Money talk…eww. It’s a taboo subject, one that makes people anxious and nervous. It definitely makes me anxious and so that’s why I’m talking about it here on the blog. I feel as I dive deeper into the subject it becomes less intimidating and my confidence around it grows. So, maybe if you’re in the same boat our upcoming Financial Series will help you too.
Today I’m playing it safe and sharing information on private money lending. Luckily, my amazing, beautiful friend, Angela Vannucci, is laying it out for us. She works for a commercial lending company, Blackburne & Sons, and wrote today’s post. Pass along this info, there are many people who are interested in this type of investment but don’t know where to start.
Learn and enjoy!
Almost 15 years ago (yikes!), I walked out of college and into the private-money business at Blackburne & Sons Realty Capital Corporation. At that time, I had no idea what I was getting into and only knew a smidge about real estate, let alone what private-money lending was about. People may equate private-money lending as a type of crowd-funding, which is a term that gets thrown around quite often these days. After reading this blog however, I am hopeful you may have a better understanding of private-money lending and how you may want to participate in a deal or two as a piece of your retirement portfolio.
Private money lending can be simplified as someone (or a business) needing a loan, and a private person/entity loaning them the funds. Of course, there is much more to it than that but if I had to give one sentence to describe it, that would be it. There are different ways to lend money but in the case of Blackburne & Sons’ business model, we vet borrowers who need a loan, complete the necessary due diligence and then put together a group of private investors who will lend to the borrower, at reasonable rates and terms. At Blackburne & Sons, those rates can be anywhere between 7.9% to 14.9%, fixed rate for the first 5-years, with no prepayment penalty (which is huge for borrowers who just need private-money for the short-term).
Why is there such a thing as private-money lending? Private-lending exists to fund loans when conventional lenders, i.e. banks and credit unions will not. There could be a number of reasons why a conventional lender will turn down a deal. Whatever the reasons may be, a bank turn-down allows us private-money lenders to swoop in on qualified borrowers and offer yields of 7% to 14% to our investors. A few reasons why banks and credit unions may pass on a deal… (1) does not meet minimum credit score, (2) insufficient income, (3) property-type/condition and/or (4) not enough cash or equity into a deal, i.e. loan-to-value (LTV) too high. There could be some other reasons but I think these four sum up the majority of reasons that I hear about.
I cannot speak for other private-money lending firms, but the beauty of Blackburne & Sons is that we can underwrite and approve a deal based on the three C’s; Capacity to pay, Credit and Collateral. If the borrower meets two of the three C’s then we can usually structure a deal that meets the needs of the borrower and provide a reasonable return to the investors. It is a beautiful example of supply and demand. The trick is finding a balance between a reasonable rate for the borrower and a reasonable risk for the lender.
For example, if a borrower is purchasing an industrial property for $1MM, and is seeking a $650,000 loan (which is a 65% loan-to-value), but his credit is 620, he could be denied at his local bank for an approval. BUT… this same borrower could come to Blackburne & Sons where we may issue an approval based on a valid letter of explanation on the less than perfect credit, if the LTV is reasonable and the borrower’s income can support the loan.
Above is a very short version on how private-money lenders can help borrowers, but what if you are an investor and are curious to know if this is the right investment vehicle for you? Well it all comes down to your personal risk tolerance. Private-money lending is risky! While almost all investments have a level of risk, private-money lending comes with a higher level of risk. Therefore, if you are a conservative investor, then this is not for you. But… if you are more open to taking a risk, then read on.
The beauty of real estate private-money lending is that your security is the real estate. If a borrower defaults, Blackburne & Sons (on the investors behalf, which would be you) would commence collections for non-payment, up to and including completing the foreclosure. Once a foreclosure is completed and title is transferred into the name of the investor(s), investor(s) can then decide whether to hold, lease and/or sell depending on the situation, market and/or property type or condition.
With risk there is reward, right? Investors who choose to lend in the private-money world can earn between 7% and 14% return on their money. Full disclosure… a return is never guaranteed and a loss of principal is possible. However, with diversification of a private-money portfolio, I have personally seen our investors earn a very reasonable return over the course of their investment history with us. The key is finding your personal lending preferences and not putting all your eggs into one basket. For example, some investors only choose to lend in California, while others will only lend to borrowers with a certain credit score. And, then other investors will only consider a loan that will yield 12% or above. Or, we have one investors that invests $5,000 to $10,000 in each, and every, deal. It really all comes down to your personal investment strategy and preference. My recommendation to any investor I speak with that may be on the fence of investing is… if you have any doubts at all, do not invest. I probably lose many investors with that line, but I am ok with that. I’d 100% rather sell my deals out slower with investors who are comfortable with the risk, then sell a deal quickly with investors who are not or unsure. That thought process and company culture is why I think Blackburne & Sons has survived for the last 37 years and I am proud to do my part.
This article just touches on the very basics of private-money lending for borrower and investors (lenders), but please stay tuned! Happy to continue to pass along more information on specific topics that will break down the individual pieces in the future. In the meantime, please feel free to check out our website at www.blackburneandsons.com for more information on who we are and what we do.