Can I invest in private real estate credit?

Short-term loans to homeowners and builders can generate solid returns for investors

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If you are looking for an investment vehicle that generates strong short-term returns without the volatility of growth stocks, then private loans may be for you.

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Becoming a private lender is not as complex as it sounds. All you really need is a comfortable amount of underutilized capital, above zero risk tolerance, and access to a good real estate lawyer because you are going to be targeting investors. real estate and finance their projects.

Experts say there are two reasons private lenders tend to focus on real estate.

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First, from pinball machines needing money for renovations to commercial investors looking for bridging loans, there is a reliable and consistent demand for liquidity from the real estate industry. While large developers and builders usually have lines of credit to cover these costs, smaller businesses will seek liquidity in the private market.

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The short-term nature of these investors’ plans means you can charge interest rates comparable to what would likely be offered by traditional lenders. In Canada, an interest rate of ten percent or more on private transactions is not uncommon, according to real estate experts, although seven to ten percent is more common.

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Second, since your loans will be secured by the real estate assets of your borrowers, the collateral at stake will usually be worth much more than the amount you lend. It helps control your risk.

As a private lender, your returns come in many forms. There’s interest, of course, but some lenders also charge exit fees or “points” – fees that are paid by borrowers in exchange for a lower interest rate. Some lenders opt for profit sharing on the projects they help carry out, but experts say these deals carry more risk due to the uncertainty of budgets, deadlines and going to the open market. ‘a completed project.

Finding borrowers can be a challenge for first-time private lenders. You’ll need to get your name out there, so putting some work into your social media feeds is a smart move. Joining one or two local real estate investment groups will help you meet investors who are actively seeking cash. You can also build relationships with mortgage brokers specializing in private lending.

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But you won’t get far in the private lending industry without a qualified and experienced real estate lawyer in your area to negotiate your deals and review contracts, experts say. A good real estate lawyer can also be a reliable source of leads.

As simple as private lending seems – and it often results in surprisingly frictionless transactions – there are always risks involved. A good strategy for your first transaction is to start small and stay local. Meet the builders and developers you will be working with face to face and ask them to tell you about their projects.

Work closely with your lawyer to close a case or two under your belt. Doing these things will give you a clearer idea of ​​how much risk you are comfortable with and what you could gain.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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