New investor from Los Angeles, California. Trying to learn

[Tim Neighbors]

I'm here to learn, looking for advice, tips, wisdom, and maybe to offer the same to those who may be even newer than I. I purchased my first 2 investment properties (both buy 'n holds in the Austin Area) this year. I have enough for a 3rd, but I'm trying to decide if I should do hard money lending instead, or invest it outside of real estate entirely so as not to put all of my eggs in one basket. The historically low interest rates tempt me to go for another home (probably in a different area), but I fear I may be too heavily invested in real estate if I do. Any suggestions? tips? general knowledge?

Thank you!

tim

[Chris Powell]

Welcome Tim, 

We are new to Bigger Pockets too but I have been involved in Private Lending since 1990 and the mortgage industry since 1983. There are many considerations to making a private money loan but I'll hit a couple of the majors for you here.

There are numerous lending laws and consumer protection laws that you must follow in order to create an enforceable loan transaction and stay out of court. I would recommend working with a licensed reputable mortgage broker to avoid usury and safeguard your self from the regulators.

Always get an independent appraisal and read it! You would be surprised at how many lenders don't take the time to read the appraisal. The equity in the property is your prime protection against loss and having a good appraisal is key.

Make loans in First Lien Position and make sure you receive an ALTA policy of title insurance insuring your lien position on the property securing your loan.

Meet your borrower and do your own physical inspection of the property. It's always a good idea to meet the person you are loaning money to and I've seen an appraisal of a beautiful home which upon inspection,  was  actually only vacant land. I don't know what happened to the home or if it ever existed.

Don't lend money to poor people. Make sure they have the ability to make payments and a viable exit strategy to payoff your loan. Anyone can make a loan, the real challenge is to finance a successful transaction wherein you get paid off at maturity.

There is lots of fraud out there, recent title transfers with max cash out, borrower will to pay super high fees and costs, cash out wherein the borrower has no cash left in the deal are just a few warning signs that there could be trouble and warrant closer scrutiny.

If you don't have sufficient funds to make a first trust deed, there are many professionally managed mortgage pools that will combine you funds with funds of other investors to make loans you can't due to loan size. You can also hold a fractional interest in a single loan but must be originated and serviced by a licensed real estate broker. There are advantages and disadvantages to both and you should do your homework to see which is best for you. I like pools where the manager has a significant amount of their own money invested in the pool and in the event of a loss, the manager looses first but are less common. Pools also mitigate your loan risk by spreading your investment across a pool of loans and offer a fixed rate of return with no disruption in income stream in the event a single loan isn't performing. 

Be safe and do your homework and I think you will find Private Lending to be both interesting and rewarding.

BTW: The term "Hard Money" arose because Banks historically only refinanced loans that provided the borrower with limited or no cash out. When a refinance was not "rate and term" and the borrower received cash or hard money, the transaction was known as a Hard Money Loan. Private Lending is now filling the void the Banks can't fill due to regulation by Big Brother. 

Best, 

Chris