As a private lender on rehab deals in-particular, you make your profits faster than you would by holding-onto a property long term.
You lend the money to a seasoned real estate investor for the purchase and rehab of the property.
Once the property is renovated and sold, you get your money back, plus your interest, which is can be anywhere from 6%-15%.
Depending on the deal, you might be able to get as much as 20%.
And you get all this back within just three-to-six months.
If you were to buy-and-hold a property, it’ll probably take you YEARS to make your initial investment back from when you acquired the house.
Collateral is Worth More than You Invest
Another reason why I’m a fan of private lending, is because your safety net is worth more than the money you lent-out in the first place.
Most private lenders don’t lend anymore than a 70% loan-to-value ratio (some will go up to 75%).
This means that if a property is worth $100,000 in it’s renovated state, the max amount you’d lend on that rehab project is $70,000.
To secure your investment, you created a mortgage on that property in the first lien position, where you take the same position a lender would take.
That mortgage legally makes it so that you take over the rights to the property if the borrower defaults on the loan.
So even if the borrower defaults on the loan, the property you’re getting is actually worth more than what you spent out of your pocket (remember, you didn’t lend more than $70k on that $100k house).
Another good thing about private lending, is that it’s a true win for everyone involved.
As the lender, once the home is resold, you get a return on your investment over a relatively short period of time.
In a matter of six months or less, you’ve made a 6%-20% return that you can reinvest if you want…
Or, you can just sit back and feel good about the boost you just gave your retirement or bank account, depending on where the money came from that you used to fund the loan.
The borrower/real estate investor profits from finding and fixing-up the property, so they win too.
The End Buyer
After the property is fixed-up, the end buyer gets a home in awesome condition that their family can call home for years to come.
And if you’re the sentimental type, you can relish at the thought that YOU’RE the one that made that happen for that family, because you funded the loan for it all to be done.