Earning Returns While Managing Risk By Participating in Real Estate as a Debt Investor
As the real estate bubble of 2007 demonstrated, real estate can be risky, but there are ways to participate while minimizing that risk as a debt investor. As a debt investor, you can lend your retirement funds to a fix & flipper. As always, due diligence is absolutely essential before participating in any investment. The best practices for a debt investor are to receive a promissory note, mortgage, and be named as additional insured on the property insurance.
Here is what each of those documents mean:
- The promissory note is a promise to pay a certain amount by a certain time.
- The promissory note sets the terms and conditions, and is unique to what the two parties agree to.
- For example, the Lender receives a 10% interest per annum on the money lent with the interest and principal payable with the sale of the property.
- While some may want monthly interest payments, a balloon payment at the end to simplify the process for the rehabber and the lender, especially when working from a retirement account.
- The mortgage is a financial instrument that pledges the property as collateral to guarantee repayment of the loan.
To manage and help mitigate unnecessary risk:
- The loan amount should be at most 75 percent of the After Repair Value (ARV).
- Have the mortgage recorded by the County Recorder to hold a 1st lien position.
- Have the borrowers (rehabber) add you as an additional insured on the home insurance, in case anything happens to the home. This way the lender’s capital is protected against any causalities.
- When multiple investors are necessary to accumulate enough funding, 1st lien position can be achieved by joining the investors together with a joint venture agreement or a trust and recording the mortgage for the joint venture group or trust in 1stposition.
Investing in real estate as a debt investor offers the features of:
- Safety – you have the house as collateral purchased at 75 percent of market value.
- Security – promissory note, insurance, mortgage, 1st lien position.
- Predictability – no more roller-coaster stock market or 3 percent CD.
- Tax Advantage – tax-deferred or tax free when completed within your IRA.
- No Costs or Hassles – the borrower pays all the costs and handles all the details.
- High Return – earning 8-12 percent from fix & flippers
To learn more about private investing and the opportunities available to invest, call 210-441-4233.