Investing in real estate is one of the fastest and easiest ways to grow your wealth. One of the main contributing factors to the speed of wealth creation is the use of leverage. Leverage is the ability to use OPM or Other People’s Money.
There are two sides to leverage—the investor who asks for the loan and the lender who has to analyze the investor and the project. You may start as an investor but move into the world of lending over time.
Welcome back to the Real Estate Lifestyles series (part 1), where we compare various real estate and investing worlds in getting an idea of what may suit us best. Today will be a good read for those who want to avoid construction, property management, and closings. Becoming a lender may be something that is more up your alley.
HENRY- High Earner Not Rich Yet
Real Estate Investor. The real estate investor gets a bad reputation sometimes. We always see them when they are busy dealing with clients, agents, lenders, contractors, and property managers. However, today I want to look at a more typical scenario where the investor owns and operates 2-4 properties.
I gave the book “Buy, Rehab, Rent, Refinance, Repeat” the highest recommendation for real estate investing. Although our investor today only owns four homes, we will still have to deal with the top four principal team members—property manager, lender, general contractor, and agent.
The real estate investor is always trying to increase his return on investment (ROI), as he should. Let’s look at how our small investor of four homes interacts with these team members.
Property Manager. With four homes, the investor may decide to do his own property management. Be warned that doing your own property management can tax your mind, body, and soul. It is a time-intensive endeavor. Becoming a landlord is not something he should take lightly. He should read “The Book on Managing Properties” before he makes this decision.
Lender. Although you deal with a lender when you first get a home, you will want to perform multiple refinances to maximize your profits. A Cash-out refinance can help you tap into your equity and use that money to leverage for other rentals, investments, and college.
Don’t Gamble Your Retirement Away 4
General Contractor. If you only have four homes, you will mainly deal with a handyperson. However, you may want to add value to your property by changing floors, adding rooms, or changing the landscaping. Knowing a good, trustworthy general contractor is a must.
Agent. An investor should always have a good real estate investor at his side. He may even want to sign up to be a real estate agent. Agents can help you find lenders, contractors, wholesalers, and property managers. They can also give you a comparative market analysis to ascertain the relative value of your properties. Agents know what is happening in the world around you.
As you can see, the investor has a lot going on at all times, even with four homes. There is always more value to extract from your properties, and your job is to find those ways. Being a real estate investor takes a lot of leadership and relationships. Let’s take a look at lenders.
Real Estate Lender. A real estate lender is more of a background support person to the investor. However, the lender is also an investor; she is just not at the forefront of the retail cycle. It makes sense that the lender was a real estate investor at one time. I want to look at three types of lenders today—professional lender, hard money lender, and private money lender.
Real Estate is a Mindset (Beginner)
Professional lender. The experienced lender works for a bank, credit union, or portfolio lender to review and approve loans. She has to learn how to screen, review, and question loan applications, credit reports, and project proposals. If you plan to get into the private lending business, being a professional lender wouldn’t be a bad idea.
Hard Money Lender. A hard money lender is a lender using their small company’s money to make short-term loans. A hard money lender bases her decisions on the project proposals. Investors usually use hard money lending when they are performing fix-and-flips or BRRRR investments. The interest rates on hard money loans are very high.
Private Money Lender. A private money lender bases her loans on the value, credibility, and reputation of the investor. She is usually in the investor’s inner circle. Private money may want a piece of the debt (loan) or equity (returns) of a real estate deal.
Real Estate Investor vs. Lender. Now that we have a general rundown of the two real estate individuals let’s compare lifestyles. The real estate investor is probably on the grind upwards. They may be trying to establish a nice stream of passive income from rental properties. They are constantly looking for the next deal or improvement to increase their ROI or NOI (net operating income or profit).
21 Passive Income Ideas
The lender is usually more seasoned; they should already have a pile of money. Deals come to them; they don’t have to search for them. Lenders can set up assistants to review prospective agreements beforehand and only keep the potential winners.
A real estate investor accumulates properties to build rental income. A lender gathers loans to make interest income. They both have to do their due diligence, but the investor is more of a mover and a shaker, and the lender is more of an office-based individual.
Getting started. Anyone can be a real estate investor, but it takes hard and soft skills. Being a people person is one of the soft skills it requires most. You will be dealing with professionals, and the only way they will assist you is to bring value.
A lender needs money to get started. You may need upwards of $1 million to become a hard money lender. As a private money lender, you may need much less. For example, your brother or sister needs a loan to finance a down payment on a property—that makes you a private money lender.
You’ll Need $20,000/Month Passive Income
Conclusion. Most of us won’t have the money to become a lender right out of the gate. Also, it is never a bad idea to have a portfolio of 2-4 physical real estate properties. Real estate helps us protect against inflation and recessions.
As we grow and age, we may want to wind down our days of real estate investing. Dealing with tenants can be tiresome. Transitioning some of our wealth into the lending business gives us a return on our cash without being in the stock market.
We can have a small portfolio of rental homes (2-4) and have a small private money lending business. We can make our personal money lending circle just between family and close friends.
There is always a budding real estate investor that we can mentor and help finance. They can go out into the world and build up their real estate portfolio. We can sit back and enjoy getting interest on our loans or taking part in our equity stake’s rental income.
What do you think about real estate investing and lending? There is room for a mature investor to take part in both avenues. Becoming a diversified investor is a hallmark of building generational wealth. Thanks for reading. Please follow us on Twitter for more free passive income PDFs. Enjoy and Happy Investing.
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