Achieving higher returns means taking on more risk, right? Not necessarily.
If you want attractive yields utilizing a self-directed retirement account, but have little time to find alternative investments, then investing in loans backed by real estate could be a reasonable choice.
- They provide security by being backed by a hard asset such as real estate – This helps to minimize the risk if the borrower defaults on the loan
- They carry shorter terms on the investment notes
- Verifying the lien position – Choosing anything other than first position on the title increases the risk that you will not be able to collect should the borrower default.
- Not completing a recent title search – not knowing if the property has a clean title may have a negative impact on your return if the borrower defaults on the note.
- Not having a current appraisal report of the property. When all is said and done, the goal of the private mortgage investor should be to confirm they have more than sufficient equity within the collateral to justify the loan. This is one of the more crucial aspects of due diligence for this type of investment.
- Not requiring homeowners insurance for the property, which creates unnecessary risk in the event of destructive weather, fire, or vandalism on the property.
- Not having an experienced attorney reviewing the loan closing documents and agreements – which could leave the investor exposed to otherwise avoidable risks.
- Income producing commercial properties
- Multi-family homes
- 1-4 family investment properties
- New construction
- Renovation projects
- Loan at 8% Interest Rate
- Based on a commercial building with $128,000 annual revenue
- Loan Amount: $350,000
- Loan Term: 24 months
- Appraised Value of Property: $800,000
- Loan-to-Value: 44%
- Security: 1st lien position on property with total assignment of rents
- Annual Interest Earned: $28,000
- Total Interest Earned: $56,000
- Total Return: 16% over a 2 year period
Josh Manier is Managing Partner of Island View Private Loan Fund, LP which provides a platform for self-directed IRA investors and high net worth individuals to conservatively invest in private mortgage loans, obtaining attractive returns while preserving their principal invested. The fund specializes in non-recourse financing for self-directed IRA holders looking to renovate, build new construction, or who need assistance structuring owner financing for their investment real estate transactions. He can be reached at 952-345-3445 or via email at email@example.com. Additional information can be found at www.ivplfund.com.