What are private loans?
Private loans come from private lenders, which are individuals or organizations that loan money directly to companies. Projects listed on HousingCrowdfund involve companies that have been formed to develop housing. When an investor signs a private loan with a housing developer, the investor's return on investment is the interest rate that the developer pays on that loan. The interest rate, and the other terms of the loan, should be clearly outlined in a loan agreement between the investor and the developer.
Benefits to Borrowers
Private loans can provide developers with an alternative to bank loans. The benefits to the developer can include little or no fees to establish the loans. Private Loans can also be uncollateralized. That means the developer does not need to set aside ownership in order to guarantee the loan. In fact, the terms of a private loan can be virtually any terms to which the investor is willing to agree.
Private Loans & Bank Financing
Sometimes housing developers will use private loans in combination with bank financing. Banks will typically have a limit on the amount they will loan for projects like apartment development. That limit could be in the range of 60% to 80% of the projects appraised value or its total project cost (usually the lesser of the two). Private Loans are one way that developers can raise the cash needed to secure the bank financing.
Creating Passive Income
The term Passive Income
can have a range or different financial and legal definitions. However, in investing it usually means, "earnings derived from a rental property, limited partnership, or other enterprise in which a person is not actively involved" (investopedia.com
). Private Loans create a form of passive income, because you are earning a return based on the money that you loan to others.
Private Loan Risk
As with every investment opportunity, private loans involve risk. The risk involved with private loans is the possibility that the borrower may fail to make payments on time, or miss payments completely. There is also the possibility that a borrower may default on a loan, causing the investor to lose all of their money. Before engaging in a private loan, make sure that you review the project carefully, familiarize yourself with the owners, and have your financial and legal advisors review all of the investment details.