How a Private Money Lender Can Become More Involved than a Bond Investor

Private investors looking for routes other than stock and bond markets can prosper well in private money lending (also termed as hard money lending). If investors understand the basics and approaches of private money lending, then returns could be promising with little risks involved. At the core, private investing is quite similar to bond investments—returning a fixed yield and paying off at maturity date.

For instance, if you lend a capital of $200,000 to a borrower at 8% interest (requiring only interest payments), you’ll be earning $16,000 per year. While if the transaction goes ideally with borrower not getting defaulted, you will acquire complete payments at or even before the maturity date along with the original invested capital.

However, when preparing how to become a promising private money lender in Dallas TX by lending money for healthy yearly returns, there are few factors including the two below you need to study that can make you more involved than a bond investor.

1. Liquidity

If a business opportunity calls you needing the money for investment before the loan is totally paid off, then becoming a private lender is not a wise decision. Even though most loans successfully pay off at the maturity date, but there is a percentage that some do not as expected.

In the event of requiring your invested money before the occurrence of the maturity date, you can use an online loan exchange to sell the loan, or hire a hard money loan broker to sale it to another private investor. But do remember, both performing and non-performing hard money loans are normally sold at a discount, so it’s better to acknowledge the possibility of receiving a cut on your returned money.

2. Collateral Valuation

A nice way to dilute risk! The defined collateral in private money lending is very important to consider for your overall security and involvement in the transaction. Take your time and thoroughly evaluate the value of the collateral asset or hire a professional to do the job.

A common and steadfast belief among lenders is, “drive the comps yourself”. It states that going through the documentation and visuals of the property is never enough, travel to the subject asset to assess the property yourself. You might get surprised looking at something that wasn’t included in the paperwork!

Go further by asking several other sources to determine the valuation. Besides appraisal and physical involvement in checking out the property, acquire the use of a Broker Price Opinion or an Automated Valuation Model to come up with the most authentic and closest value figure.