If you invest for the long-term, you will begin to have excess funds to invest in different ventures. The stock market is a store of wealth but is not a wealth generator. The stock market returns are usually about 4-10% annually, but not a way to obtain lots of money. The idea is to bring in lots of money and put it into the stock market to keep it growing.
Since we focus on building our four types of passive income (retirement, investments, rental, and business), our bank accounts will start growing more and more. Having excess money means that we will have money to put to work.
Private money lending is a great way to earn 10-30% returns without taking on too much of a workload. Let’s take a look at the pros and cons of using your excess cash to invest in real estate through other people’s visions.
Is Real Estate Wholesaling Right for You?
Definition of Private Money Lender. A private money lender is someone who loans money to another individual or business. In our case, it will be for real estate investors. The most significant risk for a private money lender is ensuring that the loan applicant is credit-worthy- meaning they can pay back the loan.
Finding investors to start a loan. Finding solid investors will be the most challenging part as an early private money lender. We can break down the different types of investors by echelon.
Echelon 1. Echelon 1 will be your inner circle. These people will be from your friends and family. Yes, it is risky to lend to the family because maintaining the relationship is of utmost importance. However, knowing someone closely also opens up significant investment opportunities.
For example, my sister lives in Kansas. If I am researching the housing market around the Kansas area, I may see great deals that are not available here in Florida. Now, we may be able to combine forces and start investing in the Kansas area. Ideas like this are tremendous and can leverage relationships to grab opportunities otherwise not available to us.
Echelon 2. The investors under echelon 2 are friends of friends and family. You will probably not reach these types of investors until you have done a few deals with close family and friends. Once you get your name out there as a stable investor, you will start to get referrals from friends and family.
How to Leverage Real Estate at Any Age
During echelon 2, you will need to start requesting investing portfolios and resumes and also business plans. Since you may not know this person directly, you need to check their credit-worthiness and track record. It will be a good idea to have a standard list of questions or applications. Doing your due diligence is a must at this level.
Echelon 3. Now, you may have created a website or business cards. Real estate agents also should know who you are. You will start to have house-flippers and rental investors coming around to ask for loans. You probably have formed an LLC because your business has become a lot bigger.
Echelon 3 is where many people make their passive income. If you can get an assistant to handle most of the paperwork, you can become a front-money style person. Once your assistant lines everything up, you look it over and lend the money out if you feel confident in the investor and investment. Your decision is based on the investor’s presentation, credit, and investment history. If they have a track record of successful house-flips, they are probably a reliable investment. Echelon 3 is a great place to be for retirees. The investors seek you out and come to you. You no longer have to search for real estate deals.
Use Real Estate as Your Wealth Generator
Pros of being a Private Money Lender. As I said earlier, you can receive a great return on your investment. You will have to look at lending laws in your state, but you could charge 10% interest plus points. Or you could ask for a percentage of the property’s capital gains when it sells.
When you lend money, you will use the home as collateral. If the project doesn’t finish, you can take them home and either finish it or sell it. You shouldn’t be left in the cold if the deal is structured correctly. It is essential to have a smart tax and legal team.
Cons of being a Private Money Lender. There are risks inherent in all investments that make you income. You should only be using a small percent of your overall wealth to lending privately. If you had $1 million in assets, maybe you would limit your private money lending to $100,000 at one time. You can mitigate most risks by using referrals, credit reports, project history, and building rapport. You can have a couple of house flippers that keep returning to you for cash. Once you have a good connection, you wouldn’t need to seek out more investors. That would be the ideal situation.
My take on private lending. My Grandpa was a private money lender. He gave small loans to people that could not get any credit. Watching him work when I was younger was terrific. People were able to build up their credit by paying him back and becoming trust-worthy. He was ahead of his time. I believe this is an excellent way to earn a return on your investment for people who don’t mind dealing with others. I can see myself using private lending with a small amount of my net worth. I would like to do some investing with my children.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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