5 Questions to Ask Your Private Money Lending Sponsor
Private money lending in the real estate industry is a very reliable way to get double digit returns on your investment dollars. It far surpasses most other forms of investment, including CDs, stocks and bonds. It’s also the most passive form of investment there is. When you become a private money lender, you act as the bank. You supply the money and the private money lending sponsor acts as the middleman and lends the money to borrower. The borrowers then use that money to build or develop projects. If you want to get into private money lending, you’ll go through a sponsor. But you need to be careful which sponsor you work with, because they are not all the same. Once you’ve made the decision to become a private money lender, here are some important questions you need to ask.
1. How Do You Vet Borrowers?
Borrowers are the entity or individual who will actually be using your money to fund their projects. A borrower should be fully vetted in terms of reputation, experience, credit rating and previous success rate. Obviously, you wouldn’t want to lend money to an entity that’s a big credit risk. When you act as the bank as a private money lender, you rely on your sponsor to do the vetting of borrowers. It’s not out of line for you to ask what the lending criteria is and how they vet the borrowers.
2. How Long Have You Been in Private Money Lending?
You want to work with a private money lending sponsor that has experience plenty of experience in that space. Although being the bank as a private money lender on your end is very easy and straightforward, there are many complex transactions that take place on the back end. You definitely want to only work with a private money lending sponsor that knows exactly what they’re doing. You can glean that by asking how long they’ve been in private money lending.
3. Do You Have Any Previous Clients I Can Ask For a Recommendation?
As someone interested in becoming a private money lender, you most likely value your privacy. You don’t necessarily want others to know about your private money lending activities, right? Therefore, it stands to reason that the private money lender may not have a long list of past clients who are willing to talk to you about their experiences. However, it’s reasonable to be given the name and contact information for a business that the sponsor has worked with. It may be a financial institution, one of the past borrowers, or someone else the sponsor works with in the private money lending space. That person can tell you whether or not the sponsor follows through on their promises and what they are like to work with.
4. Can I Roll My Money Over Into New Opportunities?
Once the term of your loan is over, you may not necessarily want to take repossession of your capital. For financial reasons, taking back your capital can make things unnecessarily complicated, especially if you plan on reinvesting in the next PML opportunity. Some sponsors offer you the chance to simply roll over your investment into the next opportunity, but not all. Find out ahead of time what all of your options will be when the term comes to its end. That way you won’t need to make a last minute decision about what to do with your capital and you can make sure your money’s working for you without any non-productive gaps.
5. What Will Be Your Lien Position?
In some rare cases a borrower may default on a loan. It happens. As the lender, you need to know where you stand in this event. The ideal position is first lien position. This is where you and the other lenders have the right to take possession of the asset and do whatever you want with it. As the first lien holder, any other claimants have to stand in line behind you. You could sell the asset as is or develop it further; whatever you all agree on. First lien position is so important that we recommend not working with any private money lender sponsor that is unwilling to give you first lien position. This is no less than what any bank or other financial institution would demand upon lending thousands of dollars. And it’s what you should expect from your private money lending sponsor.
These are not questions that you should ask; they’re questions you needto ask. No matter where or how you decide to invest your hard earned money, make sure you only put it in trusted hands. In the case of private money lending, you need to do your own due diligence to make sure the sponsor can be trusted. You’ll find most of the information you need to know in the Private Placement Memorandum you receive from your sponsor. But in addition to that information, you’ll want to ask these important questions. Once you’ve found a sponsor you can trust, of course, you won’t need to run through all these questions over and over again. If you’d like more information about the private money lending opportunities at American Real Estate Investments, or to ask any of these questions, please feel free to contact us today.