The right way to borrow private money
This week I have had calls from multiple private lenders telling me horror stories about investors that had borrowed their money and did not make good on the loans. To me that’s crazy! And I want to explain today what private money lenders are, and the right way you should borrow from them.
In most cases, a private lender is a person who is using their retirement account to invest. They often use their 401k, solo 401k, and self-directed IRA to lend out of. Occasionally I come across lenders who have their funds to lend outside of an account like this. But for the most part, private money lenders are people trying to increase funds in their retirement account so that they will have enough to live on once they do retire.
I want you to realize that when you borrow money from a private money lender, they are trusting you with their retirement. They are not federally insured. So, if something goes wrong, they are just out that money. And that could really hurt someone.
The reason I am harping on this is because anyone who borrows money should pay it back like they agreed. But you should feel a deeper sense of responsibility to make sure that a private money lender gets paid back because of the impact that it can have on the end of their life.
So, what is the right way to borrow from a private money lender?
First, you want to make sure your lender is secured and protected. In real estate this means you are going to record a security deed at the courthouse. The purpose of this is to put the world on notice that your lender has a lien on the property — meaning that if the property were to sell, they need to get paid back. This lien shows up on the title search the attorney does for the closing and that is how they know to contact the lender and make sure they get paid off.
This is very important because by securing them to the property, you are protecting them as well. We all like to be optimistic about the deals we are doing. Especially when we set them from the beginning and get excited about the big profit. We expect things to go smoothly. But sometimes, unfortunate things happen. Because of this I always tell my lenders I want them to be secured because if I die, I want to make sure they are taken care of and are able to get paid back. That is a priority to me, and I want them to know that.
Another way that we protect our lenders is by listing them on our insurance. Death is not the only unforeseen circumstance. Property destruction is pretty bad, too. By having our lenders on our insurance policy as a mortgage holder in the amount they loaned to us, if the property were to be completely destroyed, they still get paid back. So, it is very important to have the right amount of coverage and to make sure your policy premium is paid.
My private money lenders have been business owners, airline pilots and utility workers. I have borrowed from teachers, nurses and mechanics. I have even loaned money from a tenant who got a large disability settlement and wanted to grow those funds. I have borrowed from both friends and family. And not once has one of my lenders not received their money back.
When you borrow from people like this, realize how important it is to take care of them. They are trusting you, and you should make good on that trust. Get them secured, get them protected and make sure you borrow the right way.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.