Private mortgages and private money can offer attractive returns to investors, but as with any investment strategy, it comes with risks. The key is to understand these risks and learn how to mitigate them. The first risk to consider is the property risk. It is crucial to evaluate the value and condition of the property, and the zoning and loan-to-value ratio. It’s also important to consider the market the property is in and how quickly it might sell if it goes into power of sale. Another risk is market risk, as smaller and remote markets might limit the ability to sell the property. The third risk is the borrower’s risk, including their ability to service the loan and whether they owe any taxes. Finally, it’s important to assess the exit strategy, as it is crucial to exit the deal and get the private loan paid back by the end of the term.
To mitigate these risks, it’s essential to conduct due diligence by seeking a third-party appraisal of the property, verifying the borrower’s credit, and analyzing their exit strategy. It’s also important to consult with a lawyer or mortgage broker to ensure the loan is serviceable using rental income and to limit your exposure in smaller markets by cutting down the loan-to-value ratio. Moreover, it’s recommended to avoid lending against a 100% loan-to-value ratio, regardless of how great the deal looks.
Summary
Private mortgages can offer high returns, but it’s essential to understand the risks associated with them. By taking appropriate measures to mitigate the risks and conduct thorough due diligence, investors can reap the benefits of this investment strategy while minimizing their potential losses.
