Expected Returns On Private Mortgages
“What Type Of Return Can An Investor Expect To Receive From A Private Mortgage?”
If you’re an investor looking to put funds into private mortgages, one of the first things you’re going to want to better understand is the rate of return you can expect to receive from your investment.
With private lending, the rate of return is made up of an interest rate charged on money borrowed as well as any lender fees that are part of the loan commitment.
For today, I’m only going to focus on the interest rate you can expect for either a first or second mortgage as lender fees may or may not exist in any one particular deal.
The following interest rate ranges I’m going to provide for private 1st and 2nd mortgages can be applied to both residential and commercial real estate lending scenarios.
When looking at first mortgage financing opportunities, a private lender should expect a return in the 7% to 12% range with the majority of deals being priced between 8% and 9%.
An interest rate of 7% is going to command a very high level of equity and a corresponding low loan to value whereas rates at the higher end of the range are going to relate to higher loan to value scenarios where the maximum financing amount one can expect is 85% loan to value.
In our office, it is fairly rare that we place private mortgages in the 80% to 85% range as they are higher risk and not something that most of our private lenders have an appetite for.
Private 2nd’s Are Higher Rate And Higher Risk
The interest rate range on a private second mortgage is going to be higher, landing in the 8% to 15% range.
The higher rate is relative to the higher risk of being in a second mortgage position where you have less coverage on your loan compared to the first mortgage holder.
Similar to the discussion above on private 1st’s, to get a private 2nd mortgage at an 8% interest rate, the overall loan to value ratio is going to have to be low indicating that the borrower has a considerable amount of equity in the project to cover off the lender’s funding risk.
Real estate based loans in second mortgage position that are at the higher end of the range will relate to higher risk scenarios which include applications like construction or high ratio debt refinancing requests.
Some private lenders prefer small second mortgages because of the higher level of return they afford, but they will also stick to smaller loan amounts to reduce their potential risk of loss.
If you’re current a private lender, or would like to become one and want to learn more about the different potential rates of return that are available to you, then I suggest that you give me a call so we can go over your investing criteria together and see if we can match up rate and risk scenarios that can meet your investing requirements.