Pros & Cons of Private Lending
Pros and Cons of Private Lending
As with any new business venture, you will face both positive and negative circumstances. The decision of whether or not to proceed with this money making strategy lies in the balance. Do the pros outweigh the cons for you? Let’s review some of the biggest pros and cons involved in private investing.
The Pros:
• Reliable Cash Flow
While there are no guaranteed returns, private money investors can typically expect 8-10% annual returns. They may also receive monthly interest payments, depending on how the loan is structured. If an investor chooses to work with a security grade real estate fund payments can be either returned to the investor, or reinvested. Remember, this cash flow isn’t your normal cash flow. This is cash
flow that comes without having to rehab houses, without owning properties, without dealing with tenants, and without having to qualify for any mortgages.
• Security / Capital Preservation
Loans are typically secured by a first position "priority" lien on real estate properties. Additionally, the Loan-to-Value (LTV) ratios are typically 60-70% allowing the invested capital to be preserved in the event of foreclosure or declining property values during the term of the loan.
• Investment Diversification
Investors are allowed to diversify their overall investment portfolio with real estate assets, without being subject to property ownership headaches. These loans also offer the same diversification benefits as property ownership, but with more passive participation.
• Low Volatility
Loans are typically short-term in length (12 months or less) which can mitigate potential market risk and interest rate risk.
• Passive Investment
Investment in private loans is a “passive” investment in contrast with direct real estate ownership. Investing in a managed private loan fund is more “passive” than being a direct lender because the Fund handles all aspects of the lending process.
The Cons:
• Investing in private mortgage lending is not FDIC insured and returns are not guaranteed.
• Real estate markets can be volatile and unpredictable, which can lead to a decrease in the underlying value of the real estate, which serves as security for the private mortgage loan.
• Borrowers may default on their loans and private mortgage lenders must have necessary experience and capacity to handle a default and potential foreclosure process in order to protect their investment.
• Private mortgage lenders must have familiarity with federal, state, and local lending regulations and ensure their loans are in compliance.
• The duration of projected cash flows may not be realized in the event of prepayment by the borrower.
• Reinvestment risk exists if the capital is not redeployed after the loan payoff occurs.
As with any investment, investing in private real estate loans does present inherent risk. Investors can mitigate some of those risks by investing with experienced private mortgage lenders who can properly analyze, identify, and manage these risks.
To your success,
Michael
These materials are not intended to be relied upon as the basis for any investment decision, and is not, and should not be assumed to be, complete. The contents herein are not to be construed as legal, business, or tax advice, and each party that receives these materials should consult its own attorney, business advisor, and tax advisor as to legal, business, and tax advice. In considering any performance information contained herein, parties should bear in mind that past performance is not necessarily indicative of future results.