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Should You Be The Bank?

Did you know that you can act like a bank and loan money from your personal accounts, including retirement accounts, to people and companies looking to borrow money? We represent many clients who make these "hard money" loans secured by real estate mortgages.

The advantage to you, the lender, is that the interest rate typically charged (usually at least 10%) far exceeds the rate you would otherwise expect to receive on a money market or bond account. Retirement accounts may be used to fund these loans. Of course, hard money loans are not without risk, as you will have to foreclose the mortgage if payments are not made. We advise our private lenders not to make loans if the loan-to-property value ratio exceeds sixty percent (60%). The lower the ratio, the greater the incentive for the borrower to make monthly payments. A foreclosure can take six months to a year, or possibly longer, and you may not receive payments during this time. If you are living off the mortgage interest, then this type of investment is not suitable for you.

Why do borrowers want "hard money" loans when lower interest rates are available through traditional banks and credit unions? Reasons vary, but private lenders meet the needs of borrowers who: (i) need to move quickly; (ii) are self-employed and may have unstated income or poor credit; (iii) are looking for flexible terms (i.e. deferred payments, longer amortization period, etc.), or, (iv) who have credit issues.

Being the "bank" can be profitable to you, the private lender, but you must be smart about how much you will loan on a property, and who you will loan to. Experienced counsel is needed to document the terms of the loan and make sure that the money owed you is properly secured.

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