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This Old House - Do-it-Yourself

Five Things to Consider Before Handing Out a Real Estate Loan

Written by Posted On Wednesday, 31 May 2017 15:33

Overseas real estate investment is hot right now. To illustrate, housing prices in Tokyo went up 9.3 percent last year. If you wanted to invest in stocks, the iShares Europe Developed Real Estate (IFEU) had a 13.3 percent price increase this year. Many of the holdings are in France, Germany and the U.K.

 

So, it certainly makes sense to buy properties overseas. You can also do so by loaning an investor the funds to purchase a property on your behalf. Of course, you must be cautious before sending someone a real estate loan. Here are five things you should consider first.

Available collateral

This is some type of security for the loan. For example, if repayment is not made, collateral can be seized to sell it. Ask your borrower to display assets that would be acceptable for the amount you intend to loan and that would be easy for you to sell.

Secure your agreement in writing

You always want to have a written contract before proceeding. If you need help, there are many samples of legal forms online. If the amount is significant enough, you can certainly request for an attorney to draft the document for you. Within your written agreement, it is critical to spell out the terms such as how much is being borrowed--including the interest rate.

 

In addition, you want to address the possibility of late payments, as well as how and where payments will be made. This is imperative in the event things go sour, you have a binding document to submit in the court system. Plus, all the terms and requirements should be clearly communicated and everyone on the same page.

Design a fair interest rate

Lending money should not be for free. You should still charge an interest rate, but it's also important to be fair. To remain competitive, make the rate high enough to make more money than if you left it in your bank account but competitive enough to generate responses.

 

Just keep this in mind: if you give someone more than $12,000 a year, it will be treated as a gift and subject to tax. To avoid the tax, your interest rate must be as high as the IRS' Applicable Federal Rate.

Perform an asset search

You want to know that the recipient you are dealing with is legitimate. As a result, you should hire someone to execute an asset search. You can find items such as homes, properties, statements from friends and family members about spending habits as well as abnormal shifts in a credit score. People can make various claims to get loans. An asset search will ensure you are dealing in facts, and not fantasy.

Create formal payment terms

  • Since you are an individual loaning money, your borrower might find it easier to make a late payment to you. It's not fun chasing after people for money. You're certainly not in the business of debt collection. So, in your agreement, include details such as:

 * When payments are due
 * How they are due
 * Where they can be made (By check, online, money order, etc...)
 * Late fees

It is best not to take cash since that would be more difficult to track. You might even think of setting up automatic deductions from your borrower's bank account to yours--this would be the most straightforward and convenient option.

Loaning money isn’t the easiest of processes. Yet, when you want to invest in real estate overseas, the tips above can help streamline both your lending and term requirements.

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