Is a DSCR Loan Right for You?

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If you’re a real estate investor looking for an easier way to qualify for financing, a DSCR loan might be the solution. Unlike traditional loans, DSCR loans focus on the income from your rental property instead of your personal or business finances. Whether you’re new to investing or you like to keep your taxes lean with write-offs, this loan could be your ticket to growing your portfolio. Is a DSCR loan right for you? Let’s take a closer look!

What is a DSCR Loan?

A DSCR loan stands for Debt Service Coverage Ratio. It’s a mouthful, but simply put, it’s a loan for real estate investors. This type of loan focuses on rental properties and doesn’t require proof of your personal or business income. That means even if you started your business yesterday, you might still qualify!

Unlike traditional loans, the DSCR loan is based on whether your rental property will break even or better.

Who is a DSCR Loan For?

DSCR loans are designed for real estate investors looking to buy or refinance rental properties. If you:

  • Are just starting out in real estate investing
  • Don’t show much income on your tax returns (because you write off expenses)
  • Have a good credit score and want to focus on rental properties

Then, a DSCR loan could be a perfect fit for you.

This loan is ideal for people who don’t want to show income or haven’t been in business for two years. Many investors who just quit their jobs and started investing in real estate can benefit from this product because they can qualify without needing two years of income.

Key Benefits of DSCR Loans

  1. No Personal or Business Income NeededWith traditional loans, lenders often want to see two years of income history. But DSCR loans only care about the property’s ability to cover its debt.
  2. Rental Income is What Matters
    DSCR loans don’t rely on your tax returns. Instead, they check if the rental income will cover the property’s mortgage and expenses.
  3. Flexible Options
    You can use DSCR loans for single-family homes and even properties with up to four units. There are also portfolio options for multiple properties and mixed-use loans for special cases.

The DSCR Loan Formula

How does a DSCR loan work? It’s all about the numbers. The lender looks at the rent your property brings in or could bring in. This is called the Debt Service Coverage Ratio. If the rental income covers your mortgage, taxes, and insurance, you’re good to go!

Example:
If your property rents for $1,000 a month and your mortgage and property expenses total $900, you have a good DSCR ratio, and you’re in a solid position to qualify.

Three Things Lenders Look For

To qualify for a DSCR loan, lenders will check:

  1. Rental Income
    The property should break even or have positive cash flow. The lender will only consider five things: your mortgage payment, property taxes, insurance, HOA (if applicable), and flood insurance (if required).
  2. Credit Score
    Higher credit scores mean better rates. The higher your score, the better the deal you’ll get.
  3. Loan to Value (LTV)
    How much money are you borrowing compared to the value of the property? A lower loan-to-value ratio means less risk for the lender and better terms for you.

When is a DSCR Loan Not Right?

While DSCR loans are great for many investors, they aren’t for everyone. Here are a few cases where a DSCR loan may not be the best choice:

  • Owner-Occupied Properties: You can’t live in the property if you use a DSCR loan. It’s strictly for rental properties.
  • Fix and Flips: DSCR loans aren’t ideal for short-term investments like flips because they often come with prepayment penalties.
  • Other Options Available: If you have solid income and qualify for a traditional loan, you might want to explore that route for better rates and no prepayment penalties.

Conclusion: Is a DSCR Loan Right for You?

If you’re looking for a long-term rental property investment and don’t want to deal with showing income or tax returns, a DSCR loan is a great option. It allows you to invest in rental properties with fewer hurdles, focusing on the property’s performance instead of your personal finances.

To see if it’s the right fit, run the numbers, look at your credit score, and make sure the property will at least break even. And, as always, it’s wise to shop around and get the best rate possible!

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Compare different loan options today!

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When you’re investing in rental properties, choosing the right loan can make all the difference in your cash flow and overall investment success. Let’s compare three different loan options. Theses include DSCR loans, traditional loans, and local bank loans. Therefore, understanding both the pros as well as the cons is vital to finding the best loan for your investment success! 

