School of Hard Money > Lenders 101
What's involved in investing in Deeds of Trust?
At its heart, investing in Equity or Hard money loans is a lot like investing in a bond which returns a fixed yield and pays off at maturity
If you make a loan to a borrower for $100,000 at 8% interest, and require interest-only payments, you'll likely earn $8,000 income each year. And if the borrower does not default, the loan will pay off at or before maturity and the original principal will be returned plus interest.
When investigating whether or not to be invest in Trust Deeds, you should consider the following:
Do not consider becoming a private lender if you need the money before the maturity date. Even though most loans payoff early, many pay as the loan was written. You can sometimes sell loans to another private investor via Newmark Investment and Loan. But even performing private money loans are typically sold at a discount. If you want to sell notes, even if it is performing, be prepared to offer a discount.
- Property Valuation
The underlying collateral for an Equity loan is very important to the overall security of the transaction. Carefully evaluate the value of the real estate and you may want to use several sources to make your evaluation. You may choose to see the property and the compare it yourself. That means do not just look at photos on an appraisal and assume you the appraisal is an accurate value. Take the appraisal and get in your vehicle and drive to the subject property as well as each comparable and make the determination for yourself if you think the value is realistic.
Sometimes loan investments require that investors advance additional funds for a variety of reasons. Advances may be required to cure delinquent property taxes, cure a senior lien position, hire an attorney, pay to defend bankruptcy claims, or even remodel a property if a foreclosure takes place.Do not invest in equity/hard money loans without leaving yourself a cash cushion. Be conservative and leave yourself plenty of liquidity in your personal finances to handle unexpected circumstances.
Make sure you obtain title insurance which insures your lien position as a lender and offers fraud protection against forgery. Title insurance is not like homeowners insurance. If you suffer a loss with your homeowner policy, you submit the claim and get a quick reimbursement. Title insurance is an indemnity policy and as such you are reimbursed for a sustained loss only and not the potential for a loss.
- Borrower Credit
Determining the borrower's capacity to make monthly payments is the key to a successful loan investment. Equity/Hard money loans are primarily based on the collateral, but a review of the borrower's credit, track record and capacity to make payments and repay the loan when due provides additional security for the investor.
- Private Lender Insurance
you will need to make sure the property owner has appropriate fire and liability insurance in the amounts you desire as an investor. The insurance company must also be notified to include the investor as the loss payee on the policy. In the event of loss, you are secured.
Review the loan documents to ensure that the actual loan documents match your understanding of the transaction.
HARD MONEY AND FORECLOSURE
In the event that the borrower defaults on their payments, we will be involved to give the investor added security. This is a process which will require an expense.
Newmark Investment and Loan will help you become a Trust Deed Investor. As you work with Newmark, you should know about the different ways you can invest in loans. Below is a list of different options and the pros and cons of each option.
- Fund new Equity/Hard money loans
The new loan can be for the purchase or construction of a new property by the borrower or for the rehab or refinance of existing debt on a property the borrower already owns.PRO - A new loan to a new client offers the possibility of a continued lending relationship with current and future profits. In this scenario you are lending specifically to one party and have control over the terms, etc. If this is a new loan made to a previous client you have the previous performance history readily available.CON - If this is a new client, you will have no previous payment history on which to base a lending decision and will have to rely upon other credit performance or on the equity position that will motivate the borrower to perform on the note.
- Buy Existing Notes
The purchase of a loan that has already been originated. When you buy loans from private money lenders they can be performing or non-performing and can be purchased at face value, at a discount, or sometimes, if it’s a great loan (high yield, low LTV, great borrower), at a premium.PRO - There is a performance history that can be analyzed and evaluated. On non-performing loans, combinations of deep discounts at note purchase and good collateral values can provide excellent yields for an investor willing to go through the foreclosure process. Some notes, while currently non-performing, may either perform in the future or payoff to avoid foreclosure.CON - You could adopt an existing liability if the note was not originated or serviced properly. Non-performing loans may force you to foreclose to recoup your investment - a potentially lengthy and costly process. Your due diligence reviews are always at the mercy of the records available from the current lender.
- Fractionalized Loans
As an investor you may or may not have enough funds to invest in certain notes or you wish to achieve diversification by owning a portion of several different notes. With a fractionalized note you own an undivided interest in a note and trust deed. For example, if a borrower required a $1 million loan for a shopping center, the note may be fractionalized into 10 different investors, each investing $100,000. All 10 investors would be vested on the recorded security document. Investing in a fractionalized note is different from investing in a mortgage pool. In the fractionalized note, the members all have an interest in a singular note. When the note liquidates, the investment liquidates.PRO - Investors can diversify by investing in multiple fractional transactions vs. all funds in one proverbial basket.CON - If you do not own 51% or more of the fractionalized note, you will have to go along with the majority owners on decisions regarding foreclosure or other required decisions.
- Junior Liens
You can earn higher returns by investing in second trust deeds. Junior lien investments are not for the faint of heart. You may be called upon to reinstate the 1st, payoff the 1st. If you are unable to repay the possibility of being wiped out is much greater than a first lien position.PRO - Higher rate of return. Less initial cash outlay.CON - Higher risk. If a borrower defaults on the first mortgage, you may have no choice but to bring the 1st mortgage current or payoff it off to protect your investment. A declining market could put you upside down in the property unless you are able to "ride it out" until the market swings back and a bankruptcy filing by the borrower could easily wipe out your investment completely as other liens will take priority over you in the proceedings.
There is no "right" way to invest in loans. There is no substitute for your personal due diligence. Rely on professionals for advice, but make the private lending underwriting decisions yourself after careful research and analysis.
State of Nevada Mortgage Lending Division requires the following disclosure for all trust deed investors who fund loans: "Investors are not guaranteed any interest or return, and the investment is not insured." The investment is secured by real estate and in the event of default, the investor has the right to foreclose. "Investors must be given applicable disclosures" and investors must be accredited and show proof of ability to invest.
Equity Lending 101
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NV. MLD # 3644
NV. REAL ESTATE Lic. # B1002424
Real Estate & Construction Hard Money / Private Money Equity Loans - Reno, Sparks & Northern NV
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