Whether you want to diversify your portfolio or are committed to a real estate investment as a primary strategy, investing in an equity-based lender is a way to invest in real estate without having to worry about individual properties. An equity-based lender often gives more weight to the value of the collateral than the creditworthiness of the borrower. Equity-based lenders finance both acquisitions and refinances of investment properties.
The lender (and its investors) makes money from the interest and fees associated with these loans. Although there is always some risk associated with any type of investment, investing in loans secured by real estate offers some downside protection in the event that the borrower is unable to perform. Of course, it’s always smart to ask some key questions before making any type of investment.
7 Questions to Ask Before Investing with an Equity-Based Lender
1. What are the typical returns?
Every investor wants to know what they can expect for returns. Of course, it’s not possible to predict the future, but you can evaluate returns from previous years to see if they are in line with your expectations. Evaluate past performance to gain confidence in any hard-money lender you are considering investing with.
2. What type of volatility can I expect?
Every market has ups and downs, and real estate is no exception. Prepare yourself for both extremes by learning more about the volatility of the real estate market and the lender’s performance history. Make sure your risk tolerance can handle the typical volatility of this type of investment.
3. What is your average loan-to-value ratio?
The loan-to-value ratio (LTV) is an indicator of the risk associated with the loan. A lender’s average LTV can tell you if your risk tolerance aligns with its practices.
4. What market trends are you currently seeing?
Learn more about how the market is currently performing and how the lender expects it to change based on current trends. If you’re aware of a trend like this, you want to be sure the lender you invest in sees the same potential.
5. What are your requirements for lending?
Mitigating risk is key when it comes to equity-based lending, so you want to be confident that the lender you choose is careful with your investment. Find out who qualifies for equity-based loans and who does not, what documents are required, and what the criteria for lending are.
6. What are your sponsor fees?
Hard-money lenders typically charge front-end fees, which are calculated as a percentage of the amount invested. Any organization you are considering should be transparent about what these fees are.
7. How long is the lockup period?
Hard-money lenders typically have a lockup period, during which you are restricted from cashing out your investment. Find out how long this period is to make sure it aligns with your comfort level.
Invest with Socotra Capital
Whether you have deep roots in real estate investing or are just starting to explore your options, investing in equity-based lending has the potential to generate strong returns with minimal effort. Socotra Capital has funded more than $500 million in private money loans since 2007, and we’re continuing to grow.
We currently manage more than $200 million in assets and are seeking new investors. If you’re an accredited investor and want to dive into the world of equity-based lending for real estate, get in touch with Socotra Capital through our investor portal.