If You Want to Become a Hard Money Lender, Take These Steps to Lower Your Risk
Hard money lending is a great way to save for retirement and enjoy passive income to pay the bills or invest with. It’s generally considered a fairly safe and secure investment, because in each transaction an actual piece of real estate is used as collateral. However, there are a few measures that can be taken to ensure the highest return and the lowest amount of risk.
First, if you’re new to the industry and want to become a hard money lender, find a mortgage broker. Mortgage brokers have experience and will be able to explain the whole process to you, they also probably already know a few qualified and reliable investors. They can help set up a plan to earn you steady returns and monthly cash flow and determine the right interest rate and LTV for you. Although mortgage brokers to charge a fee, if you’re a newbie this is not the place to cut corners.
Second, the lower the LTV the better (as far as secure investments.) Although a very low LTV may restrict you’re pool of borrowers, it’s a general rule that the lower it is the less risk involved- that’s because the lower this number, the lower the amount of money you’re putting into the deal relative to the investor. The LTV stands for the loan to value the ratio, or the percentage of the full value of the property you’re willing to loan. A standard number that is pretty safe is 60%- this means that if the house will be worth $100,000, the investor will have to come up with $40,000 on his own. Meaning that if he is foreclosed on for any reason, and you acquire the house- you have just received $40,000 built in equity. And that’s the worst case scenario!
Another thing you want to keep in mind is the type of property your investor is interested in. Obviously large rehabs are a little bit more risky, as well as unconventional types or property like condos or duplexes. Typically you want the bread and butter deal- three bedroom two bath, one car garage, or something similar.
Tags: borrowers, cash flow, collateral, condos, duplexes, hard money lender, hard money lending, income, interest, interest rate, investment, Investments, investor, investors, mortgage broker, mortgage brokers, passive income, private lending, risk, secure investments, Steady returns, wealth management
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