Lending to real estate investors offers the private lender many advantages that they would not otherwise enjoy through other means. Before discussing the benefits, let’s briefly explore what private money lending is. In the real estate finance industry, private money lending refers to money that an individual, not a bank, lends to a real estate investor in exchange for a predetermined rate of return or other consideration. Why private loans? Banks generally do not lend to investors on properties that require improvements to reach market value or “after repair value” (ARV). Savvy people with cash in a brokerage account or self-directed IRA are realizing that they can fill the void left by banks and earn a higher return than they are currently getting in CD, bond, , savings and money market, or even the stock market. A market was therefore born, and it has become essential for real estate investors.
Private money lending would not have become popular unless lenders saw enormous value in it. Let’s review the main advantages of becoming a private lender.
Terms are negotiable – The lender can negotiate with the borrower the interest rate and a possible profit sharing. Additionally, interest and principal payments can also be negotiated. Whatever agreement is suitable for both parties to a private loan is eligible.
Return on investment – Current interest rates on private money loans are generally between 7% and 12%. These rates, as of April 2018, are currently higher than CD, savings account and money market yields. They also outperform the 4.7% the stock market has produced, adjusted for inflation, since 1/1/2000. It’s over 18.
Guarantee provided – The 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 offers the lender a guarantee of quality in the event of default by the borrower.
Choice – The private lender can choose to whom to lend or on which project to lend. They can get detailed information about the project, the experience of the investors and the type of profits normally made.
Effortlessly – The Lender only takes care of the loan. The investor takes all the other risk and does the work to find, buy, repair and sell the property. The lender simply collects the interest.
Stability – Real estate has its ups and downs. But nowhere is its volatility as pronounced as the stock market. Additionally, when purchased at an appropriate discount, the property provides a cushion against the ups and downs.
Tax exempt/tax deferred – A private lender can lend against real estate from a self-directed IRA. Earnings can grow tax-deferred or sheltered, helping build your retirement nest egg faster than ever.
Diversification – Lending on real, tangible, brick-and-mortar assets provides additional diversification to a lender’s portfolio to provide downside protection.
If you have a desire to invest in real estate, but don’t want to take on all the associated risk or get your hands dirty, private loans could offer a wide range of opportunities and benefits to grow your wealth. and plan for your retirement. .