{"id":162745,"date":"2023-11-27T13:32:00","date_gmt":"2023-11-27T20:32:00","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=162745"},"modified":"2024-02-29T16:55:38","modified_gmt":"2024-02-29T23:55:38","slug":"private-lending-vs-landlording-in-todays-market","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/private-lending-vs-landlording-in-todays-market","title":{"rendered":"Private Lending or Landlording: What Makes More Sense Right Now?"},"content":{"rendered":"\n<p><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/which-real-estate-investing-strategy-is-best-for-your-goals\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Real estate investing strategies<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;have always been a topic of debate, with investors considering various strategies to maximize their returns, save on taxes, and accommodate various lifestyle preferences.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Landlording is, of course, the most popular route for investors, but don&#8217;t sleep on private lending. In today\u2019s real estate market, with lower inventory and transaction volume, active investors are starting to look at more&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/raking-in-passive-returns-in-real-estate-without-volatility\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">passive income<\/span><\/a><span data-preserver-spaces=\"true\">-generating solutions to replace some of their current investment strategies, such as&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/guides\/how-to-flip-houses\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">flipping<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;and owning&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/are-rental-properties-a-good-investment\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">rentals<\/span><\/a><span data-preserver-spaces=\"true\">.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Why the shift? With fewer good deals on the market, coupled with lower profit margins, reduced depreciation benefits, and longer appreciation realization, real estate investors are finding that&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/private-money-lending-is-a-perfect-alternative\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">private money lending<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;could be more advantageous in today\u2019s stagnated market compared to previous years. Here\u2019s a look at the financial considerations of each strategy.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Private Lending: The Power of Being the Bank<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Private lending involves lending your capital, and perhaps some capital from within your network, to other real estate investors or borrowers in exchange for a fixed interest rate. When considering this approach, it&#8217;s essential to calculate the potential returns and compare them to traditional buy-and-hold investing as a landlord.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Let&#8217;s delve into the financial benefits of private lending:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong><span data-preserver-spaces=\"true\">Compounding returns:<\/span><\/strong><span data-preserver-spaces=\"true\">&nbsp;If you&#8217;re lending your funds at an interest rate of 12%, your investment is poised to double in approximately six years. This means with taxes factored in, you can expect your initial investment to double in 7-7.5 years.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Wealth accumulation<\/span><\/strong><span data-preserver-spaces=\"true\">: Instead of using your capital as a 20%&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/down-payment\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">down payment<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;for a long-term rental property, you could lend it out at a 12% interest rate, effectively putting 100% of your capital to work. Over time, your wealth accumulation through private lending outpaces the gains from the amortization process as a landlord.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">More passive investment<\/span><\/strong><span data-preserver-spaces=\"true\">: Being a landlord comes with a host of responsibilities, even if you work with a property manager, from dealing with maintenance and repairs to handling tenant issues and turnover. Private lending allows you to avoid these landlord headaches, giving you peace of mind and more free time.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Capital liquidity<\/span><\/strong><span data-preserver-spaces=\"true\">: Private lending keeps your money more liquid in the way CDs do. You won&#8217;t need to take out a loan against your property&#8217;s equity or pay interest to access your own capital. This liquidity can be liberating, especially when you&#8217;re considering your financial flexibility.<\/span><\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Buy-and-Hold Investing: The Well Trodden Path<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">While private lending has its advantages, it&#8217;s important to consider the unique aspects and challenges of being a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/what-is-a-landlord\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">landlord<\/span><\/a><span data-preserver-spaces=\"true\">:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong><span data-preserver-spaces=\"true\">Appreciation<\/span><\/strong><span data-preserver-spaces=\"true\">: Property appreciation can be speculative and inconsistent. Some investors may realize substantial appreciation, while others experience minimal growth. Recent trends emphasize&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/rental-property-cash-flow-analysis\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">cash flow<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;over appreciation, making the latter less reliable, and where we are at currently in today\u2019s market cycle, it will take a much longer time to realize double-digit appreciation in some market and asset classes than in the previous decade.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Property management<\/span><\/strong><span data-preserver-spaces=\"true\">: As a landlord, you&#8217;ll have to handle various property management tasks, from leaky toilets to evictions. In addition to the time and effort required to resolve these issues, it also requires additional capital. If you experience multiple turnovers or evictions, or even large capital expenditures, before you can build up cash reserves, you could find yourself shelling out more capital than you anticipated.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Equity and leverage<\/span><\/strong><span data-preserver-spaces=\"true\">: The paradox of&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/what-is-home-equity\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">equity<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;is worth noting. Some investors, in their pursuit of leverage, prefer having as little equity in their property as possible. This approach allows them to access their capital through loans. Private lending gives you the flexibility of having your money at your disposal without paying interest to access it.<\/span><\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Final Thoughts<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Both private lending and being a landlord have their merits and drawbacks. The decision between the two depends on your financial goals, risk tolerance, and lifestyle preferences.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Private lending can provide a steady source of passive income, faster wealth accumulation, and fewer landlord hassles. However, it doesn\u2019t offer the depreciation or tax deferral benefits owning rentals does. Additionally, being a landlord offers the potential for property appreciation and the chance to build equity, albeit not with the rapid increases we\u2019ve experienced in the last five to 10 years.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Ultimately, your choice should align with your investment strategy and personal preferences. As you consider your options, remember that financial freedom and success can be achieved through various paths in the world of real estate investing.<\/span><\/p>\n\n\n\n<div id=\"hero-block_62ee867235a1c\" class=\"first:mt-0 hero-block py-4    has-background has-slate-300-background-color has-text-color has-slate-800-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-2\/3 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-theme-slate-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">All the cash flow, none of the hassle<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px\">Learn how to create financial freedom and passive income in real estate as a private money lender.\u00a0<em>Lend to Live<\/em>\u00a0makes passive income through private lending achievable for anyone. <\/p>\n\n\n\n<div id=button-custom-event-block_64138705d4d27 class='button-custom-event'>\n      <a\n    href=\"https:\/\/store.biggerpockets.com\/products\/lend-to-live?utm_source=blog&#038;utm_medium=marketing_block\"\n        x-on:click=\"window.analytics.track('Blog Block | Publishing: Lend to Live Book', {\n      referrer: 'https:\/\/www.biggerpockets.com\/blog\/private-lending-vs-landlording-in-todays-market',\n    });\"\n    class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Get Yours Now<\/a>\n  <\/div>\n\n\n\n<div id=button-custom-event-block_641384b1eb1d8 class='button-custom-event'>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/3 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/07\/lendtolive-cover-scaled.jpeg\" alt=\"lend to live cover\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n\n<p><\/p>\n","protected":false},"excerpt":{"rendered":"<p>With interest rates as high as they are, is now the time to enter the market as a private lender? Here&#8217;s what you need to know.<\/p>\n","protected":false},"author":613616,"featured_media":162750,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7403,5183],"tags":[],"class_list":["post-162745","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-private-money","category-landlording"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/162745","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613616"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=162745"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/162745\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/162750"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=162745"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=162745"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=162745"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}