When you use private money for real estate investing there are several clauses your lending agreements should never be without. One of those clauses is the “No Pre-Payment Penalty” clause. Here’s how it works.
When you borrow private money for real estate investing, you’re accomplishing a great deal. You’re protecting your credit, and maximizing your borrowing potential, as well as gaining access to a ready and flexible source of money.
It would be a shame to go through all of that and leave yourself open to harm in one critical area… what if you’re stuck with a repayment term that’s too long?
The sure way to avoid this issue is to put a “No Pre-Payment Penalty” clause in every private money for real estate investing agreement you make. That way, when you’re ready to pay the loan off and free up those funds for a new investment, you’re not stuck paying a hefty penalty.
Here’s how the clause should be worded.
"The Borrower reserves the right to prepay this Note (in whole or in part) prior to the due date with no prepayment penalty"
Without this clause, you would be obligated to pay the lender the full interest due on the loan for the entire term, no matter how long it is. That’s not the kind of flexibility you want in a loan of this type, and flexibility is one of the main reasons to use private money for real estate investing.
Protect yourself and your borrowing capacity when you're accessing private money for real estate investing by including the above clause in every one of your private notes and contracts. You’ll be glad you did.
By: Tom Dunn