How To Become Your Own Bank?

Halle Eavelyn

No question, the market (stock, real estate, heck, even the grocery) has taken quite a beating lately. Everywhere is fear and uncertainty, but this also gives you the exact opposite end of the spectrum: extreme opportunity. Over the next two to five years, a LOT of money will be made, and you get to decide if you are going to “play by the rules” (which have been changing almost weekly for the past year, in case you haven’t been keeping score) or break out of the box the bank wants you to be in and loan out some money for a great return.

Bernie Madoff Would Be Jealous

Madoff went under offering 12% return on your money – crazy, as far as others thought, if the bank is only paying 1-3%. But in real estate, how does earning 8-15% or more on your money sound, secured against first mortgages (trust deeds) on real property? This is a typical range of interest rates you can charge people to borrow your money – loan as little as $25,000 in some areas, up to as high as you want.

Got IRA?

Short on cash? Use your IRA or 401K – as you may have noticed, it’s not doing well in the stock market! If you take about a month to transfer it over to a self-directed plan, you can loan it out just as you would your cash, and the profits will help to grow your IRA. Below is an example of how to do this:

Use a Strong System

But how to protect yourself? There are nightmares about people having to foreclose, and then ending up with worthless property, but it’s easy to avoid these missteps. The trick, like everything in business, is to use a strong system. First, choose the amount you will lend. Set your parameters, just as if you were a bank – after all, you are the bank in this case. Here are some questions you should ask yourself before you make your first loan:

How high will you lend against the value of the house?
What locations do you want to loan in? Does it need to be near you, so you can view the property yourself, or can you trust someone local in another area to view the property and send you pictures?
Would you prefer a short-term loan, where you can get additional points each time you lend your money, or a long-term loan, where you will just collect a payment each month?
How long do you want to loan your money for?
Who will work with you on setting up the loan docs?
Is there rehab involved?
What are the minimum criteria for your borrowers – credit score, assets, etc.
What type of property do you want to make loans to? Single family? Multi-unit? Apartments?

These are the initial pre-planning stages of creating your own financing. Next week, we’ll talk about how to structure the loans you create.