stock share or a bond. So, how do you invest in private money loans? How do you get started? How do you take the plunge?

The answer is: very carefully. Learning the private money lending business takes time. But once you understand the nuances and study the business, it can provide returns substantially greater than other investment choices.

There are professionals in the business of helping investors make loan investments. In the past, they have been referred to as hard money lenders, loan brokers, or mortgage loan originators. These are professional business people who are skilled and in most cased licensed by their state at originating private money and conventional loans.

The best part about using one of these sources of assistance to invest in loans is that the fees are typically paid by the borrower and therefore you get the expertise without paying for it directly. You pay for it because of the additional fees you would likely have collected had you originated the loan yourself.

For example, if the borrower was willing to pay 3 points up front for a $300,000 construction loan, you may earn the entire $9,000 fee up front as the sole investor and originator. If you use a loan originator instead, you may still get a piece of that commission; typically 1 point they keep the remainder.

If you’re just starting out, the services of a loan originator can be invaluable and they will help walk you through the transaction. Many investors who are not real estate professionals maintain life-long relationships with their loan originators just as a corporate executive might maintain a relationship with an investment advisor.

 

Augie Byllott is a full time real estate investor who specializes in all facets of residential real estate investing.  He is also a nationally recognized Author, Trainer, Coach and Speaker who teaches creative real estate investing to people from all walks of life.  Augie believes in creating win-win scenarios through the use of Intellectual Capital and Transaction Engineering. Visit him at www.PACTProsperity.com

 

Pitbull Conference to Spur IRA Private Money Lending

February 26, 2014

Investing in real estate through a self-directed IRA might not be for everyone. For many, being a landlord is daunting – hassling with tenants, upkeep on maintenance, and all the other elements of owning rental property. Although IRA holders have the ability to hire third-party property managers, some do not prefer all the moving parts associated with owning investment real estate.

However, there are other investments that take advantage of the reemerging real estate market that don’t require the day-to-day involvement of property management. Last week in Ft. Lauderdale, we had the opportunity to address a packed room of eighty private money lenders at the Pitbull Conference, and from all reports, that business is booming.

The need for private money is significant, so much so that real estate-backed lending is one of the fastest growing self-directed choices in IRAs. The lenders, representing funds from $1-60 million, were eager to learn how IRAs could be put to use for financing buying, fixing up and flipping, and renting investment property. It just so happens that the time for their business couldn’t be better.

According to BankRate, current 5-year CD rates garner approximately 2%. At that rate, it would take about 36 years for an investment to double in value. It’s no wonder that people are looking for alternative ways to make their retirement funds work at a more efficient rate. Is the stock market better? It certainly has done well over the past two years, but how much higher can it go? And what type of gains can you make while you still hold the investment, or must you sell out to earn your gains?

When lending private money out of your IRA, the rate you charge is based on the outcome of your negotiation with the borrower. It can be a conventional 30-year mortgage, or a six-month loan to a rehabber. At NuView, IRA lending has had anywhere from 5 – 18% interest, depending on the client’s loan terms and collateral.

To seriously misquote Shakespeare’s Hamlet, “Either borrower or lender be.” An IRA can do both. Look through our site or give us a call to learn more. We will help you unlock your IRA and let you make all the decisions.

Private Money Loans from a Self-Directed IRA – High Returns at Low Risk

January 23, 2014

Guest article by Fern C. Burr:

For more than 20 years, I have worked as a Realtor, a mortgage lender and broker, and a real estate investor. My reason for success is this – I always try to maximize my profits in a way that is as safe, secure, and as careful as possible. Now, however, I spend a lot of my time teaching other people how to be successful real estate investors.

While I still tinker in the stock market, I prefer investing in real estate. I was introduced to the concept of a self-directed IRA 10 years ago, the same time that NuView opened their office in Lake Mary, and I have been a client ever since. I am always happy to spread the word about self-direction and what a useful tool it has been for me and for many of my clients.

People think of a mortgage broker as someone who originates institutional mortgages for primary residences and for buy-and-hold rental properties. These types of mortgages are referred to as Conventional and FHA loans. While we do originate those products, we are also known in the real estate investor community as THE place to go for private money. These private funds often come from people who use their self-directed IRAs to invest in mortgages secured by real estate, in essence these people lend money from their IRA to the borrower.

Why do people need private money? Sometimes the property needs work or it won’t qualify for Conventional financing; other times, private money satisfies “the need for speed.” Recently, I got a call from a buyer on a Monday telling me his offer on a property was accepted. It was a great deal, but it had to close on Friday. Because the buyer got us everything we needed quickly, and because of the great relationship we have with the owner of the IRA and the excellent work relationship we have with the staff at NuView, we were able to close that loan in less than one week.

