So You Want to be Private Lender…Good Idea!
“There’s Gold in Them Thar Hills!” – Mark Twain
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In January of 1848, a small nugget of gold was found at John Sutter’s sawmill in Northern California. Sutter was afraid that the discovery of gold would take his workers away from the mill. He was also concerned that gold would bring prospectors onto his land. He asked his workers at the mill to keep the gold a secret, but it did not stay a secret. By late 1848, gold fever started to spread across the country making national news. In droves, people flooded the State of California seeking their fortune in gold!
However, while a minority of miners made money during the Californian gold rush, the majority of miners did not. Actually, out of every 1000 miners, 3 got rich.
So Who Made the Money?
The merchants made the money! It was very common for people to become wealthy by providing the miners with food, loans, supplies, and services. Many people who became wealthy ran the boarding houses, the banks, the livery stables, and supply stores.
A True Story
There was an entrepreneurial gentleman, who found out about the gold at Sutter’s mill while in Northern California. He immediately headed South to San Francisco and bought every pickaxe and gold pan from all the supply stores in town. He then established his own supply store and spread the word about the gold rush! (by the way, a private lender gave him the cash for his inventory.) When buyers of pickaxes and gold pans came to his store, his inventory was priced considerably higher than his original cost as he had a virtual monopoly for gold mining supplies.
Just like in 1848, the entrepreneur who thinks out of the box will be successful and profitable.
The parallelism between private lending and the gold rush is uncanny. Today, all real estate investors want to get rich building homes, flipping properties, or managing large apartment complexes or commercial properties. However, only a minority of the participants in this market will get rich. Much like the mass of miners in 1848, the participants of this market work too hard, take too many risks, and are always looking for the next dollar.
The way to make money in the real estate market is by providing the capital or the “tools” to the “miners” through private lending and the buying of private, real estate-secured notes.
You can do this with other people’s money, through a self-formed lending club, your self-directed IRA, a line of credit, or your own funds and make double-digit secured returns where your borrower takes the risk and you collect your check!
Do you do any private lending? Why or why not?
Photo: Wikipedia Commons