The theme this week on the Retirement Quick Tips Podcast is: Investments I Hate. 

Today, I’m talking about private loans. 

I most often see private loans made from my clients to family and friends, or to renters in a residential property they own. The person they make the loan to in the real estate scenario is often a long-time renter who wants to buy my client’s house. It seems like a good idea, since they want to sell it, and they want to give their renter a chance to own the property over time. 

The owner of the property can’t sell it outright to the renter, because in the case of the private loan situation, the buyer has poor credit and can’t qualify for a traditional mortgage. 

I have a client who sold her rental property using a private loan arrangement, and it only took about 2 months before she stopped receiving payments. 

The appeal of private loans is usually 2-fold - In the case of family and friends, you’re usually loaning money to someone you know and care about who is in need. If you’re loaning money to your children for a down payment on a house, there’s nothing wrong with helping them get ahead and giving them a better interest rate on the money they need than they could get from a bank. I get that. 

But these private loans can go sideways, so if you’re willing to make a private loan, then you should also be willing to pay an attorney to write a watertight contract, and be prepared to be out additional money if things go wrong. 

In the case of my client and her renter who stopped making payments, she’s in the middle of a legal battle right now. She’s received no income from this property in many months now, and it’s going to be probably another several months before the issue is resolved and she gets her house back. 

The appeal in her case was that she wanted to help this longtime renter of hers buy a house, she was looking to sell anyways, yet he took advantage of her and now it’s going to cost her a lot of money to get her house back. When a bank doesn’t want to take a risk on a higher-risk borrower, there’s often a good reason, and it’s probably best to steer clear of private loans. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast. 

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance