The Time Value of Private Money Loans

Options Instead of a Conventional Loan

It does not matter how low or high the interest rate is for a desired mortgage loan if the borrower cannot qualify for the loan. Conventional 30-year fixed mortgage rates have hovered within the high 3% to mid-6% rate ranges over the past 10 years between 2006 and 2016. Money received today is much more valuable than money received in the future due to factors such as inflation.


Time is On Your Side

The median length of time for an owner-occupant with a 30-year fixed mortgage rate is 10 years. Right around 10 years, the owner is likely to pay off the loan by refinancing or selling the property. This average 10-year hold time for owner occupants is a key reason why 30-year fixed mortgage rates are tied directly to the 10-year Treasury Yields.

However, non-owner investors or “fix and flippers” may only hold their mortgages in place for a few months or a few years. Private money, as a result, becomes very affordable due to the short closing and holding time averages. The brightest investors these days know how to find the most valuable and deeply discounted prices prior to buying the properties, improving them, and selling them as quickly as possible for a quick $50,000, $100,000, or $250,000+ profit once they truly have confidence in their funding sources.


Time is Money

Whether the investor’s loan rate is 4% from their local bank or 7% from a private lender, the carrying cost differences for the monthly mortgage payments can be insignificant if the loan is paid off in full within a few months or a year or so. The present value or access to money today is of more value to an investor than the access to future capital. This is especially true if the investor only has an incredible home buying opportunity available this week.

An investor who paid $500 in mortgage interest for a private money loan on a property that quickly generates $100,000 in profit still has a $99,500 net profit instead of using a bank loan that never closed on time and the deal fell apart. A high percentage of sellers today lack faith in conventional banks closing on time in less than 30 or 60 days, so they prefer “all cash” or private-money qualified borrowers who can close in a few days or weeks.


Private Money is Affordable & Accessible

100% of nothing is still nothing. Or, the missed opportunity to purchase a potential high quality “fix and flip” deal due to lack of available personal or third party cash options leads to zero profits. Back in the 1980s, some private or hard money mortgage loans were called “The Perfect Vision Loan” (20/20 – 20 points and 20% rates). On a comparative basis, today’s private money options are as good as or even better than many of the best fixed mortgage rates over the past 35+ years.

Give us a call at California Private Money Lenders to talk about private money loans and if they are the right choice for you at 707-315-1119. Or you may fill our our Borrower’s Form or Contact Form and one of our trained private money specialists will be in touch promptly to answer your questions.

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Using Your IRA or Pension Plan to Invest in Trust Deeds

A Source of Steady Cash Flow

Investors looking to get the steady cash flow of interest-bearing investments like bonds or CDs, with returns more akin to buying stocks, should carefully consider buying trust deeds. These investments are excellent for IRAs since they offer steady long-term income which can help meet your investment needs whether you are retired or not.


Trust Deed Investing

Buying trust deeds turns you into a real estate lender. When someone wants to borrow money to buy a property, they turn to an investor like you for the trust deed or, in some states, a mortgage. You receive monthly payments of interest and principal usually, and either have the loan paid off over time which can be for as little as one year and typically less than five years. These payments can either be reinvested into your IRA to grow tax-free or can be taken as withdrawals to meet your minimum withdrawal requirements.

Trust deeds have a number of features which make them safe. First off, they require buyers to put up a substantial sum, giving them motivation to make their loan payments so that they can keep the property. Because of this significant down payment, if the buyer does default, the lender ends up owning a property with significant equity.

In addition, most trust deed lenders will only make loans to highly qualified people who have the means to repay their loan. These factors make trust deed investing a relatively safe activity with very healthy returns.


The Magic of Self-Direction

To engage in trust deed investing with your IRA funds, you simply need to set up a Self-Directed IRA with a custodian that will allow you to place your IRA funds in a trust deed investment.  There are several excellent companies to work with such as Pensco, Lincoln Trust, formerly Fiserv, Entrust and Equity Trust Company to name a few.

Some require a minimum amount to be present in your IRA in order to invest in a vehicle like a trust deed investment. Please contact your plan representative as all IRAs have different rules and regulations. These IRA accounts let you specify how the funds in the account are to be invested, instead of limiting you to just a few vehicles. Once your money is with one of these self-directed accounts, you can then buy trust deeds and earn income on a tax-deferred basis.

If the trust deed maker defaults and you take the property back, you will also be covered because IRS regulations allow self-directed IRAs to own real estate. If this happens, the windfall profit that you could receive from the sale of any foreclosed property would also be tax-deferred.

Because of this, using IRA funds to buy trust deeds works exceedingly well for both conservative investors looking for performing trust deeds, and for aggressive investors looking to buy distressed trust deeds as a part of a “loan-to-own” strategy to acquire real estate.

If you are interested in trust deed investments, give us a call at California Private Money Lenders and we can answer your questions about private money loans and investing in trust deeds. You man either call our offices at 707-315-1119 or fill out our contact form and one of our experienced private money loan specialists will get in touch with you promptly.

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