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Private Lender Pillar #1: The Return Of Investment

August 3, 2020

Originating Private Mortgages from an SDIRA can initially involve a major shift in your investment philosophy and overall thinking – I know that was the case for me, as it took me years to take the first step and actually fund a Private mortgage.

When performing due diligence on a potential private loan from an SDIRA, some questions you may find yourself asking are:  Where do I start?  What should be the first thing I look at when vetting a potential loan?

The answer is simple, follow the two ROI‘s.

The first ROI you should be concerned with is the Return OF Investment (ROI-1).  By concerning yourself with the security and safety of your money is paramount to success and wealth building.  To ensure the return OF my money I require the following from the borrower:

  1. Multiple exit strategies in case the market shifts – like it did recently or in 2008
  2. Enough liquid cash (not in retirement accounts) to cover:
  3. the interest payments for the life of the loan,
  4. payment of the first draw contracts, and then be reimbursed by my funds after the repairs are inspector approved
  5. Down payment and/or all closing costs – the borrower MUST have skin in the game, otherwise they can walk away from your money to easily.

Also, I require the borrower to pay for the following insurance policies to protect the property to which my investment is tied.  I live and lend in the Gulf Coast of Texas, and require the following insurance policies before I lend any funds:

  1. Lender’s Title Policy
  2. Hazard Insurance
  3. Liability Insurance
  4. Windstorm
  5. Flood

Once I have assured the return of my money back to my SDIRA, then and only then do I consider the second ROI, which is the Return ON Investment (ROI-2).

I prefer to look at each loan individually and try to be flexible within the current market conditions when it comes to interest rates and points.  However, you should consider charging enough points to cover the cost of a foreclosure up front at closing– that way you can have the funds in your SDIRA and take foreclosure action quickly, so your money is not held hostage by a bad deal!

I hope you have found this helpful, and I wish you safe and prosperous Private Lending.

Keith Baker

Host of the Private Lender Podcast

Questions: [email protected]


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