Traditional Loans: Pros and Cons

Pros:

  1. 30-Year Mortgage Stability: Traditional loans offer the security of a 30-year mortgage. Therefore, they have predictable payments over a long period, which can help with long-term financial planning.
  2. No Prepayment Penalty: Unlike some other loans, traditional loans usually don’t have prepayment penalties. You can sell or refinance your property without worrying about extra fees.
  3. Lower Interest Rates: Generally, traditional loans come with lower interest rates compared to DSCR loans. As a result, this can significantly impact your cash flow, especially on larger loans.
  4. Home Hacking Opportunities: If you’re buying a duplex, triplex, or fourplex, you can live in one of the units and qualify for an owner-occupied loan. This often means a lower down payment and a better interest rate.
  5. Uniform Rules Across States: Traditional loans follow the same rules and guidelines across all 50 states. This makes them a consistent option no matter where your property is located.

Cons:

  1. Income and Credit Requirements: In order to qualify, you need to prove your income and have good credit. This can be a hurdle for some investors.
  2. Cannot Close in an LLC: Traditional loans require you to close in your personal name, not in an LLC. This can affect how you hold and protect your properties.
  3. Limited to 10 Properties: You’re limited to financing 10 properties with traditional loans, which can be restrictive if you’re planning to build a large portfolio.
  4. Seasoning Requirement for Cash-Out Refinances: If you want to cash out, you must wait one year after your last refinance or purchase.

DSCR Loans: Pros and Cons

Pros:

  1. Flexibility: DSCR loans are incredibly flexible. Therefore, they can be used for single-family homes, fourplexes, and even larger properties. They’re also great for unique properties like VRBOs, non-warrantable condos, as well as mixed-use properties.
  2. Ease of Qualification: You don’t need to prove your personal income or employment status. The loan is based on the cash flow of the rental property itself.
  3. Close in an LLC: DSCR loans allow you to buy and refinance properties under an LLC, offering better protection for your investments.
  4. No Limit on the Number of Properties: Unlike traditional loans, many DSCR lenders don’t limit the number of properties you can finance.
  5. Available in All States: While guidelines may vary slightly, DSCR loans are available across all 50 states.

Cons:

  1. Prepayment Penalties: DSCR loans often come with prepayment penalties, which can be costly if you plan to sell or refinance within the first few years.
  2. Higher Interest Rates: Interest rates on DSCR loans are typically higher than traditional loans, which can impact your cash flow, especially on larger loan amounts.
  3. Market Sensitivity: DSCR loans can be more sensitive to market changes. During uncertain times, these loans might disappear or change rapidly, which can be risky for investors.

Local Bank Loans: Pros and Cons

Pros:

  1. In-House Products: Local banks often offer in-house loans, which they fund, service, and keep. These loans usually come with shorter terms, like three, five, or seven years. There are also options to refinance or adjust afterward.
  2. Flexibility: Local banks are known for their flexibility. They may finance unique properties or smaller loans that larger lenders won’t touch. Therefore, this makes them a great option for small towns and rural properties.
  3. No Prepayment Penalties: Like traditional loans, many local bank loans don’t have prepayment penalties, giving you the freedom to refinance or sell without extra costs.
  4. Favorable Terms for Small Loans: Local banks often prefer smaller loans, which can be a perfect fit for lower-priced properties in smaller markets.

Cons:

  1. Varied Rules: Each local bank sets its own rules, which means you have to shop around to find the right fit. This can be time-consuming.
  2. Lending Limits: Local banks may have lending limits, which can be a barrier if you’re trying to finance multiple properties or larger portfolios.
  3. Geographic Limitations: Local banks tend to lend within specific regions or markets. If your property is outside their footprint, you might not qualify.
  4. Callable Loans: Some local bank loans are callable, meaning the bank can demand full repayment before the end of the term if market conditions change.

Conclusion: Choose the Right Loan for Your Situation

Each of these loan types—DSCR, traditional, and local bank loans—has its own strengths and weaknesses. The best choice depends on your current situation, investment goals, and the specific property you’re financing. When you compare different loan options you can maximize your cash flow and protect your investments.

Remember, it’s all about finding the right fit for each property and stage in your investment career. Whether you’re just starting out or adding to your portfolio, there’s a loan that can help you achieve your goals. Compare different loan options today to set yourself up for a successful future! 

 

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10 Ways That a DSCR Loan Can Be Good for Your Deals

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Are you looking for a loan that fits your real estate investment needs? A DSCR loan might be the perfect solution. Whether you’re just starting out or have hit a roadblock with traditional lenders, this loan focuses on the property’s income rather than your personal finances. Let’s explore 10 ways a DSCR loan can be good for your deals!

1. Helps When Your Income Is Low

If your income over the last two years is too low to qualify for a conventional loan or a loan from your local bank, a DSCR loan is a great option. It doesn’t rely on your personal income. Instead, it focuses on the property’s rental income.

2. Works for New Businesses

Just started your business? No problem! A DSCR loan doesn’t require two years of business history. Even if you’ve been in business for just one day, you can qualify. DSCR lenders don’t care when you started or how long you’ve been in business.

3. No Worries If You’ve Changed Jobs or Moved

Have you recently changed jobs or moved? Conventional lenders might see this as a red flag, but not with a DSCR loan. This type of loan doesn’t care about your job history or recent moves, making it easier to get financing.

4. Perfect for New Investors

If you’re just starting as a real estate investor, you might not have the experience conventional lenders look for. But DSCR loans are ideal for new investors because they don’t require a history of investing.

5. Focuses on Positive Cash Flow

For the best rates and terms, your property needs to cash flow positively. DSCR loans are designed to reward properties that generate strong cash flow. The more your property earns, the better the deal you’ll get.

6. A Solution When You Have 10+ Properties

If you’ve reached the limit of 10 conventional loans, it’s time to consider a DSCR loan. These loans don’t have the same restrictions and still offer 30-year fixed-rate options.

7. Rewards High Credit Scores

While DSCR loans are available to those with lower credit scores, the best deals go to those with higher scores. A strong credit score can secure better rates and terms.

8. Ideal for Long-Term Holds

If you plan to hold onto your property for at least three to five years, a DSCR loan is a smart choice. However, be mindful of prepayment penalties if you decide to sell or refinance within that period.

9. Best for Turn-key Properties

DSCR loans work best with properties that are ready to rent and require no additional work. They’re not suitable for flips, as they don’t provide funds for repairs and often come with prepayment penalties.

10. Offers Interest-Only Payments

If you’re looking to improve cash flow, DSCR loans can offer interest-only payments. This option isn’t available with conventional loans, making DSCR loans a great way to manage your finances while your property appreciates.

Is a DSCR Loan right for you?

In the world of real estate investing, finding the right financing is key. A DSCR loan offers flexibility, especially when your personal finances don’t meet conventional standards. By focusing on the property’s income, this loan opens doors for both new and experienced investors. Consider the 10 ways a DSCR loan can be good for your deals as you move forward in your real estate investment journey!

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What is a DSCR Loan and What Can You Do With It?

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What is a DSCR Loan and What Can You Do With It?

If you’re a real estate investor, you’ve probably heard about DSCR loans. But what is a DSCR loan, and how can it help you? Let’s dive in.

What is a DSCR Loan?

A DSCR loan, which stands for Debt Service Coverage Ratio loan, is designed specifically for real estate investors. This loan is never used for owner-occupied properties—only for investment properties.

The best feature of a DSCR loan is that it doesn’t rely on your personal income. That’s right, no tax returns, no W-2s, and no need to show any personal income. The focus is entirely on the property you’re buying. The lender looks at the income generated by the property, not your personal financials.

How Does a DSCR Loan Work?

The key to understanding a DSCR loan is knowing how the lender evaluates the property. They look at the rental income from that property to determine if it covers the expenses, including the mortgage, taxes, insurance, and any HOA fees.

A key term here is the DSCR ratio. This ratio compares the property’s income to its expenses. For example, if your property’s rent exactly matches your expenses, you have a DSCR ratio of 1. Lenders prefer a higher ratio, meaning the property brings in more income than it costs to operate.

Benefits of a DSCR Loan

There are several benefits to using a DSCR loan:

  1. No Personal Income Requirements: 

This loan type doesn’t care if you write everything off on your taxes or if you don’t have a steady job. It’s all about the property’s income.

  1. Flexibility: 

Whether you’ve just started your business or have been around for years, it doesn’t matter. DSCR loans are available even if you don’t have an established business.

  1. Variety of Options: 

DSCR loans come with many options, including three-year, five-year, 30-year, and even 40-year terms. There are also interest-only options to help keep payments low.

  1. LLC Friendly: 

You can purchase properties under an LLC, which can provide additional protection.

  1. Works Well with BRRR: 

If you’re using the Buy, Rehab, Rent, Refinance, Repeat (BRRR) strategy, DSCR loans are a perfect fit for transitioning to long-term financing.

Where a DSCR Loan Falls Short

While DSCR loans offer many advantages, they aren’t perfect for every situation:

  1. Higher Interest Rates: 

DSCR loans often have interest rates 1% to 3% higher than conventional loans. The market for these loans is more segmented, so shopping around is essential.

  1. Prepayment Penalties: 

Many DSCR loans come with prepayment penalties. If you sell the property within the first few years, you might face additional fees.

  1. Not for Owner-Occupied Properties: 

These loans are strictly for investment properties, so if you’re looking to finance a home you’ll live in, this isn’t the right choice.

  1. Credit Score Sensitivity: 

You need a decent credit score to qualify. Typically, lenders look for a score of at least 660, but higher scores can get you better rates and terms.

  1. Location Limitations: 

DSCR loans are often restricted to properties in larger communities. Smaller towns, especially those with populations under 25,000, may have fewer DSCR loan options.

Other Things to Know About DSCR Loans

  • Suitable for Short-Term and Long-Term Rentals: 

Whether you’re renting out a property long-term or using it as a short-term rental like an Airbnb, DSCR loans can be a good fit.

  • Not Dependent on Current Rent: 

You don’t need to have the property rented out to qualify. As long as you have a lease in place or are working on getting it rented, you can use a DSCR loan.

  • Covers Various Financing Needs: 

DSCR loans are available for purchases, rate and term refinances, and cash-out refinances.

Conclusion

DSCR loans are a powerful tool for real estate investors. They offer flexibility, don’t rely on personal income, and provide a range of options to suit different investment strategies. However, they do come with higher interest rates and other considerations, so it’s crucial to shop around and understand all the terms before committing.

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Private lending with your IRA

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Private lending with self directed IRA's

How to lend with your IRA or other retirement plans…private lending with your IRA.

 

Private real estate notes are a great way to keep your retirement growing nice and steady without the roller coaster ride of the stock market.

But did you know you can fund one of these loans with retirement funds through a company that offers Self Directed IRA Plans?

Most large IRA companies only allow you to invest in stocks and bonds. Self-Directed plans, however, allow you to invest retirement funds in any investment the IRS allows.

This includes real estate and loans.

To invest in private notes using your retirement funds, you must set up an account with a company that offers the Self-Directed options.

Here is a list of some of the companies that offer Self-Directed plans:

  1. The Entrust Group
  2. Equity Trust
  3. Pensco
  4. New Direction IRA
  5. IRA Services Trust Company
  6. Midland Trust
  7. Mainstar Trust
  8. Vantage IRA’s

Of course, you can check the web for other local options, too.

Once you establish an account with one of these companies or another you feel comfortable with, you can start funding loans!

Our suggestion is to select two or three companies you can see yourself working with and shop them for fees and customer service.

Some companies charge just an annual fee, and some charge every time you create or payoff a loan. Other companies might charge you both fees. So, it’s smart to take a few hours and see what best matches your needs.

If you’re interested funding short-term loans (3 to 6-month loans) and have a funds moving back and forth, you might want to stay away from companies that charge larger fees per transaction.

On the other hand, if you’re more interested in long-term loans that go on for years, you probably want to find a cost structure that has a lower annual fee and a larger per transaction fee.

It’s truly up to you and what you’re comfortable with.

