Private mortgaging lending can give good returns without too much risk. You can ask for a high interest rate as only those borrowers who have not been able to get loans from banks and other traditional lenders turn to private mortgage lenders. This means that you can get better returns than those from traditional investment options like the stock market. And if the borrower starts defaulting, your equity in the property will increase, which will cover your investment
The property is the collateral for the loan due to which the investment is relatively secure. Moreover, a private mortgage lender gives loan for only about 50 to 70% of the total value of the property, and this low loan to value ratio makes the investment even safer. But to be able to benefit from this low risk and high return investment, you need to keep a few important things in mind.
Inspect the property
Before you give a private loan for a property, you should personally inspect it as photographs can be misleading. Inspect all the documents carefully. You should get the property deed and read the description of the property and this description should match the property. It is always better to finance a property that is in your own area. You can personally inspect the property and make enquiries, and you will know the kind of risks involved.
Make sure it is a primary mortgage
You should carry out a complete investigation and see that there is no prior mortgage on the property or the property is not about to be foreclosed. If there is another mortgage, then your risk will increase significantly and your LTV ratio should be lower. It is always better to finance a fresh mortgage than refinancing an existing mortgage. Your investment will be more secure as a primary mortgage.
Another thing that you should look out for is whether the property has adequate insurance cover. The standard insurance will not cover many risks such as floods. If the property is in an area where such a risky event occurs frequently, then you should insist on separate insurance for that risk.
Paperwork should be in order
You should sign a proper legal contract when you are getting into a private mortgage deal. This will not only help in case of legal disputes, but will also be needed when you are filing tax returns.