Learn 6 key due diligence strategies for investing in private lending. Start with as little as $1,000, with no loan origination required.
Learn 6 key due diligence strategies for investing in private lending. Start with as little as $1,000, with no loan origination required.
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*Constitution only operates in select states
Private lending involves investors originating real estate-backed loans (fix-and-flip, bridge, or construction loans) to real estate investors like flippers and owners of rental properties. Private investors act as lenders and earn returns through monthly borrower interest payments.
Because loans are secured by real estate (typically worth substantially more than the total loan amount), investors are protected from default and market risk. Additionally, short-term loans carry higher interest rates, typically between 10% and 14%, so investors can generate higher returns than stocks and bonds.
However, new investors run into a few problems when lending to borrowers:
As a result, instead of funding entire loans, the vast majority of non-institutional investors purchase fractions of a loan that a lender already originated. For example, with Constitution Lending, anyone can invest in short-term commercial loans with just $1,000. We also take care of loan sourcing, underwriting, origination, and servicing.
This guide reviews the benefits of fractionally investing with a private money lender. We also touch on how to tell the difference between high and low-quality loans so you can have confidence in what you’re investing in. At the end, we cover how you can invest in Constitution Lending private loans in less than five minutes.
Constitution Lending has originated over $300MM of commercial loans across the U.S. Because of the quality of borrowers we lend to, our investors have never incurred a principal loss. Sign up for an investor account to learn more about our options.
Investors are sometimes hesitant to originate private loans due to the high capital requirements. They need at least $200K, and in many cities, between $300K and $600K, to finance commercial real estate projects.
We don’t recommend new private lending investors take this path because they are pouring a large portion of their portfolio into an asset class they aren’t 100% familiar with.
Constitution Lending lowers the barrier to entry for private loan investing by enabling investors to purchase fractions of our loans with just $1,000 and realize all the benefits mentioned above, such as substantial downside protection and 10% to 14% annualized returns.
When investors originate individual loans, it’s difficult to diversify across multiple locations, borrower profiles, and loan types because origination is expensive.
If an investor has significant capital tied up in a single loan and the borrower defaults, which is very unlikely but still a possibility worth preparing for, the investor will not receive regular cash flow until the borrower sells the property and uses the proceeds to repay the loan balance.
However, with fractional investing, investors can easily diversify their portfolios. For example, instead of putting $200K into one loan, they can put smaller amounts of capital into several different loans. So, if borrowers in one of the loans stop paying, they will still receive monthly interest payments from the other borrowers.
That said, Constitution Lending offers a 6 month payment guarantee that pays our investors monthly interest payments if the borrower doesn’t pay (more on that below).
Originating loans is time-consuming and requires significant expertise. Investors must build a network of high-quality and creditworthy borrowers, underwrite their financials, service the loan, adhere to financial compliance, apply for lending licenses, and more. This is not possible for the average investor working a full-time job.
With Constitution Lending, investors can tap into our network of borrowers and industry expertise. We originate, underwrite, and service loans so you can simply receive monthly interest payments. This makes fractionally investing in private loans more passive than origination.
Given those benefits, due diligence is still necessary to ensure you’re investing in high-quality loans. Here’s how to tell the difference between good and bad loans.
The most important indicator of a loan’s quality is its loan-to-value ratio or LTV.
LTV is a metric that compares the unpaid loan balance to the total value of the underlying asset. For instance, if a multi-family home is worth $1MM and the loan amount is $750K, the loan’s LTV is 75%. In other words, LTV indicates how much collateral is backing the loan.
Low LTV loans are safer because there’s a larger buffer between the property’s value and the loan balance. This buffer protects loan investors in the event the property loses value or the borrower defaults.
When investing in private loans, we suggest selecting loans with an LTV below 75%. This provides a 25% buffer; the borrower can default, the property can lose 25% of its value — which is extremely rare — and investors can still sell the property and recover the full loan balance.
Here’s an example illustrating how LTV loans protect investors:
Even then, investors could sell the property for $800K, recover their $750K, and return the $50K difference to the borrower.
With higher LTV loans, the buffer shrinks. For example, a 90% LTV means investors start losing principal once the property value drops more than 10%.
A good way to determine the quality of loans a lender is originating is to examine its default rate, which is the percentage of borrowers who stop paying.
The average default rate on private loans in the U.S. is 4%. If a private money lender has a default rate higher than 4%, it means that they are lending to borrowers who aren’t creditworthy.
With Constitution Lending, we have a network of borrowers with good credit histories, strong repayment track records, and decades of real estate investment experience. Due to the quality of our borrowers, our default rate is just 2%.
Although borrower defaults are unlikely, you still want some assurance that if the borrower stops paying, you will receive monthly payments as one of the investors.
Constitution Lending is the only lender with a 6 month payment guarantee on all their loans. Our payment guarantee means we will pay you monthly interest payments for up to 6 months if the borrower stops paying.
During the 6 months, we use our debt resolution expertise to recover the loan balance through a property sale, returning investors with their full principal.
The fourth method of gauging a lender’s loan quality is to assess whether they are invested in the same loans you are or if they are simply mortgage brokers connecting you to private loan sellers.
We discourage investing in private loans through mortgage brokers. They don’t have their own capital invested in the loans they sell; instead, they earn a commission on each private loan, giving them little motivation to exclusively promote high-quality loans.
Instead, partner with a lender like Constitution Lending, who is invested alongside you. We own majority stakes in all the loans you see on our platform because we originated them. This reinforces investor confidence in the strength of our loan offerings.
Lien position refers to the order in which investors are paid if the borrower defaults and the property is sold to pay the loan balance.
Investors in the primary mortgage are paid first. Investors in any secondary mortgage get paid afterward, and what’s left over goes to equity investors, i.e., the borrower.
When you invest in Constitution Lending private loans, you become a first-lien investor. You are paid in full before any other investors or equity holders.
Consider the interest rate that the borrower is paying as it indicates your annualized returns.
The interest rates on the loans we originate range from 10% to 14%.
You can start investing in hard money loans with Constitution Lending in just a few minutes.
For investors who already have a network of creditworthy borrowers looking for low LTV loans, know how to underwrite, have a deep understanding of federal and state regulations, and have a hard money lending license, traditional lending is an option.
For investors who don’t have the capital nor the time to source, originate, underwrite, and service loans, utilizing the expertise of an established lender by fractionally investing in their loans is a better option.
Another common method of investing in private loans is purchasing them from banks through portfolio sales. Banks usually bundle and sell mortgage loans to investors; however, this investment strategy requires at least $1MM.
Fractionally investing with a traditional lender offers investors diversification across multiple loans without requiring millions of dollars.
Many investors turn to mortgage brokers and marketplaces to connect with loan sellers. Investors can buy loans from sellers, step into the lender’s shoes, and collect monthly interest payments.
However, as we touched on above, we do not recommend this, as loans on these platforms are typically low-quality. Investing alongside a lender like Constitution Lending is best to ensure you’re investing in high-quality loans. Our capital is invested in the same loans as you, giving you confidence in the quality of your investments.
Learn more about our private loan investment options by creating an investor profile here.
| Qualification | Requirement |
|---|---|
| Minimum and maximum loan amount | $150,000 to $3,000,000 |
| Type of property | Non-owner occupied single-family, multi-family, and 5-8 unit properties |