When it comes to building a successful investment portfolio, the name of the game is diversification. While the stock market can offer incredible returns, it also comes with a high level of risk. Alternatively, government backed securities offer very little risk, but ruturns might not even keep place with inflation. Private mortgages offer the best of both worlds — very little risk and a great ROI. Here are five reasons for you to consider investing in private mortgages.
1. You get better rates than the banks do.
Traditional lenders are looking for high credit scores and down payments that are at least 20 percent unless you get an FHA loan. In that case, though, buyers end up paying mortgage insurance (PMI), which ends up adding thousands (or tens of thousands) to their payout over the course of the loan. If you act as a private lender, you can charge a higher rate than the banks do. Savvy brokerages have buyers on hand who can pay a higher down payment but simply lack the credit score or income verification to seal the deal. If you connect with one of them, you can both benefit.
2. Being a lender is a lot better than being a landlord.
If you’re the landlord, the onus of the repairs falls on you. Toilet leak? Your problem. Leaky roof? Your problem. Air conditioning unit goes out? Your incredibly expensive problem. This can eat away at your rental income quickly. If you sell the property, serving as a private lender, you still get payments each month, but instead of having to earmark some of the money for repairs, you can put it all in the bank. The buyer has to worry about setting aside funds for repairs, not you.
3. Buyers default much less frequently than renters.
If a buyer enters into a private lending agreement with you, it is important to remember that you are his road back to better credit. The likelihood of the buyer going into default on this mortgage is lower than many people think. It’s true that the buyer represents a risk, but if he has set aside enough of a down payment (30 percent or even more in some cases) for a private loan, that shows some financial skill. So you’re getting a higher rate of return with less risk than you might have thought.
4. You get to set the term of the loan.
Traditional lenders generally extend mortgages that have 15 or 30-year terms at fixed rates, or adjustable rates that allow a certain number of rate changes over the term of the loan. As a private lender, you have a little more flexibility, as you can set the term how you want it. If the client is simply waiting for an influx of cash from a new job or another investment, choose a term of six months to a year. That way, you get your whole principal back sooner with interest, and you can move on to the next investment. If the buyer wants to set up a longer note, such as five to ten years, feel free to go along with it if you can stand having your money tied up that long.
5. You base your lending decision on the property, not the borrower.
The fact that you can set your required down payment as high as you wish, means that the risk of default doesn’t have to be worrisome. If a borrower puts down a large down payment, they will be much less likely to fall behind on the agreement. However, with a large amount of equity already in place, if a default does take place, you have a higher probability of selling at a profit. There are brokers in every market with access to clients who are looking for private lending sources, giving you many opportunities to make a profit from real estate without having to manage a single property.