Part 7 in a series of 7 posts
Ok, we're getting down to the last three questions here.
Should I form an entity to lend? It is not the same thing to lend as to borrow, so the considerations for lending aren't the same as for borrowing. Even though we can't lend to end homeowners, and lend to commercial entities only, we don't have to be a commercial entity to lend. The issue here is about liability protection. So once again, consult with your attorney about the liability incurred in lending, and the two of you should discuss together whether you will lend from an entity. My personal feeling is that since this is a business transaction, I want to do business from my entity, but that's my personal situation.
Should I lend outside of my geographic area? Ok, on this one, there are strong feelings on both sides. Certainly, when you buy stock through your broker, you don't worry about where the company is, simply if they are making money. But depending on how you lend, the answer can be quite different. If you are contributing money to a pooled fund, and have no control over where your money goes, then where the fund lends is also outside of your control. In that case, the costs of managing a loan in a particular location are the only considerations. Since you aren't managing the loan, the fund is, it is probably not an issue. However, if you are lending directly or through a local hard money company, then there are numerous things to think about:
- You should always go to the property before you lend on it. How far do you have to go to put your feet on the dirt?
- Do you have a network of attorneys, title companies or real estate brokers in the area where you are lending? You will need an attorney or title company, depending on the state, to close the loan.
- Do you have contractors to finish a rehab in that area? If the property is in disrepair, and you need to take it back for non-payment, you'll need to manage contractors to finish it if that's part of your exit strategy.
- If you have to foreclose, you'll need an attorney for that, and an auctioneer.
- Then you'll need to resell. Do you have a network of potential buyers in that location, or a real estate broker to get it sold quickly?
- Are you familiar with the laws in that state? It's easy to get tripped up by assuming they are the same as they are in your state.
Attorneys, title companies, auctioneers, real estate brokers, and even buyers are all over the place. If you are comfortable setting up this network in an unfamiliar location, have at it, but it is much more difficult to find these people, and find good ones, from 12 hours away.
Now, just to give some perspective on the other side of the argument, if where you live is not a good location for lending, and assuming you wish to lend, then you have two choices: move, or lend in another location. And there is no reason to invest in your backyard simply because it's convenient. I know many people who are comfortable investing all over the US. Certainly it increases the pool of available deals. But it also exponentially increases the complexity, because of logistics and the need to educate yourself and make connections. I wrote a post on "Grief to Revenue Ratio". Everyone has to decide how much extra aggravation is worth it to them. It's a personal choice. But most experienced real estate investors seek local lenders, because a local knowledge of the market is critical to making an informed decision. Local lenders make quicker decisions, and that's how more business gets done.
What about business loans instead of real estate loans? Auto loans? Personal loans? The reason we make real estate loans is because the loan is secured by a hard asset (hence the term hard money). With a business loan, if the owner lets the business decline or shut down, the asset is gone. Poof. Take a restaurant for example. If the restaurant isn't operating because it gets shut down by the health department, then there is no income, and pretty much no asset. If the restaurant pays rent and doesn't own the building, then all that's left is the sign over the door and a lot of used restaurant equipment. And in this economy, used restaurant equipment or office furniture isn't selling. Believe me, there is a surplus.
Auto loans? Well, it's an asset, but a quickly depreciating one. And the problem with autos is that they have wheels. And I think the laws that effect debt collection and the repossession are going to be determined by where the vehicle is at that moment. Do you really want to be repo man in Alabama? Alaska? Minnesota? (choose a state that's not near you to fill in this blank)
Personal loans? Just donate the money to to needy and be done with it. You'll have no unmet expectations.
There are many considerations in whether to buy, borrow or lend. If you want to talk about lending some more, get in touch with me. My phone and email are posted on my website. I'm happy to chat and answer your questions
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