Our first two tours of homes in August will feature properties that are or can be financed by the seller. In these cases, the seller acts as a private lender.
Here are some of the top reasons why someone might want to lend private money, secured by tangible real estate:
Totally passive income: A private lender makes a loan to an investor, but does not have to acquire the property, fix it up, manage tenants, monitor a budget, or market it for sale. A private lender is given a fixed rate of return, regardless of the ups and downs of the marketplace.
Higher Rates of Return: A real estate investor can typically offer 2-3X greater rate of return than the best interest rate a lender can earn through the bank, in stocks, bonds or CDs.
Low Risk: A private lender’s investment is secured by a tangible asset as collateral, unlike stocks and bonds which are unsecured (why do they call them securities, I wonder?). This investment is secured with a promissory note and deed of trust; and lender’s insurance also protects the lender. The lender is named as additional insured on the insurance policy.
No cost to the lender: There is no cost to have your investment managed for you, unlike your typical financial advisor or funds manager who takes 1-2% in management fees off your securities investment portfolio.
You can drive by your investment: Your investment as a private lender is secured by tangible real property. You may decide which property you wish to collateralize your private loan. You may visit the property as an investor works on fixing it up to see what they are doing with your investment.
Unique opportunity: A private lender’s investment is highly localized, typically in neighborhoods and properties with which the lender is intimately familiar.
Real World Investor: Typically, the private lender has met and knows the real estate investor securing the loan. The investor is personally accountable to the lender. In addition, the lender can check references and credit histories from the investor.
Educational: A private lender has the opportunity to learn from and study real estate investing, by observing the entire process as an investor in it.
Community Involvement: The private lender has the reward of knowing that s/he has helped in improving and revitalizing a neighborhood, offering affordable housing for an end-buyer, and played a small role in saving the world…one house at a time….
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