5 REASONS TO LEND MONEY
Discover a safer, clearer way to grow your net worth
Mark loaned $100,000 to Suzanne, a real estate investor he knew and trusted.
Suzanne and her team used the money to fund renovations on a property. They completed the renovations, sold the property, and paid Mark back his $100,000 plus interest, in a short period of time. Both were very pleased with the transaction.
It is an age-old practice, loaning money for real estate transactions.
Mark knew how it all worked because he had taken out loans several times over the years to buy cars and houses. And he paid the loans back with interest.
This time he was the lender. He was the one earning the interest. He was the one in control, setting the terms.
Mark had invested his savings in a variety of ways, such as in mutual funds, individual stocks, and a small rental portfolio. He added lending to his investment plan, private lending like the loan he made to Suzanne and her team.
Mark’s loan was secured by the property Suzanne was renovating. He as lender, and she as borrower, drew up and signed a mortgage and a promissory note, putting everything in writing.
He and Suzanne negotiated terms for the loan, including the interest Mark would receive, the payment schedule, etc. Mark made sure the terms met his needs and were agreeable to him.
With the property as collateral Mark gained peace of mind with this investment. He knew the relative safety of this kind of investment. He liked the clear, favorable return he would receive.
Being the lender can be an avenue for you to use, like Mark, to grow your net worth.
When done correctly, lending on appropriate real estate projects can be a low-risk, high-return investment, benefiting both you as the lender and the real estate investor as the borrower.
5 REASONS TO LEND YOUR MONEY FOR REAL ESTATE TRANSACTIONS
In the next sections, we will explore 5 reasons or benefits for loaning your money to fund real estate transactions. This can be a winner for you as you grow your net worth.
REASON #1: CLEAR RETURN ON INVESTMENT
You can be clear on the return you will receive when you loan money.
Most of the assets in which we are invested do not have clear returns.
For example, we don’t know if the stock we buy will go up or go down.
But, Mark negotiated the return, or interest amount that he wanted and was clear on what the return would be on his investment. No more hoping he would do well. His return on investment was clear.
Lending provides clarity of return.
For example, buying a certificate of deposit from a bank, a CD, is like lending the bank the money. You agree on and know that the rate of return will be 2% or 3%. It is clear.
Or, take the bank which loaned you the money to buy your house. You locked in a rate of return for the bank when you signed the mortgage. They were clear that it would be 4.2% or 3.8% or whatever.
This is one of the primary advantages of loans – clarity of the return.
Mark’s attorney drew up a Promissory Note, a legal document that clearly spells out the terms of the loan. It obligated the borrower to pay back both the amount loaned and the clearly stated interest on that amount.
Mark received exactly what he expected.
REASONS #2: SECURED WITH REAL ESTATE
Another advantage Mark received with his real estate loan is this: It was secured with the real estate. Real estate has real value.
Mark learned about the project the real estate investor had planned, knew the location and value of the property. He also recognized the value the property would have when it was renovated. The property provided excellent collateral for his loan. This gave him a sense of safety. And in the event he did have to foreclose there was enough equity to do so and still come out ahead.
His attorneys drew up a written mortgage, a proven real estate loan document, and filed the mortgage at the Courthouse as a public record.
Mark also made sure Suzanne and her team had an adequate insurance policy in force on the property, another way of mitigating his risk. This included both property insurance and title insurance.
The mortgage and insurance protected Mark’s investment.
REASON #3: HIGHER RETURNS
Mark was able to get a higher return on his loan than he would have received with some of his other investments.
Suzanne was willing to pay this higher return to Mark because she needed this funding to make the project work, a project which would prove to give her a good return on her time and effort and money invested, as well. She saw this as a “win-win” situation for both Mark and her.
Many ordinary people like Mark and like you are receiving clear returns of 6% or 8% or more, depending on the scope of the investments.
Private money lenders are growing their net worth every day through the excellent returns they receive from their lending to real estate investors.
REASON #4: LESS TIME
Mark realized he could have chosen to be an “equity partner” in a real estate deal. This would have other risks and benefits. But Mark chose to be a “lending partner”.
Often in multi-family properties “equity partners” commit to five years or more.
Mark was able to negotiate a 24-month term on his loan with this particular deal. This shorter time period suited Mark’s investment strategy better than the long-term commitment.
He was in and out in a bit less than the 24-month timeline, earning money the whole time.
Some lenders on some real estate transactions can move their money even more quickly. Mark liked having his money work for him. He was ready to make another loan as soon as this one ended.
REASON #5: PASSIVE INCOME
Mark was a “passive investor” in this particular real estate project. This means he was not spending time actually working the renovations.
Suzanne and her team were active partners. They put a lot of time and work into the project.
They developed plans, worked the plans through the zoning and city departments, hired contractors and bookkeepers and property managers, and were constantly making decisions and taking action. And they received an appropriate return on their effort. They enjoyed what they were doing as active partners.
Mark, on the other hand, was “passive”. He enjoyed getting a good return without having to put in the work. He was letting his dollars do the work for him.
He built a relationship with the real estate investor and came to know, like, and trust her. He made sure he understood the project, asking a lot of questions upfront. He had his own attorney review the documents. He signed the required paperwork.
Then, he relaxed, slept well, and cashed the checks he received for his interest payments.
DID YOU KNOW YOU CAN LEND OUT OF YOUR IRA?
You can lend money from your IRA for someone to purchase and improve a real estate property. You can.
There is such a thing as a “Self Directed IRA”. In addition to the standard stocks and mutual funds, within “Self Directed IRA” you can invest in other assets such as real estate.
Just as with your other investments, the gain will be tax-deferred or tax-free, depending on the type of IRA you use.
There are several excellent “Self Directed IRA” custodians around the country. Ask and we can tell you some that our investors use.
Lending with your IRA is an excellent way of growing your retirement funds.
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Harland leads our Investor Relations. He is a “repurposed” Pastor and Army Chaplain. He is an author, speaker, mastermind facilitator, and coach. Harland lives with his wife, Barbara, in DeLand, Florida.