Lending to real estate investors offers the private lender many benefits not otherwise enjoyed through other means. Before we get into the benefits, let’s briefly explore what private money lending is. In the real estate financing industry, private money loans refer 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 don’t typically lend to investors on properties that require improvements to reach market value, or “after repair value” (ARV). Smart people with cash on hand in a self-directed IRA or broker account realize they can fill the void left by banks and earn a higher yield than they can currently earn on CDs, bonds, savings and market accounts. currency, or even the stock market. This is how a market was born, and it has become essential for real estate investors.
Private money loans would not have become popular unless lenders saw great value in them. Let’s review the main advantages of becoming a private money lender.
Terms are negotiable – The lender can negotiate the interest rate and possible profit sharing with the borrower. In addition, interest and principal payments can also be negotiated. Any arrangement that works for both parties for a private loan is permissible.
Return of investment – Current interest rates charged on private money loans are generally between 7% and 12%. These rates, as of April 2018, are currently higher than the yields on CD, savings, and money market accounts. They also exceed the 4.7% that the stock market has produced, adjusted for inflation, since 1/1/2000. That’s over 18 years.
Guarantee provided – The real estate property serves as collateral for the loan. Most real estate investors purchase their properties at a significant discount to the market. This discount provides the lender with a guarantee of quality in the event of default by the borrower.
choice – The private money lender can choose who to lend to or on which project to lend. They can obtain detailed information about the project, the experience of the investors and the type of profits that are normally obtained.
No effort – The Lender only cares about the loan. The investor bears all other risks and does the work of finding, buying, repairing, and selling the property. The lender only charges the interest.
Stability – Real estate has its ups and downs. But its volatility is not as pronounced as that of the stock market. Also, when purchased at a suitable 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. Earnings earned can grow tax-free or tax-deferred, helping build retirement savings faster than ever.
Diversification – Loans on real, tangible, brick-and-mortar assets provide additional diversification to a lender’s portfolio to provide protection in the event of a period of inactivity.
If you have a desire to invest in real estate, but don’t want to take all the associated risks, or get your hands dirty, private loans could provide you with a wide range of opportunities and benefits to increase your wealth and provide for your retirement. .