We treat our loan applications for private mortgages the same way we treat a loan application for an institutional mortgage: We get information on income, liquid assets, and a full tri-merge credit report. We also always get an appraisal on the property. The name of the game is Due Diligence. We want to love the borrower and love the property. Every borrower has to have some “skin in the game.” We gather all this information, then the lender just has to make a “common sense” decision.

Fern is a State of Florida Licensed Loan Originator/Mortgage Broker and Owner of Mortgage Professionals of Central Florida, and she is also a State of Florida Licensed Real Estate Broker. You can reach her at [email protected] or 407-330-2855.

Is Obama Capping IRAs?

April 12, 2013

It happens to me almost every presentation. Someone from the audience raises their hand during a seminar on self-directed IRAs and asks, “What is the likelihood that the government is going to take away my IRA?” Or, “will my Roth IRA indeed never be taxed again, or will Congress change their mind later when they are desperate for more revenue?”

Until this past week, I dismissed those conjectures as needless concerns from conspiracy theorists. Until the headline “Obama wants to put $3 Million Cap on IRAs” was found on the front page of the local paper. Maybe there is something going on that we need to pay attention to…

Now, of course, the political approach of making such a drastic move is first to reassure everyone that this will only target the rich, not you or I. And there is a slight inference that no one can gather such a large IRA together without some unfair advantage and extreme good fortune. In the article, recently failed GOP Presidential candidate Mitt Romney’s $100M IRA was trumpeted as the perfect example of how a large IRA is created based on insider knowledge and understanding tax law nuances.

Regardless, the rest of us in much lower tax brackets should be a bit uneasy. IRAs were created to help individuals have a shot at creating a retirement for themselves that industry and government had no stomach or ability to provide. Now over 47 million households have them, with almost $5 Trillion saved for retirement. It’s not unexpected that the government is eyeing those accounts with a great deal of interest, impatient for the tax revenues that will only come upon personal distribution of those largely pre-tax assets.

But wait, this won’t affect me – or anyone I’m likely to know. $3M is a huge IRA and not likely to be amassed by an ordinary person. Not true. For example, a person can, through a SEP IRA, contribute up to $51,000 annually. Through consistent savings and wise investing – many choosing a self-directed IRA, it is not impossible or even improbable of achieving a large balance in your IRA. We certainly have clients that would be taxed under this potential plan.

The concept of charging a tax on an IRA account which was created in the first place to provide a tax shelter to encourage savings is flawed policy. A bad idea is equally as bad regardless of whether or not it affects you or I.

Balancing the budget is something that both sides of the political aisle proclaim to be important for the future of our country. Doing it by taking it directly from retirement plans that were pledged never to be taxed is wrong.

Who knows, are Roth IRAs next?


Glen Mather is President of NuView IRA, Inc., a leading self-directed IRA administrator in Orlando, Florida. He can be contacted at 407-367-3472 or [email protected]

The Delicious Dillema – What Alternative Investments to Buy with a NuView IRA

February 25, 2013

One of the most frustrating elements of a self-directed IRA is the fact that you have to find an alternative investment to make it grow. Unlike typical “off the shelf” investments like mutual funds, you may actually have to be patient and wait for the best opportunity to present itself.

However, to the patient can come choices that are hard to match in the world of publicly traded stocks and bonds.

As most of you know, I make my living as the president and CEO of NuView IRA, a self-directed IRA administrator in Florida. However, I make my retirement investments just like each of my clients – through alternative investments via self-direction. As such, I find myself researching opportunities to see what is best for my retirement account. Last week, I let a few friends know that I had some retirement funds recently come available to see what investment opportunities were out there. Among my personal contacts are Realtors, fellow investors, builders, private lenders and real estate developers. I had recently sold a property owned by my retirement account and wanted to get the proceeds back into action. Additionally, my brother had moved some funds out of his company’s 401k into a NuView IRA and he wanted to partner with my retirement and make some alternative investments together.

Now, after networking with friends and family members, I have been able to narrow it down to four opportunities. First, a private developer of luxury apartments that is offering an 8% return with further profit participation, a property wholesaler in the Orlando area who finds great deals in rental properties with cash flows at 7%, private notes for the purchase of semi-tractors, secured by the “pink-slip” at 9%, and a local Realtor who has a great property to fix up and sell, estimating a 10% return within 6 months.

Each opportunity is attractive for various reasons and rather than choose one of the four investments, I am contemplating on spreading my funds partially amongst all four. Through fractional ownership and the ability to partner with my brother’s IRA and others, I may indeed be able to accomplish my goal and achieve true investment diversity.

