Let’s look for a moment at the situation that many big banks are in: Over the last decade, some banks began lending too much money on some homes, sometimes as high as 110% LTV! They also created some loan programs that would amortize over 40 and 50 years, to reduce the payment for borrowers. Those risky underwriting guidelines allowed borrowers to have little ‘skin in the game’. In 2007 millions of borrowers subsequently started walking away from their homes. Banks had little if any, protective equity of their own, which has contributed to our still-fresh recession. While these risky loans have wreaked havoc on our economy… there are a few, strong ‘safety’ take-aways:
- Securitize your loans with Deeds of Trusts or mortgages – Get them recorded – THIS is true safety!
- Don’t lend without protective equity: a minimum of 35% to 40% or more!
- Shorter loan terms can further reduce risk!
- Think: Conservative. Not Speculative!
You might be asking “How is there more safety in Trust Deeds?” Let’s look at this way: You have a chance to lend $50,000 on a property with a value $100,000, meaning you still have $50,000 in ‘protective equity’. This loan is written for 2 years at 7%. Interest only payments are $292. If the property drops in value 30% in those 2 years, the borrower still has to pay those interest payments every month. Should you need to foreclose, there’s still enough protective equity (20%, right?) to sell the property and have a return of all your principal and interest, plus fees. What this means to you: Have you ever been able to get your principle and profits back when a stock drops 30%? Usually, it’s not very quick. (And to say NOTHING of ‘lost-opportunity costs’!) What this REALLY means: This added security gives you new choices beyond the stock market and provide safety you CANNOT find there.
The other great safety inherent in Private Lending is the transparency. Unlike the CEO or COO of a company, we actually get to know quite a bit about the borrower – and maybe even talk to him (I always talk to the borrower!) I can get clarity about him, how he thinks, what’s important to him. I’ll look at his credit report, and make sure he has a willingness to pay his bills on time. At this point, almost everyone has some credit challenges. But we can really get a great picture of a borrower, and use that information when making a decision: First-Hand information. Not from a blogger, reporter, or cable tv stock hustler…
(Yes, you can tell stocks aren’t my bag. You’re right. I like assets. Big, juicy assets – assets that I can discover what the real deal is. And no, I don’t enjoy being a landlord very much, either. Some people (maybe you) love to hold property, but not me. The great thing about real estate is that there are so many ways to invest. This is why I love the monthly income for private lending – without the headache of being a landlord!)
Here are your big 3 questions:
- Is your portfolio focused on safety?
- How can you get more safety in your portfolio?
- Do you think you’re being conservative, or are you ACTUALLY being conservative?
In this market, because there’s so much volatility, you really must have a more hands-on approach to investing – so go get your hands dirty! But remember – the old adage is true: Safety First!