When you’re a new lender just getting started with private money lending, one of the most difficult challenges you’ll face is trying to sort out the good opportunities from the bad. The main problem is that no two deals are going to be the same.
Even if they seem similar at first, you’re likely to find some important differences hidden below the surface. Luckily, by knowing which types of properties are the most promising and which come with a little extra risk, you can be proactive in avoiding bad deals from the get-go.
The following is a list of four different types of properties that you’ll encounter as private money lender, but may be better off staying away from:
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♦ Christopher Ragland of Noble Capital is the author of this article warning private money lenders of the pitfalls they may encounter when looking to invest money into a property. The advice is sound and not your run-of-the-mill warnings. For example, the article warns against investing in high-end luxury properties.
Usually you would think that high-end properties would be a great investment but they can also be very hard to place after they are ready for the market. There are fewer buyers and less opportunities to make the sale. As a private money lender you want to have willing and ready buyer when your property is ready.
♦ Tenant-occupied properties can also be a problem even though your average "buy and hold real estate investors" usually want people occupying the property. The situation is different for hard money lenders because you typically want to flip the property for profit as fast as possible and move on to the next investment. You don't want to have to deal with existing lease agreements and the hassle of showing the property when it's occupied is an uneeded headache.
♦ The other two points of caution would be trying to fix and flip rural homes and houses in declining areas.
Investing your money into rural area homes that will naturally have less potential buyers can leave you stuck , it's best to keep your investment money in or near the major metropolitan areas. And secondly, stay away properties in steadily declining neighborhoods.
A rational long-term investor would never purchase the stock of a company whose price is steadily dropping. Likewise, a serious private money lender should always be wary of neighborhoods that are falling out of favor with home seekers, and especially careful of those seeing a downturn in value or growth. Some real estate investors actually see this as an opportunity to get and flip properties that other lenders don't want. But a cautious lender would stay away.
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