So, go check out a couple. Find the fees that match your goals and the customer service reps who will answer the phones and your questions.

If you have any questions on private lending with your IRA you can reach out to us through the contact us form and we would be glad to help.

 

What are private real estate notes?

 

Private lending with your IRA

 

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Ways to make your private notes a lot more secure. Part 2

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private notes done right

In our last post (Ways to make your private notes a lot more secure. Part 1) we discussed 5 ways to keep your private notes more secure.  In this post we are going to wrap up our conversation on this topic with the remainder of our top 10.

Private notes are a great way to earn above market interest rates and this is a few ways to keep them more secure and well protected.

6.  Check how committed your borrower is to their promises by asking them to put things in writing. That’s what a loan agreement is for—to spell out every term of the loan.  You will find a lot gets promised and don’t try to commit it to memory.

7.  Walk away if a borrower offers outrageous rates. If it’s over market rates, it’s probably a scam. Good borrowers don’t want to pay inflated rates. In fact, they want to pay and negotiate the lowest rate they can get.

8.  Always escrow funds for fix ups. That means you hold the renovation funds back at closing and release them later, as work is completed on the property. This will ensure the property value is reached by all the worked being completed as agreed.

9.  Ask for a borrower’s “story.” Learn about the good, the bad, and the ugly. This will build trust and prove if a borrower is trustworthy. If their story changes each time you talk to them, walk away. Don’t be talked into a bad loan relationship. Get all of your agreements in writing and fact check as much as you can.

10.  When someone needs to close a deal SUPER-fast (in hours or a day or two), run, don’t walk. This “emergency” to fund NOW will likely become a pattern and those loans will become a headache for you for years to come.  The borrowers will also likely want to skip steps that protect your money…there are too many loans out there to take on this extra risk.

 

If you have any questions on how to keep your loans as secure as possible please reach out to us on the Contact Us form.

Secret to better returns

Have a great day.

 

 

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Ways to make your private notes a lot more secure. #1

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private notes done right

Ways to make your private notes a lot more secure. Part 1

Putting money to work in private notes is a savvy, safe way to invest your money. But like all investments, there are there are a few ways to make them even more secure.  Please understand that the fees and costs of these items should always be picked up by the lender.  These costs are a lot less than they would pay with a traditional lender.

Here are 1-5 of our top 10:

  1. Always insist upon using a third party to create your closing documents. Have your attorney complete or review all the documents (this should be covered by the borrower and not you). Do NOT let the borrower write them for you.
  2. Hire an appraiser or local realtor to valuate each property to so you know the real current market value.  Do put all your trust in the valuation provided by the borrower. It doesn’t mean they’re trying to lie. They simply might not know the value of the property.  The loan to value is key to keeping your money secured.
  3. Require each loan be closed, insured, and recorded by a title company and or attorneys office. If a borrower claims closing/recording through title is a waste of time or money, they are not the type of borrower to receive your money!
  4. Always pay for title insurance and request first lien position. First lien position will ensure you get paid back first, before anyone else.  If you just order title and don’t request to be in 1st lien position you may end up in a jr lien position.
  5. Always verify wire instructions verbally with your title company to avoid fraudulent activity. Do this each time you send or receive a wire. Wire fraud has increased and always take the time to protect your money.

Next up Ways to make your private notes a lot more secure. Part 2. 6-10

Private notes secured

If you have questions or what to learn more about private real estate lending reach out to us today through the Contact Us form.

 

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Private notes-Income and Security #3

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Better rates and returns

At this point, you know having a good loan means having good properties and good borrowers.

But there’s still one more key component that will help you build a solid foundation for your investments:

Good security.

We all interpret the same conversation in different ways. For example, a conversation between you and a borrower might be understood in two different ways: your way and their way.

That’s why it’s so important to know these top 3 ways to secure your loans:

  1. Get it in writing and get it signed by both parties.
    • No verbal agreements allowed.
    • Record agreements like rates and terms.
  1. Always have an attorney prepare your documents.
    • Use YOUR attorney, not the borrower’s.
    • Require the borrower to pay the cost of the attorney (not you).
    • Ensure defaults are in place.
    • Include all documents required by the state.
  1. Close through a title company
    • Make sure you’re in the proper lien position (first).
    • Make sure the lien gets recorded.
    • Make sure the closing is handled by a third party (title).

