A Lending Trust is a great passive investing option for individuals who have cash in banks, retirement accounts, IRA's or other monies they would like to invest. A lending trust is a pooling of smaller amounts of money to invest in a real estate transaction, including purchase and remodel or new build with land. A Lending Trust may be viewed as a mini-syndication. Real Estate Lending Trust are set up specifically for real estate investments. The Real Estate Lending Trust
is formed for a single specific project to loan money for a real estate deal. Once the
money is paid back, the Lending Trust is dissolved and all the investors receive a 1099INT in
Jan. for their interest earned. An attorney forms the Lending Trust, prepares all legal
documents for the closing, receives the funds, and disperses the funds. An LLC & the potential owner
act as the trustee or administrator- many administrators also have their own funds in each deal.
Real Estate Lending Trust - Purpose for Lending:
1. Gain a good return with real estate as security. The SEC does not like to see words like safe, secure, low or no risk or guaranteed.
2. Have smaller amounts invested, reducing & shared risk
3. Provide a vehicle to get higher returns on small amounts of capital sitting
dry on the side lines and not invested (Roth IRA, HSA, etc.)
4. Gain experience & knowledge for future larger investing, or
to learn to be a hard money lender.
Real Estate Lending Trust Target Market for the Lender: (the ideal person for this type of investing)
1. Minimum investment is $10k.
2. SDIRA: Solo 401k, Roth IRA, Traditional IRA, HSA, CESA
3. Cash: personal or business account funds
4. Small amounts that are sitting dry and getting less than 1% return
5. Short term place to put your cash, while you are waiting for your own
project or deal to develop.
6. A passive investor.
A potential target market for the borrower for a Real Estate Lending Trust: new construction and fix & flip rehabbers.
Real Estate Lending Trust typically short-term loans 3, 6, 9, 12 months only.
Real Estate Lending Trust exit strategies or options:
1. Pre-approved experienced borrowers who have proven track records.
2. Whether 6 or 12 month terms, borrowers are allowed to have two automatic
extensions for 2 months each with a point fee charged for each extension.
3. Borrower sell the house is the main goal and main exit strategy.
4. Borrower finds private money to pay off the Lending Trust.
5. Borrower signs a deed in lieu of foreclosure.
6. Lastly, the Lending Trust will foreclose on the house and get the property.
70% of the appraisal or ARV is the maximum loan amount. This allows plenty of
equity, if the borrower defaults. If a default happens, the house is managed by the administrator of the Real Estate Lending Trust administrator until the home is sold. During the life of the loan, funds are released when the property is purchased, after milestone completion stages of repair are completed and after the final inspection - funds are not deposited up front. This
minimizes lending risk. Often times, the Real Estate Lending Trust administrator will provide a personal guarantee to cover any loss with personal and business funds. If there is a financial hit taken on our loan, the administrator will take the hit. Depending on the Lending Trust administrator, if there is an excess gain from taking back the home and selling it, the administrator will keep the excess gain for the extra work involved and extra funds put into the deal.
Other things to note, per John Ford, owner and administrator of BelAir Lending, a TREIA, Inc vendor member:
The max. loan length is 12 + 2+ 2, a total of 16 months. Most are 3-9 months.
The Real Estate Lending Trust administrator will always be in the 1st lien position.
For the borrower: 12% and 2 points for an experienced borrower.
Interest starts to accrue on the entire amount from the closing date, even if some funds are held for construction/rehab draws.
12 mo. loan. max, 1 extra point for each 2 month extension.
Borrower pays all closing cost & fees and require personal guarantees from the borrower.
All insurances are in place: hazard or builder’s risk, liability & workman’s comp. and title insurance.
For the lenders:
Lenders are paid 10% simple interest.
Administrator keeps the 2 points for administering the deal and the 2% spread between what the borrower pays and the lenders earn for vetting, sending out 1099’s for interest earned, and construction inspections for draws if needed.
Administrators will have their own money in the deal too.
Preferred interest is paid, which means you get paid before the administrator gets paid - they don’t get paid until the deal completes successfully.
Hardship Cases: If a lender invest money and needs it back, the administrator will return it within 30
days or less, but the lender forfeits any accrued interest for that month. All investing has
risk-investors should not invest money needed to live on. Expect & plan for lending
money to be tied up for 6-10 months for a rehab and 12-16 months for a new
construction loan, but if you need it back, it is not a problem. Life happens. It is a
fairly simple process to substitute in and out of a lending trust, but it must be for a
hardship, not simply that you found a better deal for yourself.
John W. Ford