Your Credit Policy is Your Personal Private Lending “Gospel.” And It Starts with Establishing Your Loan Amount Range

If there’s one thing I’ve learned from the subprime meltdown of 2008, and more recently the Silicon Valley Bank and Signature Bank debacles…

…it’s the importance of knowing your investment parameters. In the world of private money lending, we call this your credit policy.

A credit policy is the set of specific, non-negotiable loan parameters within which you will extend capital to borrowers to ensure maximum profit and minimum risk.

And it’s your way of getting to NO as fast as possible, so you can focus on the “fewer better” YESES that will maximize your effort-to-return.

But what exactly goes into a Credit Policy? Let’s break it down over my next few articles, starting with your loan amount range.

1️⃣ Loan amount range: Pretty obvious. This is the minimum and maximum loan amounts you're comfortable lending to safely keep your money deployed. Things to think about here are…

• What real estate submarket are you lending in? Average property value varies widely, even from neighborhood to neighborhood within a given zip code.
• Effort to return ratio. (5) $100K loans earn the same interest income as (1) $500K loan, but is literally 5x the effort. Example: you can deploy money quicker in California because home prices there are so much higher than the average market.
• How diversified do you want to be? This is the counterpoint to the point above; you need to consider the tradeoff between effort and diversification.
• Consider lowering your loan amount range as long as the subject property conforms to the neighborhood around it. National lenders almost never go below a $100k loan amount. This presents a huge problem for certain borrowers, and an opportunity for you.
• One caveat to the above: be careful of small loan amounts - foreclosure costs are fixed!

         • Let’s say it costs $7500 for the foreclosure.

         • On a $1million loan, that’s .75% of your loan amount.

         • On a $40k loan, that’s 18.75% of your loan amount.

• Consider increasing your loan limit for more experienced borrowers. Again, you can deploy more money with less effort, and decrease risk because you’re working with a “Tier 1” borrower.

So what’s your loan amount range? Give it some thought and I’m confident you’ll come up with a range that fits your investment thesis, risk tolerance, and desired ROI. That’ll put you well on your way to private lending success.