If you’ve never heard of Private Lending before, your first question will obviously be, “Is it safe?”
The answer to this question is, as with any potential investment opportunity, that your investment is as safe as the due diligence you conduct to make it happen.
So what is the game plan for a successful private loan transaction? We highly recommend the following while embarking into a private lending journey:
- Private loans are conducted through a licensed mortgage loan broker. This does not mean that every mortgage loan broker is a specialist in private lending. It is imperative that you seek out a mortgage loan broker who has extensive experience in working with private investors to broker private loans. Finding a specialist is important so you can be sure they are particularly familiar with both provincial and federal laws that relate specifically to private lending transactions, such as Regulation Z issues, predatory lending laws, and usury laws.
- Private loans should ALWAYS be completed through an escrow company or closing attorney. Furthermore, it is only after all the loan conditions have been met that you should wire transfer or send your money to the closing attorney or escrow company, who will then send your monies to the borrower. It may seem like a simple piece of advice, but NEVER send your money to the borrower directly, no matter how credible they may seem. Your escrow company or closing attorney acts as an official verification of the loan and other legal documents, giving you extra protection and a worry-free transaction.
- Private loans should only be undertaken if there is sufficient remaining equity in the collateral property to negate any possible downside risk, for example, if the borrower ceases to make payment and thus defaults on the deal. A successful private loan (and the standard in private lending) is having at least 30% equity left in the collateral property.Imagine a property worth $100,000. A wise private lender will loan no more than $70,000 (or 70%) against it, leaving $40,000 (or 30%) in equity. Should the borrower default on the loan, the private lender can then foreclose on the property. The exciting news is that in the best case scenario, your loan gets repaid, and in the worst case scenario you get the property back that has 30% equity built in!