All of this might seem like a lot of work, but these simple steps will protect you, your loved ones, and your money.

Creating good returns with good loans can be easy and profitable. All you need to do is use the 3 key building blocks I’ve shared with you to create a strong foundation.

  • Good Properties
  • Good Borrowers
  • Good SecurityBetter returns

    Ready to build your foundation for good loans? Contact us today and see how we can help you succeed in private lending.

    • Email us a question at Mike@TheNoteShop.com
    • Schedule a 30-minute consultation.
    • Enroll in my personalized coaching services.

    Did you enjoy Private notes-Income and Security #3?  Check out:

    Private notes-Income and Security #1

    Private notes-Income and Security #2

 

 

 

 

 

Private notes-Income and Security #3

 

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Private notes-Income and Security #2

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Private notes done right

What’s one of the best things about investing in loans?

It doesn’t matter if the market is up or down. Your money will be always be protected (if you do them right), and you’ll always find checks arriving in your mailbox.

But before you invest in loans, you need to make sure they’re good ones.

Last post, I shared the first foundation block to a good loan: good properties.

Today, I want to reveal the second key foundation: good borrowers.

In hot and cold markets, you want someone you can depend on to 1) keep you protected and 2) confident your payments will arrive on time.

So, what makes up a good borrower? Here are my top 3 requirements:

  1. Proof and history. They have a solid history and proven concepts for their business (be that rentals or other investment like fix and flips).
  2. Reliable income and reserves. They do not solely rely on the property to make their payments.
  3. Honest communication. They do not hide any material facts, they’re happy to keep you updated, and they’re never late with payments.

Basically, you need to find a borrower who you enjoy working with and creates a win-win relationship. A loan with this person should not create extra work for you.

It’s really as simple as that.

So, now that you have a good property and a good borrower to work with, how can you make sure your loan is secure? That’s up in our next post.

Private lending

Ready to build your foundation for good loans? Contact us today and see how we can help you succeed in private lending.

  • Email us a question at Mike@TheNoteShop.com
  • Schedule a 30-minute consultation.
  • Enroll in my personalized coaching services.

Did you enjoy Private notes-Income and Security #2?  Check out:

Private notes-Income and Security #1

Private notes-Income and Security #3

 

Private notes-Income and Security #2

 

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Private notes-Income and Security #1

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Better returns with private notes

Is your money well protected?

Does it produce income?

A strong asset and payment stream are the keys to backing all your investments.

How do you do this? By establishing a solid foundation of good returns through good loans.

Good loans are made up of 3 key components:

  1. Good properties
  2. Good borrowers
  3. Good security

Lets start by looking at number 1 in this post and follow up in future posts with 2 and 3.

Good properties.

How can I keep my money working safely for me in any economy?

The first step is to find good loans. And the first step to finding good loans is to find good properties. Because real assets are the BEST way to protect your money.

That’s what I want to chat with you about today.

Good properties.

They are the first foundation block to creating good loans. But what makes a good property?

Here are my top 3 musts:

  1. Must be highly marketable. That means it should be:
    • In an area of demand
    • In good condition
    • A functional home
  1. The property must produce income for the borrower.  Think rentals, small commercial or fix and flips (from the sale).
  2. Must be in locations you understand and like. Loan in areas that fit your comfort level.  If you are from a small town loan in small towns.  If you are from the city put your money to work in the city.

Remember, a real asset (that you like) to protect your investments is the first key building block to good loans.

Private lending done right

Ready to build your foundation for good loans? Contact us today and see how we can help you succeed in private lending.

  • Email us a question at Mike@TheNoteShop.com
  • Schedule a 30-minute consultation.
  • Enroll in my personalized coaching services.

 

Did you enjoy Private notes-Income and Security #1?  Check out:

Private notes-Income and Security #2

Private notes-Income and Security #3

Private notes-Income and security #1

 

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