Private money investors are in high demand these days. Let’s face it, not everyone possesses a stellar credit history. In addition, the loan process could be drawn out due to a variety of factors. When time is of the essence, this could literally be a deal breaker. Therefore, many borrowers opt to go the private money investor route. The trade of is the ROI (return on investment) for the private money investor, which usually in the neighborhood of 12% to 15%.
Is it All about the ROI?
The short answer is yes. The private money investor is primarily lending money for the ROI incentive. However, they are not the only party that will benefit from this transaction. The borrower will also receive fast funding, which “makes up” for the high ROI. For example, in transactions such as house flipping, where timing is a critical factor, the fast funds from a private money investor will be very useful. For this reason, even with the higher than usual ROI, some refer to private money investing as a win-win situation.
The Right Rate of Return
Private money investors usually receive double digit returns on their investments. This ROI can vary from 12% to 15% and in some cases could go even higher. This higher than average ROI is the main incentive for private money lenders. There is not one optimum ROI. The fluctuations in the ROI rate are reflected in the structure of the loan and in the length of the loan process. Moreover, just because a loan has a higher ROI does not mean that the process will not be lengthy. Each loan product is unique. Every borrower should read the fine print instead of solely focusing on the ROI and what possible “secrets” this number reveals.
How Much of a ROI is Too Low?
As private money investors typically receive double digit ROI, a return of 8% or 9% is considered low. Many private money investors may choose to opt of a transaction that yields this low ROI. When the return is this low, the loan process is typically longer than one where there is a higher ROI. There is even private money lending at the 6% ROI rate. When this is the case and the ROI is similar to that of private banks, the loan structure and conditions will usually mimic that of a private bank.
While low, an 8% or 9% ROI for a private loan product does not come with any guarantees on the length of the loan process. In fact, when the main incentive to a private money investor is a high ROI in double digits, private money lenders may steer clear of investing in a loan product with such a low yield. This may push the loan product closer to the structure of a more traditional loan. The key to borrowing or lending is to examine the ROI and other details of the loan. At first glance, a low ROI may seem attractive to the borrower but this often comes at the expense of a more drawn out loan process.