What can I do to minimize my risk as an investor in a hard money loan transaction?
- Work with an experience hard money lender who can help you select loan investments which meet your yield expectations and risk tolerance. PMLs look for long term win-win relationships with their investors. Find a PML who’s incentives are aligned with yours and has experience in the area in which you choose to lend.
- Perform your own due diligence. Carefully research the PML you plan to work with, and carefully evaluate the underlying collateral of each note investment. There is no substitute for your own carefully completed research.
- Analyze each note investment carefully. Use IRR and NPV analysis to review the financial return on your note to make sure the loan meets your criteria. See “Financial Analysis for Note Investing” and “How to Calculate the IRR on your Note Investment”.
- Seek outside advice. While a PML’s incentives may be aligned with yours, it is always adviseable to have independent experienced counsel evaluate your investment. Additional information can be found in the article “Working with Attorneys”.
- Require personal guarantees. While it is common to lend to legal entities as opposed to individuals, without a personal guarantee from the borrower you may limit your ability to fully recover your investment in a foreclosure situation. PMLs and attorneys will be able to advise you on what type and when a personal guarantee should be required.
- Carefully Review Title Endorsements. Obtaining a title policy without endorsements is like driving a car without air in the tires. Work with your counsel to carefully review the loan transaction and select endorsements that work for you.