Recently, I had a conversation with a CPA about Deed of Trust Investing (investing in commercial notes) which is what our company Restoration Capital offers. His impressions (bulleted below) were fairly typical to the misconceptions I come across in the industry:
People turn to private lenders when they cannot get a bank loan.
Because the bank will not finance them they are offering higher returns then what they would pay the bank.
Private equity lenders take risky positions such as 2nd lien positions on the property.
It is safer to invest with larger companies because they have enormous portfolios with risk spread out.
If you’ve applied for a short-term loan at a bank for a rehab or flip, you’ll quickly realize that the answer isn’t “when you can’t get a loan from a bank, you go to a hard money lender”. Rather, a thousand real estate investors here in the Northern Virginia and Washington DC will tell you the same thing – the norm is using hard money lenders for short-term opportunities and the anomaly is when a bank provides a loan.
A few interesting other facts – the average credit score for our borrowers is above 700, hard money lenders only do 1st lien positions loans and our LTVs are significantly lower than banks. The reasons rates are higher are because we need to make money. If banks regularly made short-term loans, you could bet that pricing would increase as well. Banks also assess prepayment penalties which is the opposite of how Restoration Capital practices. We want our money back, so why would we charge you a penalty for performing! In addition, we aren’t as susceptible as banks to recessions, job changes, job loss, divorce and other variables that impact long-term loans. Mathematically, we actually make safer loans than banks. That’s why Restoration Capital’s loan default ratio is less than 1% while banks average 3-5%. Other “mainstream” loans that you here about including bank originated SBA loans which are seeing an increased default rate right now; which goes to show that perception vs. reality is important to preserving your retirement nest egg.
One last point, we love the topic of securitized mortgages and Wall Street. The problem was that no fund, investment banker or investment company knew the safety of any individual loan. So when institutions like Moody tried to rate thousands of individual loans from an office a thousand miles away, it was a guessing game. In contrast, we know that every $10 million of our investor dollars is backed by more than $15 million in verifiable local real estate. This is why in the 20 years we’ve been doing this, no investor of ours has every suffered a loss. We not only provide our investors with a preferred return but we handle the loan process from application through origination and servicing, which is why there are never any surprises.
So if you get tired of seeing your investment companies like Goldman Sachs in the news defending why they didn’t know what they were selling, give us a call!