I do practice what I preach and like many of you, face the struggles of finding, analyzing and executing on alternative investments for my self-directed IRA. I have learned that with good networking, surrounding myself with investment professionals and understanding the opportunities self-direction affords, I too can achieve my dream of an achievable retirement.

All the best in your investments.

Glen

Keeping Your Financial New Year’s Resolutions

January 30, 2013

According to a study by Fidelity Investments, 62 percent of consumers said they stuck with their financial New Year’s resolutions in the past year, compared with only 40 percent who kept other resolutions. When you think about it, a financial resolution may be easier to keep than others regarding eating better or giving back to the community because for many people, taking control of their finances seems like a more pressing, dire need in their life.

Research shows that when people have a measurable goal, they are more likely to succeed with their resolution. Therefore, if your New Year’s Resolution is to take control of your finances, create a measurable goal for your financial health. If you don’t know where to start, consider these three main areas of financial health: zero consumer debt, adequate emergency reserve funds, and maximization of IRA contributions.

According to The Investment Company Institute (ICI), only 39% of US families even have an IRA. In addition, many people who have IRAs are only contributing up to the level at which their employer matches, which is often 6 percent. However, for most people, 6 percent will not be sufficient in the long term. Chances are, you will probably need to put away 15 percent (or more) of your salary to hit your financial goals.

A self-directed IRA is a great way to unlock your IRA and take control of your retirement plan. Self-direction significantly expands your investment options to a wide variety of investments including real estate, tax liens, stocks, bonds, mortgages, notes, precious metals, and other investments. There is a myth that you have to have a lot of money to get started with self-direction, but we debunked this myth in our blog entitled “How to Take Advantage of a Self-Directed IRA with Just $5,000”.

Consider these ideas as you work to improve your financial health in 2013. As always, NuView IRA is here to provide you with the professional service you deserve. Call our company of experienced self-directed IRA administrators in Florida at 407-367-3472 to discuss your investment choices within a self-directed IRA and to start building momentum toward your financial goals for this year.

As We Roll into the New Year, Seize the Opportunity to Take Control of Your Retirement with Self-Direction!

December 27, 2012

As we head into the New Year, many people will likely be looking at their bank accounts and then making it their New Year’s Resolution to save more money. While this resolution is admirable for anyone, why not take it one step further and have your New Year’s Resolution be to take control of your retirement! Mentioned in an article from Fox Business, George Papadopoulos seized the opportunity to take control of him and his wife’s retirement when his wife’s employer made significant changes to her company’s 401(k) plan.

In addition to offering an extensive list of mutual funds that employees could choose to invest their money in, his wife’s company began offering a self-directed 401(k) option for employees. Papadopoulos, being an experienced investor looking to take control of the couple’s retirement, jumped at the opportunity for self-direction. “Self-directed 401(k) options are great for experienced investors like myself,” Papadopoulos said.

Even though a traditional 401(k) plan and a self-directed 401(k) plan offer the same pre-tax benefits and automated payroll deductions, the true difference between them is the investment choices you have with a self-directed 401(k). Self-direction dramatically expands your investment options from a short list provided by your employer to a variety of investments including real estate, tax liens, stocks, bonds, mortgages, notes, precious metals, and other investments.

The percentage of employers offering self-directed retirement savings plans in 2011 was 29% and this number is growing. Who knows – maybe your employer will be next to offer a self-directed 401(k) option to employees? Give our Florida self-directed IRA administrators a call today at 407-367-3472 to learn more about your self-directed retirement plan options!

Required Minimum Distributions – You Can’t Afford to Miss This Deadline!

December 7, 2012

Don’t let the little issue of RMDs or required minimum distributions get lost in the blur of the holiday season.  The IRS makes it painfully clear that they are envious of those of you that are over the age of 70.5 and have an IRA or other retirement plans.  Interestingly, the Roth IRA holders are spared the indignity of the government telling them how to manage their finances, but more about that later.

If you hold a non-Roth IRA and had your 70th birthday before July 1 of 2012, you must take a minimum distribution from your plan.  In other words, make what was tax deferred, now taxable.  How much must you take out?  It is based on an IRS provided table that calculates your estimated life expectancy.  How much is it?  Well, if you turned 70.5 this year, you will be forced to take a distribution of a little over 3.6% of your holding.  My mother, age 92, is required to take out 9.8%. For those of you yearning to know more, consult IRS publication 590 for the rules and tables.

All non-Roth IRAs are added together to calculate the RMD, and distributions can be made out of any of the held IRAs to meet the distribution requirements.

