Lending to real estate investors offers the Private Lender many benefits not otherwise enjoyed through other means. Before we get into the benefits, let us briefly explore what Private Money Lending is. In the real estate financing industry, private money lending refers to the money an individual, not a bank, lends to a real estate investor in exchange for a pre-determined rate of return or other consideration. Why private loans? Banks do not typically lend to investors on properties that require improvement to attain market value, or ‘after repair value’ (ARV). Savvy people with available cash in a broker account or self-directed IRA, realize that they can fill the void left by the banks and attain a greater return than they may be currently getting in CD’s, bonds, savings and money market accounts, or even the stock market. So a market was born, and it has become essential to real estate investors.
Private Money Lending would not have become popular unless Lenders saw a tremendous value in it. Let us review key advantages to becoming a Private Money Lender.
Terms are negotiable – The Lender can negotiate interest rate and possible profit share with the borrower. Additionally, interest and principle payments can also be negotiated. Whatever agreement that suits both parties to a private loan is allowable.
Return on Investment – Current interest rates charged on private money loans are generally between 7% – 12%. These rates, as of April 2018, are currently greater than returns from CD’s, savings and money market accounts. They also outperform the 4.7% the stock market has produced, inflation adjusted, since 1/1/2000. That is over 18 years.
Collateral provided – Real Estate property serves as collateral for the loan. Most real estate investors acquire their properties at a significant discount to the market. This discount provides the lender with quality collateral should the borrower default.
Choice – The Private Money Lender gets to choose who to lend to, or what project to lend on. They can get detailed information on the project, the investors experience, and the kind of profits normally made.
No Effort – The Lender only worries about the loan. The Investor takes all the other risks and does the work to find, purchase, fix and sell the property. The Lender just collects the interest.
Stability – Real Estate does have ups and downs. But its volatility is nowhere as pronounced as the stock market. Additionally, when purchased at a proper discount, the property provides a cushion against the ups and downs.
Tax Free/Tax Deferred – A Private Money Lender can lend on real estate from a self-directed IRA. The gains achieved can grow either tax-free or tax deferred helping to build the retirement nest egg faster than ever.
Diversification – Lending on real, tangible, brick and mortar assets provides additional diversification to a Lenders portfolio to provide protection in the event of a down period.
If you have the desire to invest in real estate, but don’t want to take on all the associated risk, or get your hands dirty, private lending could provide a wide range of opportunities and benefits in growing your wealth and providing for your retirement.