Financing private mortgages can equal strong returns.
Known as hard-money loans because they're secured against an asset, these mortgages bypass banks for much-needed capital. Instead, they tap everyday investors who increasingly fund home mortgages because borrowers are either cash-poor or are real estate investors looking for bridge financing.
Loan brokers serve as the matchmakers. Take Texas-based Longhorn III Investments, a lender and brokerage. It matches lenders and borrowers, making loans up to 70 percent of a home's value.
"We help protect investors," says Merrill Kaliser, co-founder of Longhorn Investments. Borrowers are prequalified by scrutinizing cash on reserve, proof of employment and recent tax returns. They use this financing to convert properties into rentals and then refinance them with traditional bank loans.
Typical loans are $80,000 and last three to five months. The foreclosure rate on the mortgages is only 3 percent.
But the payoff is big. Hard-money lenders typically get 10 percent to 12 percent interest annualized, Kaliser says.