It’s one of the oldest, most proven forms of investing; lending capital to another—perhaps someone who can’t get traditional bank financing—in exchange for interest, and eventually your principal, in return.
A private lender lends money to help borrowers:
● purchase real estate (for a mortgage or a short-term bridge loan until permanent financing is put into place)
● rehab or improve commercial or residential real estate (again, often with a bridge loan)
● start or expand business ventures
● refinance credit cards or other debt
In recent decades, investing has come to be equated almost exclusively with stocks, bonds and mutual funds. However, there is greater volatility in the stock market, and many motivations to diversify at least a portion of your portfolio with private lending strategies. Here are five reasons to consider becoming a private lender:
1. Predictable returns.
When you invest in the stock market, you are placing a bet that the price will go up. Historically, this may be true more often than not. Yet we can observe times when this has gone horribly wrong! Nobody thought that Enron was going to go under, or that there was a possibility of the stock market losing more than 40% in a Financial Crisis.
When you loan money as a private lender, you have an agreement that specifies how much you’ll be paid and when. Properly constructed with protections and the right borrower, this delivers very predictable returns, such as a monthly check that comes like clockwork.
The exception? If your private lending deal is not properly constructed or vetted, there is a chance of loss. That does not necessarily mean that you’ll lose your capital, but in cases where the borrower was paying you directly, a property could have to be foreclosed on then sold to get your cash out of a property.
2. Excellent cash flow.
In addition to passing the test of time with flying colors, banks and other institutions that operate as lenders are some of the most profitable businesses in the world. Unfortunately, many people tend to be borrowers, not lenders! So if you’ve got money to lend, congratulations, you can put it to good use.
In this low-interest environment, you can earn several times what your bank is paying, without the unpredictability of the stock market. And if interest rates at banks go up, so will interest rates for private lenders! That’s because there will always be people who need to borrow money outside of mainstream channels.
Today, investors who want more income from their existing assets can earn high single digit, even low double digit interest rates (for accredited investors only) by becoming private lenders. In many cases, the monthly income is contractually agreed upon, so you know exactly what cash flow you can expect.
Not only does private lending help diversify a stock heavy portfolio, but through private lending, it is also very easy to diversify amongst different types assets, or real estate investments in different locations.
And of course, you can practice private lending with different types of assets, such as a real estate bridge loan, a fractional investment in real estate (apartment building) equity, or a collection of peer lending loans.
4. A secured investment.
If you are lending on real estate, your investment will likely be secured by the property itself, perhaps with a first deed of trust, although there are several different ways that private lending deals can be structured. (Just make sure you’re not last in a long line to be paid!)
Whether you are lending directly or through a company that vets the deals, you’ll want an appraiser to verify that the property is worth substantially more than the amount you are lending. The lower the loan-to-value percentage, the more security you have for your investment.
In a worse-case scenario that requires a foreclosure, you could actually reap additional profits for your extra effort and trouble. Alternatively, many private lenders prefer to work with companies that manage the transaction and pay them directly, significantly reducing their risk.
5. Leveraged investment opportunities.
It’s called arbitrage: By investing money you have borrowed at a lower rate to earn a higher rate, you can earn an exceptional rate of return and expand your investments.
A quick example:
You leverage your whole life cash value as collateral and borrow $50k from a bank at 4%. Then you put the money into a bridge loan earning 8%. Your rate of return is actually 100% on the money you borrowed (pay $4 to earn $8) while your asset within the policy continues to compound uninterrupted and tax-free.
Would you like to turn an existing asset into steady, reliable cash flow?
Become a private lender and use the investment strategy with the longest track record in history! Contact us and we will get you more detailed information and help you identify which options might work best for your situation.