Should I offer Private Money?

[Suvir B.]

Hi! I am new to real estate investing, and am looking for guidance and learning as I tread carefully into this promising area. Having worked in a corporate job for the past 15 years, I have about $100K+ saved up, and looking to invest.

I can spare the number for 3-4 months, and am debating whether I should invest in a private money transaction i.e. private financing someone's short term hard cash need (e.g. a flipper). What kind of returns can I expect for this duration, and what kind of safeguards can I put in place to protect my initial investment? Am I better off just investing in the stock market instead?

If I decide to pursue this option, how to I find qualified REIs? What due diligence should I do on them?

Lots of questions! Any thoughts are welcome.

[Jeff S.]

It looks to me like you're just looking for a fast return, @Suvir B., with no interest in becoming a lender. Short-term returns are unreliable in real estate and it's a rare property that can be bought, rehabbed, and sold within 3-4 months. You're taking an unreasonable risk if you really and truly need the cash back within that time frame. Six months is more realistic, but I can assure you that if you really have to get paid back on time, and your luck is like ours, the building department will find a last minute problem or the sale will fall through a time or two. Happens all the time and not worth the risk.

If the urgency is not great, and you can wait, then you can call a few of the larger hard money lenders in your area and ask if they fund their loans with investors. Some might sell their individual notes and others might run a mortgage pool. Owning the individual notes will provide the greatest return, but you are stepping into the shoes of a lender, which is probably not what you want with zero experience.

A mortgage pool is like a mutual fund except the operator loans the money instead of buying stocks. These loans can be against single family flips to large apartment complexes. You'll normally just receive a monthly check and not have to worry about lending compliance.

In some cases, you might have to be an accredited investor (look it up). In others, such as CA, state law additionally defines the amount you are allowed to invest in notes as a function of your net worth. The HML should know these rules.

Returns should be in the ballpark of 10% APR give or take a few percent. Lower perhaps for a pool and higher if you own the individual notes. Rates are so regional, Suvir, that it's almost impossible to generalize about returns, so you just have to ask around locally.

Good luck.