Today, Jim Ingersoll explains a few ways to make sure you’re treating your private lenders properly.
There’s multiple steps to take to ensure that your private lenders are protected and know that they’re in trustworthy hands.
Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Jim: Hey, everybody. I am Jim Ingersoll with the REI Classroom. Today I get to be your host, and I want to talk about the power of using private lenders.
Mike: This show was sponsored by passiverental.com.
Jim: First of all, if you want to get privacy and asset protection, and buy as many deals as you want, and increase your deal flow, you’ve got to stop relying on banks. You’ve got to stop relying on hard money lenders. But that’s really not what my focus is today. What I want you to focus on today is how are you going to protect your private lenders? This is something people don’t normally talk about. You need to treat your private lending relationships stronger and better than you do a bank or a hard money lender. This is people’s actual hard earned income and investments that you’re going to be using to go out there, and invest in your local market. So how do you protect them?
Well, the number one way that you protect them is with the collateral that you’re going to provide them. What is collateral? That’s the house that you’re going to invest in. And how can you make sure you protect your private lender when you’re buying a house? Well, they’re going to be tied to that house, that’s all they’re going to get if something goes wrong, and you default on your promise to them. So make sure it’s one that they can get out of easily.
And the way that you do that is by having a good investment criteria where you don’t pay more than 70% for that house. If the house is worth 100, you can buy it for 50, put 20 in it, you’re all in at 70, you have a $30,000.00 margin there. If something goes wrong, that’s how you’re going to protect your private lender. And you need to be able to communicate that to them when you’re talking to them, and you’re out there soliciting, and working with people trying to talk to them about how they can participate in a deal with you.
Number two, homeowners insurance. More than once, more than twice, I’ve seen people use private lenders, and they forget to get their homeowner’s insurance. Can you believe it? The reason being is that we’re all so used to having the banks do all of our documentation for us, that we just expect that bank to check off a box saying homeowners insurance, mortgagee clause, additional insured.
When there’s no bank back checking, you’ve got to be absolutely sure that when you’re using a private lender that you get property insurance, homeowner’s insurance, and then on top of that, that you name your private lender as additional insured, or give them a mortgagee clause. It’s very, very important. It’s very easy to forget this when you’re not dealing with banks. It’s so simple, but it is so critical. I know at least one person in Georgia that did this. They forgot to get their insurance completely, and the house burned to the ground. Everybody lost. Don’t let that happen to you.
Number three, this would be your title policy. Make sure that you protect them from the past, and the way you do that is with a lenders title insurance policy. Protect them from title issues going forward. And finally don’t shortcut your documentation. Make sure you’ve got a fantastic promissory note mortgage date of trust, joint venture agreement if you need one. All of these types of documents have got to be perfect. Don’t short cut on them, they get recorded at the courthouse, they protect your private lender, and that’s four ways that do it.
Number one, with the collateral, number two with the homeowner’s insurance, number three with the title insurance policy, and number four with perfect documentation. I hope you enjoyed this session with the REI Classroom. I am Jim Ingersoll.
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Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of flipnerd.com or any of its partners, advertisers, or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.
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