Private lending is an attractive alternative to investing in the stock market. Hands off, passive income with real estate as the vehicle.
What is Private Lending?
Private lending is simply lending money in a private transaction to a real estate investor to purchase residential real estate for either a long-term rental or a short-term flip, then earning money on the interest. Instead of a real estate investor having to go to a bank and trying to get qualified for a loan and having to go through an appraisal and committee process, they would have a private lender’s money at hand. It's a much quicker transaction for a home purchase.
When a real estate investor attempts to buy a property at a discount, time is a big factor. If they can tell a home seller they can close within a week after putting their house under contract, it's a very powerful negotiating tool. In my own investing career, I was able to buy a lot of real estate at a deep discount because I used money from private lenders. So, from a real estate investor’s standpoint, private money is very powerful because they can basically do cash deals. When I bought (and continue to buy) houses, I always made cash offers because I knew I could close immediately or within a few days of receiving clean title on the property. The money from my private lenders made all the difference.
The Benefits of Private Lending
In my opinion, the main benefit for you as a private lender is diversification of your investment portfolio. A lot of people I meet understand the real estate market, but they do not invest in it. Instead, they invest in the stock market through mutual funds.
However, the cash flow from mutual funds is very limited and sometimes nonexistent. You would basically need to have a huge sum of money invested in order to have enough cash flow to live on.
One of the benefits of private lending is the more consistent cashflow, whereas the stock market is probably going to be more long-term appreciation.
Let’s say you're buying a stock for $20, and you're hoping that stock will maybe go up to $40 over time when you sell it for capital gains. Who knows how long that might take. But as a private lender, you can make an investment of, let's say $40,000 and you could have $400 a month coming in. You would be earning interest from day one, and you would have $400 a month coming in for the duration of the loan.
When I borrow money from my private lenders, I usually set them up as 5-year amortized loans, but I’ve had some private lenders request 10 or 15 year loans. In each case, the money my private lenders earn is the monthly cashflow that's secured by real estate without the fluctuation of the stock market, and without the hassle of being a landlord. So, I look at it as being more diversified.
Return on Your Money
The return you can expect on your money as a private lender is negotiable. At times I’ve paid 10% and I’ve had a few private lenders that I paid 7%. I have one private lender that I pay 9% but then I pay her a fee when the loan gets paid off, which it increases her rate of return. It's all negotiable.
What I'm seeing right now is anywhere between 7% to 9%. Interest rates have come down quite a bit so that’s what I'm seeing right now in the market. I was at the bank the other day and I heard a lady (and this is the honest truth) I heard her asking the teller what the CDs were paying. It was less than 1%!
So, 7% is seven times greater than investing in a bank CD, if you look at it that way. A lot of people are afraid of investing in the stock market, but they understand how interest works. They understand they can earn interest on their money and then use that interest for groceries, for a vacation or for a college education.
I’ve actually had some of my private lenders tell me they were able to retire early because of the loans they made to me. One of them was a doctor who told me he was able to retire 13 years early because of the many private loans we did over time. That’s amazing to me!
It’s stories like his that inspire me to share the knowledge I’ve gained in my 25+ years of real estate investing. It’s been a privilege getting to know and serve my private lenders, my business associates and my community. I’ll be sharing more soon.
If you are ready to become a private lender in residential real estate, please call me. We have several opportunities available for you to earn a safe, consistent 10% on your money. ~ Samuel Madrid (210) 228-8023
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