IRA holders that are in or near their RMD years should plan for sufficient liquidity in their plans to permit the easy withdrawal of funds as required.  This withdrawal can take place anytime during the calendar year – but if not done by December 31st, a penalty of 50% of the undistributed amount will accrue to the IRA holder.

Those that have contributed or converted to a Roth IRA are not forced to take any distribution during their lifetime, as all taxes have already been paid.

So, two end-of year reminders:  If you are nearing or over seventy years of age and have pre-tax IRAs, get prepared, and take the distributions as required.  If you wish to convert to a Roth this year, you must do so before December 31st.  Talk to your tax professional before the end of the year so you make all the best moves.

As always, all the best in your investments,

Glen

Retirement Obsession Disorder

October 17, 2012

There are certain phenomena that can only be explained through experience.  Once such event is what happens when you achieve the age of fifty.

When I was thirty, my viewpoint of those meeting the mid-century milestone was a bit jaded.  It seemed that the “older” generation’s musical tastes included artists such as Johnny Mathis, Andy Williams and perhaps the more wild confessed to owning an Elvis record or two.  This graying set drove large, boat-like cars, the men wore their pants a bit higher and tended to schedule their dinner out earlier.  They never could effectively communicate with us younger types and seemed overly concerned with their investments.  Certainly I would never become like them.

Then I turned fifty.

Everything changed – perhaps not all at once, but certainly in rapid fashion.  Let’s see.  My musical tastes tend to be reunion tours of geriatric groups such as the Eagles, Bruce Springsteen, and even an occasional Broadway musical.  I now drive a Cadillac, though I would like to point out that it isn’t the size of my Father’s car.  While the waistline of my pants hasn’t risen too much, I must confess, I have become more obsessed than ever with funding my retirement.

The equation is quite simple.  If I want to retire at age 65, I now have 15 years to take what I have managed to save so far, contribute more to it, and invest it wisely enough to live out my years in blissful retirement.  This may be easy to understand, yet hard to execute, especially if the gains are subject to taxation.  It becomes even more difficult when traditional, relatively “safe” investments are providing sub-standard yields.

Retirement obsession disorder (ROD) has hit me hard.  One cure that I have found to this malady is self-direction of my retirement plan – and partnering with smart people that can help guide me to the best combination of risk/reward  to accomplish my objectives.  Through a self-directed IRA, I am able to reinvest my returns, without the tax toll gate that diminish the gains of those who choose to use after-tax money for those same investments.  Rental real estate, private lending, and new business start-ups are all part of my IRA investments, along with a few Wall Street funds.

As the principal of NuView IRA, a self-directed IRA administrator in Florida, I share the perspective of thousands of clients investing hundreds of millions of dollars with the objective of improving their retirement outcomes.  If you suffer from ROD, seize control of your retirement funds and start self-directing your IRA.  Stay involved, save slavishly and invest in things you know and understand.  If you are over fifty, best of luck avoiding those pesky AARP applications.  If you are younger, listen to your elders and start your retirement early, much earlier than I did.

All the best in your investments,

Glen

Thoughts at Thirty Thousand Feet

October 5, 2012

There is something therapeutic about flying.  No, not the shuffling through the TSA gauntlet, the detangling from the hordes of little ones returning home from Orlando with their skull caps adorned with plastic ears and clutching their furry souvenirs.

No, the respite comes once sufficient altitude is obtained, the drink order delivered, and the electronic device “all-clear” is sounded.  For the briefest of moments, sanity is restored and reasonable quiet is returned to the cabin.

Such is the case now, as I hurtle away to an industry conference in Phoenix, sponsored by the Retirement Industry Trust Association or RITA.  During the next few days, I will be learning about the latest governmental trends regarding self-directed (SD) IRAs and the likelihood of changes with the next Congress.  Rest assured that I will be sharing that information in future blogs over the next few weeks so that you will be able to anticipate any changes along with NuView IRA.

Regardless, all of us continue to move another day closer to our retirement – and I’m quite proud that on Friday, I took another step.  You might think that being a spokesperson for SD-IRAs and having  thousands of clients taking control of their IRAs, that my retirement would always be my first priority.  Not necessarily.

However, last week, I took the first step in investing my Health Savings Account (HSA) in a mortgage-backed loan.  Although some people have HSAs and can put up to $6,250 per year tax free into these accounts, most just keep them in non-interest bearing accounts.  They do not realize that they can invest these accounts just the same as an IRA, and with NuView, that includes private loans, mortgages, private companies and much more.

Join me in taking a look at your funds that are not working for your retirement future.  Don’t be up in the air about your investments.  Call our company of experienced IRA administrators in Florida at 407-367-3472 to discuss your choices and start building momentum toward the retirement you deserve.

As always, all the best with your investments.

Glen