#6 Investment Under $25,000 for 2007
Many peer-to-peer lending services are growing in popularity and offer very low starting investment amounts. Prosper is a big player in the U.S. market, although Lending Club is also showing early success. Zopa, a popular option in the U.K., is also developing a website for the U.S. (See our articles on peer-to-peer lending on Prosper.com and peer-to-peer lending with Lending Club for more information.)
Returns on these online lending services have been fairly competitive thus far, and they enable investors to both diversify across multiple loans and to make their investments somewhat automatic if they wish.
Second mortgage notes are another lending option. Many banks will provide a loan-to-value (LTV) ratio of around 80 percent for investors; loans above that amount are more difficult to find because they are riskier, and those investors who do qualify for them will face higher rates. This means that many real estate investors seek private funding.
Investors interested in mortgage lending should remember that the higher the LTV ratio they lend out on, the higher the risk they are facing. After all, there is a good reason why banks typically prefer to lend 80 percent of the property's value: They have learned over time that this is what they can expect to get back in a foreclosure situation. They have also found it to be less risky to lend on primary residences than investment properties, so banks will usually give higher LTV amounts on primary residences.
Privatized loans are a popular alternative to traditional bank financing
Banks are not going to spend a lot of time evaluating one particular deal, especially if it is a small one; they have to make assumptions that group large numbers of deals together. Since banks don't necessarily possess real estate investment expertise, they might not even know what to look for in a deal. This may offer smaller lenders an advantage in entering this niche market. Specialized expertise and knowledge allows an investor to locate prime investment deals to lend on which offer low risk compared to the potential return.
An individual investor can spend the time to complete a careful evaluation of each property before lending on second mortgages in order to feel comfortable that even in the worst case—default—the funds invested will be recovered in a foreclosure. Lending to experienced real estate investors can help to avoid the risk of default; new investors often learn painful lessons on their first few deals.
Where to find investments:
Online peer-to-peer lending services can be found through a simple Internet search. Prosper.com, LendingClub.com and Zopa.com are all easy to find on the web.
The market for second mortgages notes is not as easily accessible; it often takes networking to find such opportunities. Real estate investors seeking second mortgage notes can be found through real estate investment clubs; investors interested in providing notes can join clubs and spread the word that they are willing to lend on second mortgages. Demand is high for investors willing to lend on second mortgages because banks are feeling skittish about second mortgages in light of the recent subprime lending problems. Mortgage brokers may be a possible source for originating notes, since many of the banks they used to work with that offered these notes no longer do so. Investment clubs and networking may also provide access to opportunities to purchase existing notes from other investors.
