Also known as hard money lending, private lending is a great way for real estate investors to earn a passive income through real estate. I was actually meeting with some investors today about this very topic and the easiest way to explain it was simply: “You become the bank for somebody else.”
For an investor who needs quick financing for an acquisition and renovation, hard money can be a great source of funds. And for somebody looking to take a more passive role in real estate investing, it can be a very secure way to get a great return while still participating in the real estate market.
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Here are the top 5 reasons why I like private lending as an income producing investment:
1.) It’s a very secure investment. Lenders take a first lien position on a property and have the ability to take the property back (through foreclosure in a worst case scenario). Plus, the secured deed is recorded at the local courthouse so that there is no misunderstanding as to the lender’s interest in the property.
2.) Unlike stocks or bonds, the investment is a tangible asset that has inherent value. Whereas a company can go bankrupt and an ownership interest can be worth zero, a property will never do that. As a lender, it’s always nice to actually have the ability to touch, see, smell (well, maybe not smell) exactly what your money is invested in.
3.) Compared to most traditional investments, private lending offers a much higher return. Many private lenders can get origination points up front and anywhere from 10-15% interest. This can add up to annual yield of well over 15%.
4.) For those investors who don’t want the hands-on approach associated with owning real estate, private lending offers a much more passive option. Many investors simply don’t want the headache and liability that comes along with owning real estate and as such find that private lending is a great alternative.
5.) Unlike longer term CD’s or private funds, private loans are typically only 6 months or so. It’s a great way to park your money, earn a great yield, but have the option to pull out and do something different after a fairly short loan term.
I realized early on that owning real estate as an investment was not for everybody. I’ve found that for many of these individuals, private lending can be an excellent alternative investment strategy. Or, perhaps an additional investment strategy that allows for a diversified real estate investment portfolio.
What are your thoughts on private lending? Share below!