5 Ways Real Estate Investors Can Become The Bank
By Paul Esajian on May 29, 2015
The bank gets to make the rules. Who wouldn’t want to become the bank?
Banks get to choose who gets the money. They determine interest rates and borrowing costs. They decide how easy it is to get help or not when things are tough. They hold the throttle on the speed of real estate closings. In many ways, they greatly influence the overall real estate and mortgage market. There are many advantages of real estate investors being able to act as banks themselves.
Many real estate investors have become more interested in this aspect of the business due to need to gain access to properties, desiring higher yields, liquidity needs, a desire to help others, and for some – in order not to have to give their business to the banks that keep getting busted for fraudulent practices.
So how can real estate investors become the bank?
1. Buy Mortgage Notes
Banks hold mortgage loan notes. Non-performing mortgage loans have become a channel for some real estate investors to access distressed and discounted properties. Recently banks have been very difficult for many borrowers to work with. Banks have continuously been accused of ducking and dodging their responsibilities under mortgage settlements. Many current homeowners who are late or in foreclosure could be saved if their bank or note holder would work with them. Some real estate investors are taking on this challenge. A few are buying mortgage notes to become the bank. Then they are working with borrowers to get them to perform again. In turn these loan notes become cash flowing paper investments. That’s a win-win. If it doesn’t work out the investor gets the property.
2. Offer Seller Financing
Real estate investors that currently own properties or that are ramping up acquisitions can also resell those properties with seller financing. There are different variations of this such as rent to own, land contracts, contract for deeds, lease options, and seller held mortgages. While creating a new mortgage note may be the purest form of being the bank, all have a similar effect. You as the investor get to choose the terms, interest rates, payments, and more. You get to be as tough or lenient as you like. This can provide an incredibly valuable service to renters and buyers. And it can boost returns for real estate investors providing financing.
3. Pool Funds
Real estate investors can even pool funds from others to use to scale up buying more properties, and then offering financing on them. This can be done formally by creating your own hedge fund or REIT. Or less formally some of the options can include setting up private partnerships, joint ventures, real estate crowdfunding, and simply helping friends and family put their money to work in real estate. Just make sure you speak with your attorney and accountant to ensure you are doing everything right.
4. Loan to Real Estate Investors
For those that already have plenty of capital to put to work lending to others can be a great move. This can be a good fit for private investors that have cash but don’t want to be on the frontlines of buying and fixing houses. It might also be a good addition to diversifying for those flipping houses. Loans can be short terms with high rates, or longer term with better rates. This can help those on the frontline to operate more profitably and efficiently. And the private lender gets a far better yield than parking it in a bank or CD.
5. Start a Bank
Some may even choose to start their own bank. It might require a significant investment and navigating a good amount of regulation. But it could certainly be a great legacy to create. And perhaps an opportunity for making a great impact on the industry in showing others how to serve the community with excellence and ethics.
Summary
There can be many advantages for individual real estate investors to act as the bank. There is more than one way to tackle it too. And there is a big need for better lending practices. And better lenders. Find your path and upgrade your investing.