Private Lenders - Actions To Keep Your Investment Safe (Part 2)

Copyright (c) 2009 George Antone

Private Mortgage Lending (or Private Lending) is a very safe investment, especially when you consider the high interest rates you can earn and the use of other people's money (private money). Nonetheless, no investment is completely worry-free. That is why it is essential to do everything possible to make your investment as safe as possible.

Private Lending is one of the fastest ways to generate passive income, and for those savvy private lenders, you do not need to use your own money or credit.

First, there are some insurance policies you will want to consider. There are two insurances that you should require when you loan money on a property: Title insurance and property insurance. These policies will protect your investment and are paid for by the real estate investor.

Next you will want to be sure that your loans are recorded properly.

And finally, there are ways to structure a loan that can assure even more safety.

In this article we will cover Property Insurance. Property Insurance Property insurance protects the property against physical damage to, or loss of your assets. In other words, against the loss of your investment capital. In the case of catastrophes like fire, explosion, theft, or vandalism, property insurance helps cover your costs - whether it's to repair damaged property or replace what you've lost.

Events that do damage are known as perils or causes of loss, and include weather-related events such as lightning strikes or hail, or human causes such as robbery or a car crashing onto your property.

Policies can be named-peril or all risk policies. Named policies or specified peril policies specify which events will be covered. Remember, named peril policies will state exactly what is covered. If a particular coverage is not listed on your policy, it is NOT covered.

Here is a list of a few perils commonly EXCLUDED from named peril policies:

1. Damage caused by a flood

2. Damage caused by an earthquake

3. Damage caused by war or nuclear accident

4. Damage caused by an earth movement

All risk policies include any possible peril, unless otherwise named. Even these policies often do not include flood or earthquake insurance without an extra rider. Often, the terms "comprehensive" or "open peril" are also used to describe all-risk coverage.

All risk policies are, understandably, more expensive, however, they are the best policy for a private mortgage lender. Although all-risk policies are far superior, some properties will not qualify. Locations, property type, value, as well as your personal Insurance Credit Score all goes into determining the type of insurance package a company may have or offer.

NOTE: If the property is in a flood plain, you should demand that the real estate investor also get Federal Flood Insurance.

Before buying homeowner's insurance, you need to understand the difference between "replacement cost" and "actual cash value." Replacement cost is the amount it would take to replace or rebuild your home or repair damages with materials of similar kind and quality, without deducting for depreciation.

Do not confuse replacement cost with market value. Market value is a real estate term that describes what the current value of your home would be if you were to sell it, including the price of the land.

Actual cash value (ACV) is the value of your property when it is damaged or destroyed. This is usually figured out by taking the replacement cost and subtracting depreciation

Although the cost for replacement value is higher, the extra protection is worth it.

Remember that a private lender's main focus is to make money securely. Savvy private lenders take it a step further by creating "spreads" and making nice streams of passive income without using their money.