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FAQS
- What is a hard money loan
or a private loan? Why would I choose to invest in them?
- What kind of returns do private loans produce?
Is the interest rate fixed?
- Do private loan investments belong in my portfolio?
- Why would a Borrower seek a comparatively expensive
private mortgage rather than a conventional bank loan?
- Can I invest with my IRA?
- How often will I receive interest payments?
- Can I choose to reinvest the interest distributions that I receive?
- What would happen in the case of a foreclosure?
- What about diversification? Is it possible to achieve diversification in this type of investment?
- What is the minimum investment that I can make?
- Can I add to my investment later on if I so choose?
- How liquid is my investment? What time commitment do I have to make?
- Who can participate in private mortgage investments?
- Are selling commissions charged when I enter or leave the Fund?
- How can I learn more about whether private mortgage investments are right for me?
- What is a hard money loan
or a private loan? Why would I choose to invest in them?
A private loan is a secured
debt obligation, which produces a regular, predictable income stream to the
investor with all the security, protections and recourse that a mortgage lien
can provide. While mortgages do not typically provide any capital appreciation,
they do generate a steady stream of interest payments, which, in today’s market,
can exceed current money market rates by more than 10%. Unlike stocks, the
security is tangible bricks and mortar, where legal protections such as title
insurance and many other unique rights and remedies ensure the enforceability
of a mortgage lien. Many private mortgage loans are also secured by personal
guarantees from the Borrowers, adding another layer of recourse beneficial
to the investor.
- What kind of returns do private loans
produce? Is the interest rate fixed?
The typical interest rate for a direct private loan
ranges from 10% - 16% depending upon the time frame, the purpose, the loan-to-value
ratio, the exit strategy, the quality of the Borrower’s personal guarantee(s)
and other factors.
The interest rate can be either fixed or floating, depending upon the way
the transaction has been structured. If the interest rate is structured
to be a floating rate, we would generally set a “floor” on the rate to
protect the returns in the event the benchmark rate (i.e. the Prime Rate)
were to adjust downward, and increased yield is earned if the benchmark
adjusts upward.
- Do private loan investments belong in
my portfolio?
Not many investments can dependably generate such strong
returns, and few other investments have an asset like real estate as a “backstop” providing
a very well protected downside. Whether private mortgage investments are
right for you will depend upon your time frame, your risk/reward expectations
and your anticipated need for liquidity. Furthermore, private mortgage
loans have stable returns and fit well within a portfolio of stocks, bonds
and real estate. Adding these to a portfolio will make the returns of the total
portfolio more consistent. When evaluating any potential investment, the
advice of a professional investment advisor is helpful in assessing the
role of private loans in an otherwise liquid investment portfolio.
- Why would a Borrower
seek a comparatively expensive private loan rather than a conventional bank
mortgage?
The answer is frequently time-based. There are many reasons, but for starters, here are two:
1. Time Crunch: The Borrower has applied for a conventional bank loan,
but the time-of-the-essence closing date is rapidly approaching, the bank is
still completing it’s due diligence, yet the Buyer/Borrower simply has to close
in a timely fashion in order to avoid losing a hefty contract deposit. After
closing the bridge loan with a Private Lender, the Borrower can then take as
long as necessary to arrange permanent financing.
2. Transitional Property: Another typical case would involve a Borrower purchasing
a vacant property that he plans to convert to another use (office to residential,
for example). A bank would rather finance the deal AFTER the Borrower has executed
his business plan, rented the property and created cash flow. The Private Lender
is willing to get more deeply involved than most banks, evaluating the Borrower’s past track record, the viability of the Borrower’s current business plan to convert/improve the property, as well as the value of the Borrower’s personal guarantee or other collateral. The savvy Borrower is also fully aware that he is only going to have the Private Loan outstanding for perhaps 12 months, and that paying 12% - 14% for such a brief period of time is far LESS expensive than bringing in much more expensive equity partners for the long haul. If an owner or developer raises additional equity by bringing in partners, it is certain that he will have to give up a substantial “piece of the pie”.
- Can I invest with my IRA?
Yes. There are many IRA custodians across the US that
handle self-directed IRA’s and are familiar with this type of investment. Tax-deferred investors (IRA’s, Pension Plans, Keogh’s
and the like) should speak with their financial advisor about any possible
impact of UBTI (Unrelated Business Taxable Income).
- How often will I receive interest payments?
The Fund makes monthly distributions of interest to its investors.
- Can I choose to reinvest the interest distributions that I receive?
Yes. You can choose to either receive regular interest distributions or alternatively you can reinvest the interest that you receive.
- What would happen in the case of a foreclosure?
If a property is acquired by the Fund through foreclosure, the Fund manager will determine its disposition. It is the manager's intention to liquidate any real estate acquired as soon as economically feasible. However, depending on the frequency of foreclosures that may be experienced by the Fund, the Fund manager may determine that it is advantageous for the Fund to retain ownership and rent out the properties for a period. If such a scenario occurs, rents would be collected and distributed to the investors after deducting operating and administration expenses.
- What about diversification? Is it possible to achieve diversification in this type of investment?
Diversification is one of the primary advantages of investing
within a fund format. The Fund's goal is to have a widely diversified portfolio
of private loan investments in order to reduce risk as well as to achieve
continuity of cash flow (in other words, even if one mortgage is repaid, there
are still many other mortgages paying the desired rate of return, resulting
in continuous cash flow).
- What is the minimum investment that I can make?
$50,000 is the minimum investment. This can be divided
between regular and tax-deferred accounts. $10,000 is the minimum after the
initial investment.
- Can I add to my investment later on if I so choose?
Yes, the Fund permits current investors to add to their investment.
- How liquid is my investment? What time commitment do I have to make?
Most of our loans have terms of 1-2 years. However,
the Fund provides for liquidity following an initial investment period. See
the Offering Memorandum for more information.
- Who can participate in private mortgage investments?
Only “accredited investors” may invest in a private investment
fund after carefully reviewing the Offering Memorandum. Please visit the following
link and complete the brief form. Accredited investors
who so request will recieve and may review the Offering Memorandum
and related documents.
- Are selling commissions charged when I enter or leave the Fund?
No. The Fund does not pay any commissions in connection with the sale of interests in the Fund.
- How can I learn more about whether private
mortgage investments are right for me?
To learn more, you can contact us at 301-656-6566 or
via email at info@bwfinvestments.com.
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