Is private real estate financing a valid alternative for investors? There is no perfect investment strategy as many stock market investors found out in January of 2019. Most of the market gains from 2018 were wiped out after several days of sell-offs in the market. And, those sold on gold saw gains for the dollar negatively affect the price of gold bullion and other precious metals. Likewise, many who invested in Bitcoins in 2018 don’t even want to broach that subject.
In 2012, the Jump-Start Our Business Startups (JOBS) Act authorized any accredited investor to invest in private real estate financing, just as you would the stock market. In 2017, home renovators turned old homes and commercial properties into a $60 billion industry, so there is potential. These investors earn ten to fifteen percent interest.
Although most housing markets are at or near their 2008 peak, there’s no guarantee we won’t see some of the declines we saw in 2009. However, financing real estate investors’ capital to renovate real estate projects will still provide significant upside. There are risks to private real estate financing. Though, with the property as collateral, these are minimal.
Collateral & Loan Repayment
The borrower usually takes a loan of 70-75 percent of the after repair value (ARV). These are short-term loans of usually six months. Long enough to do the reno and put it on the market. An appraiser considers the current value, plus renovations to predict the ARV. The borrower pays interest-only payments each month and the loan principal, minus any remaining fees when they close the sale of the remodeled house or commercial property. There are no early repayment fees or penalties.
Even though the interest is much higher than a traditional loan, it is part of the expense of doing business. Most “house flippers” understand because they can’t wait for a traditional loan. Most wouldn’t qualify anyway due to the sporadic nature of their income. If you have money to invest and are interested in private real estate financing, talk to the folks at Red Door Funding.