It is a form of passive investing where you act as a private lender by loaning your capital to other investors. Your loan is secured by real estate, typically as a first or second mortgage, and you earn a fixed monthly return through interest payments and sometimes an upfront lender fee.
The most common mistake is doing a handshake deal without a proper loan agreement in place. This often leads to skipping full due diligence, such as validating the property's value and confirming the borrower's ability to pay back the loan.
A promissory note is essentially a promise to pay and functions as an unsecured loan, even if registered on title. It does not carry the same legal power as a mortgage. A registered mortgage is a security interest on the property that gives you stronger protection and a clearer path to recoup your capital if the borrower defaults.
You should be extremely cautious. If you lend funds borrowed from a secured line of credit and the borrower defaults, you will still be responsible for paying the interest on that line of credit while trying to recover your capital. It is important not to put all your eggs in one basket and to avoid stretching yourself too thin.
