As a private money lender, there are a few important dos and don’ts you should always keep in mind. You probably already have a clear understanding of some of the risks involved. Of course, the private lending business is not for everyone; and while it can be a risky investment at times, it can also be incredibly rewarding.
In this industry, lending money to borrowers contributes to helping them grow their businesses, acquire new properties, and shore up their operations in other ways.
Thus, private lending can be a very gratifying experience, knowing that you’ve helped someone achieve their goals. There’s also the tremendous opportunity to outpace inflation and other investment classes — qualities with a great deal of value in stormy economic times.
While private lending is by no means simple or cookie-cutter, there are several fundamental principles you should understand and leverage to protect your lending portfolio from unnecessary risk. Here are some of the dos and don’ts of private lending in 2022.
As a private money lender, you’ll loan real estate investors money to fund their deals. Many times, these loans are short-term and secured by the property itself. Since you’ll be putting your own money at risk, it’s essential to do your due diligence and only lend to borrowers whom you believe will be able to repay the loan. To reduce your lending risk, here are a few best practices to follow:
Before you lend money to anyone, you should take the time to get to know them and learn about their business. This includes understanding the borrower’s financial situation, investment experience, and their plans for the property. The more that you know about your borrower, the better equipped you’ll be to decide whether or not to lend to them.
Make sure you have a well-written loan agreement that outlines the terms of the loan, including repayment schedule, interest rate, and any collateral requirements.
Make sure to charge an interest rate that is competitive with other lenders, but also makes sense for the risk involved with the loan.
No one wants to think about the possibility of a loan going bad, but it is vital to have a plan in place in case it does. Make sure you know what you will do if the borrower stops making payments, or the collateral is insufficient to cover the loan.
If the borrower defaults and fails to repay a loan, you will need to take action to collect the money or enforce any security interest you have in the property. Enforcement actions may include hiring a collection agency or taking the borrower to court.
At the end of the day, as a leader in the private lending space, you should aim to exercise the best possible practices when writing loans. But we all fall short sometimes, and no matter how good you are at your job, defaults are inevitable. That said, you don’t want to be stuck with foreclosures or lengthy court processes that will lead to depreciation of the loan itself, as well as the loss of your most valuable asset — time.
Even with secured loans, the mortgage security market is by no means risk-free; no matter how fast properties are selling, or how high home valuations go. We saw the worst of it in 2008, and future market volatility is not only unpredictable, but inevitable. In the last housing crash, private lenders had few tools available to safely and cost-effectively shift risk off of their books.
In 2022, products like AXY WrapTM by Axylyum can help retail and wholesale private lenders protect their assets. If your lending portfolio is protected with AXY WrapTM, should the worst happen and your borrower goes into default, Axylyum will purchase the distressed asset at 100% of its origination price — shifting the risk from your books to Axylyum’s books and ensuring that you live to lend another day.
Many of the “don’t”s when it comes to private lending are simply the inverse of some of the steps listed above.
You’ve got an awesome responsibility as a lender. Part of that responsibility is to keep accurate records of every facet of the loan’s lifecycle, from initial communications with the borrower to the actual loan docs they sign at the end of the borrowing process, and continuing until the loan is fully repaid.
Like we mentioned earlier, your time is your most valuable asset. To preserve your time, delegate when possible, and leverage automation and digital solutions to create more efficiencies in your lending process, and to reduce the time you spend worrying about possible defaults within your loan portfolio.
At the end of the day, as a private lender, your job is to manage risk effectively. But that’s easier said than done. Markets are tricky, and even the best-laid plans may go awry, particularly when we’re faced with black swan events like COVID-19 or the ongoing war in Ukraine.
One of the biggest don’ts in private lending is overextending and taking on too much risk. However, if you’ve found yourself in a situation where you have more risk than you’d like, you can always turn to growth enablement and risk reduction solutions for lenders like AXY WrapTM.
Interested in learning more about how AXY WrapTM can protect your private lending business from the specter of borrower default?
This article does not constitute an offer to sell, or the solicitation of an offer to buy, any security interest in any jurisdiction. This material is distributed for informational purposes only and should not be construed as investment, legal, tax, regulatory, financial, or other advice. No assurance can be given that any investment objective will be achieved, or that an investor will avoid losses or obtain a return on an investment. While the information contained in this article is believed to be reliable, its accuracy is not guaranteed. Individuals should consult with their own professional advisors with respect to the legal, tax, regulatory, financial, and accounting consequences of any potential investment.