The beautiful thing about using private lenders for your real estate investing business is that you get to set the terms by which you borrow. But what terms will you set? It is necessary to design a lending program that will not only offer competitive terms to your private lenders but that will also meet your business’s needs. What interest rate will you offer? Will you offer monthly payments of interest or a lump sum repayment?
How long will the term of the financing be? What will be your maximum LTV ratio when purchasing properties? How will you collect and collateralize your investors’ money? What documentation will you use? What sort of system will you use to keep track of all of your outstanding loans and their due dates? A substantial amount of thought must be given to these and similar questions in order for your private lending program to be effective.
One of the primary sources of private lending capital is funds from investors’ self-directed IRAs. Lenders with money in an IRA may not withdraw the money but may direct it towards chosen investments. For you as the real estate investor this means that there is some extra paperwork involved. In order to invest with self-directed IRA funds you must work with a custodian called a Third Party Administrator to handle the money indirectly.
Conversely, the loyalty of your lenders is your greatest asset as a real estate investor. Loyal investors lead to long-term profitable business relationships. Loyalty stems from satisfaction as well as special treatment. Making sure that your promises to your lenders are fulfilled is the first step. Whenever possible go above and beyond their expectations. This will ensure long-term loyalty from your lenders.
And don’t forget to make them feel special. Extra touches like follow up calls and thank you notes go a long way towards making someone feel like a person, which will help your lenders feel even better about doing business with you.
Also, I must importantly point out to you that as a purveyor of investment opportunities one organization that you should be aware is the Securities and Exchange Commission, or the SEC. The SEC is a federal commission that monitors the sale of securities, or investments. There are important distinctions that you should be aware of between selling shares in a business venture and borrowing money as a mortgage secured by real estate, but the details of making sure your are in compliance with the SEC should be left to your accountant.
Just be aware that if you are doing business within a single state then your activities will be of interest to that stateâ€™s version of the SEC, and if you are doing business between states then your activities will be of interest to the federal SEC. Your business team should include a good accountant and/or attorney who can see to it that all of the appropriate filing and registration requirements are satisfied.
By Omar Johnson –www.biggerpocket.com