Private Lending – 7 Reasons You Should Be Your Own Private Lender
Private lending is one of the most trusted and oldest forms of investing. You lend capital to someone else, perhaps someone who cannot get traditional bank financing, in exchange for interest and ultimately your principal.
According to my best theory, the human species is made up of two distinct races: the men who borrow and the men that lend. ” — Charles Lamb
Private lenders lend money to help borrowers:
- Purchase real estate for a mortgage, or a short-term bridge loan to secure permanent financing.
- Rehab or improve commercial or residential real property (often with a bridge loan).
- Start or expand a business venture
- Refinance credit cards and other debt
- Through websites like Prosper.com or LendingClub.com, you can also fund a variety of other projects such as kitchen remodels and weddings.
In recent years, investing has been equated almost exclusively to stocks, bonds, and mutual funds. Because there is more volatility in the stock markets, so there are many reasons to diversify your portfolio at least partially with private lending strategies. Here are seven reasons you should consider becoming a private lender.
1. Private Lending is Historically Proven:
For literally hundreds of years, private lending has been a reliable method to generate profits and cash flows. Private lending agreements date back to 3,000 B.C. and show people lending money to other people for a defined period of time in return for “interest” in wheat, livestock or shekels of sterling.
In ancient times, interest rates between 20% and 40% were common. However, these rates became “usury” in modern times and were discouraged or outlawed. Below is a translation from Fordham University of a Babylonian contract to obtain a real estate loan. It was dated 611 B.C. and had an interest rate at eleven and one-third of a percent.
ONE mana of cash, a sum belonging IqishaMarduk, Son of Kalab-Sin (is loaned), unto Nabu–etir. Each year, the mana amount will increase by seven shekels. IqishaMarduk’s pledge is in his field near Bel. This document bears the names of four witnesses and was dated at Babylon, Tammuz twenty seventh, in 14 years of Nabopolassar (the father Nebuchadnezzar em>
Private lending contracts may take a little longer now.
The Great Depression of the 1930’s and 1940’s was just around the corner. The stock market in the United States was only 100 years old and had been through many waves of panic and crashes. The Wall Street crash of 1929 brought about a remarkable if the deceptive, bull market in the 22 years that preceded it.
John Powell, an investor, quickly learned that what goes down may also go up… way. After suffering severe losses, Powell decided to quit the stock market and began lending money to people who needed capital to buy or finance temporary properties. Powell became a private lender for the next three decades. His profits were steady and he didn’t fear market crashes.
2. Private Lending Offers Predictable Returns.
You are betting that the stock market will rise when you invest. This may have been true historically more often than it has not. But we can see times when it has gone horribly wrong. No one thought Enron would collapse or that the stock market could lose more than 40% during a Financial Crisis.
Private lenders can loan money to you. An agreement will specify how much and when you’ll get paid. This agreement is well-constructed with protections and the right borrower. It delivers predictable returns such as a monthly paycheck that runs like clockwork.
What is the exception? There is always a possibility of losing your private loan deal if it isn’t properly constructed or vetted. This does not mean you will lose all your capital. So in cases where you were paying the borrower directly, a property may have to be forfeited and then sold to obtain your cash.
3. Excellent Cash Flow.
Banks and other institutions that act as lenders are among the most lucrative businesses in the world. They have also passed the time test with flying colors. Many people are borrowers and not lenders, unfortunately. You can use the money you have to lend if you are able to.
This low-interest environment allows you to earn many times more than your bank without having to worry about the volatility of the stock markets. If interest rates at banks rise, private lenders will see their rates go up as well. Because there will always be people who require money beyond mainstream channels.
Private lenders are a great option for investors looking to increase their income from existing assets. They can earn high single-digit or even low double-digit interest rates (for accredited investors only) and become private lenders. You will know what cash flow you can expect because the monthly income is usually agreed upon.
4. Private Lending is Diversification.
Private lending can help diversify stock-heavy portfolios. It is also possible to diversify between different types of assets or real estate investments in different areas. It is also convenient to do business locally. You might be unable to make a good ROI if you live in an urban area.
Private lending can be done with different assets such as real estate bridge loans, fractional investments in real estate equity (apartment buildings), or collection peer lending loans. To reduce risk, diversify your portfolio into small loans.
5. Secured Investment
Your investment in real estate will be secured by the property, possibly with a first trust deed. However, there are many ways private lending deals can be structured. You should not be last in line for payment!
An appraiser will verify the property’s value, regardless of whether you’re lending directly or through a company that vets deals. You have more security for your investment if the loan-to-value percentage is lower.
You could even make more profit if you do have to foreclose in the worst-case scenario. Private lenders may prefer to work directly with companies that handle the transaction, which significantly reduces their risk.
Private lending opportunities, such as through prosper and lending club.com, are not always secured by real assets. Peer lending is where the borrower’s income, credit, and good credit are your “security.”
Peer lending returns are tied so that lower-risk loans with high credit scores (borrowers with higher credit scores) pay less interest while higher-risk loans pay higher interest rates and have higher default rates.
6. Opportunities For Leveraged Investment.
This is arbitrage. You can use the money you borrowed at a lower interest rate to invest it and earn a higher return. A couple of examples:
Let’s suppose you have a young daughter who is settling into her first home. She used credit to purchase furniture, window coverings, and appliances at various stores. She now owes $6000 at rates of around 21%
It is a pain to see your mother paying 21%. To pay the debt, you borrow $6000 from your life insurance policy at 8.8%. They will happily repay you at 10% interest. In reality, you’re earning 25% on the money you borrow and your mother is saving a lot of interest.
This is a simple, small example. So let’s take a larger, more lucrative example.
Let’s say your life’s cash value is used as collateral. You then borrow $50k at 5% from a bank, then put the money in a bridge loan that earns 7%. Now you get a 40% return on your money.
7. You Seem Like A Genius.
If you tell your friends that you will be a private lender they are likely to be concerned. It’s possible for them to tell you that it’s dangerous (if you’re brave enough to do it yourself). You might hear horror stories from others or be talked out of doing it.
If you are an experienced private lender and tell your friends you have been earning healthy cash flow for many years without any losses or stress from the stock market, they will think you’re really smart. You are, of course.
Do you want to make steady cash flow from an asset that is already in your portfolio? Be a private lender to use the best investment strategy in history. Contact us and we will provide more information and help you to determine which options are best for you.