Lending Private Money - Think like a Bank!

Welcome to another edition of The Business Owners' Property News - my weekly newsletter dedicated to helping business owners get started in property investing.

Today I'm going to share what steps private funders should take when lending money to property investors. And by doing so, the information is useful for property investors to become more investable too by safeguarding investors' hard earned money!

Read on...

Raising Private Finance

Raising capital is one of the two fundamental parts of property investing, hand in hand with finding deals. Great deals need funding and property investors are often in the position of running out of their own cash or it being tied up in other projects.

Raising private funding is quite popular, many property courses shout out about using "Other People's Money" - but there are risks. There are regular posts on property groups sharing horrible stories of people losing their life savings - often money that was borrowed by high profile people in a group who had a great online reputation.

Act like a Bank!

As someone who has had great success in raising private funding and worked with many private lenders and their requirements - I wanted to share some tips for those lending their hard earned cash.

Firstly, act like a bank! Ask yourself, what would a bank do? They wouldn't follow property investors on social media, see some property pictures and hand over a pile of cash! They will get to know you, analyse your financial credentials and where possible, take some security. 

First or second charge lending

A legal charge on a property gives the holder the right to enforce the sale of a property to get back their funds if there is a default.

First charge is best. This is where you are first in the pecking order to get your money back. Second charge is always going to be second in the queue, so make sure there is headroom in the asset to satisfy both first and second charges.

Bank lenders will usually not exceed 75% loan to value of both loans, which ensures there is plenty in the pot to pay all obligations. Second charge lenders - beware! If property prices fall, there may only be enough in the property value to satisfy the first charge.

Personal Guarantee

Take a personal guarantee (PG) if lending is to a Ltd co. Take the PG from all directors/shareholders. This means their is a personal obligation to pay the debt if the company cannot do so.

Again, what would a bank do?

They will ask you to take independent legal advice (ILA) and get an independent solicitor to explain to you the implications of guaranteeing a company debt.

The guarantor can’t then say I didn’t know what I was personally getting into.

ALIE

Get a statement of personal Assets / Liabilities and Income / Expenditure. This will give you an idea of the borrower's financial position and an idea of the assets that the borrower has to back up the PG.

What good is a PG if the Guarantor has no assets?

What if a first charge or second charge is not available?

You could just take a PG. I’ve had many loans on the back of a PG, but it takes time to build up trust and all the lenders have known me for a number of years. Don’t lend to people you don’t know on a back of a PG.

Restrictions

You could take out a “restriction” on a property as part of the loan paperwork, together with a PG. A restriction on a property title is an entry on the title deed which prevents the borrower from selling the property, transferring the equity or getting a new mortgage on the property - before settling the loan.

Equitable Charge

Where a legal charge is not available, as an alternative option, the lender can take an equitable charge on a property. Under ‘normal’ lending arrangements, the legal charge holders (the bank) have to give consent for another legal charge to be registered over the same property.

Consent is not required for an equitable charge. An equitable charge does not give the holder a power of sale, but, you would have the right to go to court and obtain an order for the sale of the property based on your equitable charge. 

The main difference, therefore, between a legal charge and an equitable charge is the power of sale. Also, an equitable charge would be registered with Companies House rather than Land Registry as would be the case for a legal charge..

Summary

Build a relationship first with the borrower and think like a bank when lending! Don't rely on recommendations from property groups or slick advertising and marketing. Do your own due diligence!

Don't be suckered in with massive returns - if it's too good to be true, it probably is!

If you're a property investor looking to borrow funds - be more investable by taking note of the above, become a responsible borrower and provide all that's needed to safeguard your investor's funds!

As part of our 12 month programme The Business Owners' Property Programme, we help our trainees raise private finance responsibly - like we do! To find out more, call 0121 647 7090 or email info@brahmaproperty.co.uk to get on the course or to become one of our funders!