Private Lending Networks for Seniors and Retirees
by Ryan Patterson, CEO of SeniorAdvice.com
If you spend much time listening to talk radio, you’ll probably eventually hear advertisements for private lending networks who promise stable, asset-backed investments with high returns. Many seniors are often attracted to such offers and end up investing their nest eggs. If you are retired or live on a fixed income, putting your money in the stock market can be daunting, especially with all the ups and downs that come along with it. It might seem like a great idea to invest in something that promises a steady and generous monthly return, but you should understand what you are getting into before you do so.
The type of private lending networks we are referring to generally make “hard money loans” to home builders, house flippers, and other real estate investors. These loans are always backed by hard real estate assets, hence the “hard money.” Much like a bank who funds an individual’s mortgage, these companies provide cash for the borrowers and in return receive a deed of trust for the real estate. If the borrower fails to make their payments, the lender can foreclose and take possession of the property just as a bank would when a mortgage holder stops making their payments. These loans typically charge high rates of interest, ranging from 12% and up. They then give a portion of this interest to the people who invest in their funds. This is how they can offer monthly payments on your cash that frequently average between 6% and 10%.
While this might seem like a great idea for seniors who are wanting to generate a stable monthly income from their retirement savings, there are a few questions you should always ask before considering such an option.
What happens if the borrower defaults on a loan I am invested in?
Make sure you ask the private lender what will happen if the person they loan your money to stops paying on their loan. Some lenders will guarantee your monthly payment but others will not and you may unexpectedly lose your income for some time period until they can resolve the delinquency. Also, you should understand that if your monthly payment is not guaranteed, it can take weeks or even months to resolve a foreclosure and recover your assets. If losing that monthly income for some time period would be financially distressing, you’d be wise to give such an investment a second thought.
How will your money be diversified?
Ask the lender if all of your cash will be used on just one or two loans or if it will be blended with other investors’ cash into a fund of many loans. The fewer loans your cash is invested it, the higher the risk that all of it will end up in a defaulting note. This can add a serious level of risk to such an investment.
Is the market I am investing in stable?
Real estate values can move up and down quickly. You should get expert advice from a real estate broker on how your local market is performing. If you are putting your cash into property loans in a very volatile market, you will be exposed to a much greater risk than if you are investing in a slow-growth, stable community. Remember, even if your cash is backed by real estate, it’s still only protected up to the value of that real estate, and that can increase or decrease over time.
What is the “loan-to-value” ratio of the loans
A common term used in hard money real estate lending is “loan-to-value.” This is the amount of cash loaned on a property vs the current market value of that property. The difference is the borrower’s equity, which creates protection for investors in the event of a default. The lower the loan-to-value, or LTV, the lower the risk. Alternatively, high LTV loans tend to be riskier. For example, if a property is worth $100,000 and your cash is used to make a $95,000 loan, a foreclosure might net a loss to the investors after all the fees and closing costs are paid. However, if only $60,000 was loaned on the same property, that $40,000 difference in equity would offer better protection against market fluctuations, legal fees, and other costs associated with the loan. While the LTV varies from lender to lender, a reasonably conservative loan-to-value ratio might be around 70%.
What types of lending standards are enforced?
Make sure to ask the fund manager what type of standards are used to vet potential borrowers. Do they run credit checks and asset searches? Do they require personal guarantees? Do they run title searches to ensure there are no liens against the properties? Do they get independent value appraisals for the properties they loan against? All of these should be taken into strong consideration before investing with any lender.
Seniors who are looking for creative ways to invest their retirement money and generate a monthly income to live on or supplement their lifestyle may be good prospects for hard money lenders. While such investments can produce steady income and some security in that they are backed by real estate, they can also bring on a number of pitfalls. Retirees should always speak to a financial and real estate expert before investing their money in such a fund. They should also make sure that they understand how these investments work and all of the risks associated with them.
Launched in 2016, SeniorAdvice.com is a database of senior living options and a senior care information resource. SeniorAdvice.com dedicates five percent of its profits to nonprofits serving the aging community. The company has established two scholarship programs, one for young people who volunteer with senior citizens and one to honor young people who help care for aging family members.