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You are here: Home / Featured / 5 Benefits of Investing in Real Estate Through Private Lending

5 Benefits of Investing in Real Estate Through Private Lending

May 8, 2015 by Average Joe 11 Comments

Real estate investing is a key ingredient for creating a long-term investment plan that will maximize your wealth and can even lessen your risk. But it seems like there are limited options available to you, considering most investors don’t have the necessary time or experience to do it successfully. You can:

Purchase your home. Although this is considered more consumption than investment, this is still an investment in real estate with potential appreciation.

Purchase rental property. Most people have heard about the ups and downs of owning rental properties, but collecting monthly rent from tenants is great way to generate income. The downside is the need to manage the property yourself or hire a property manager to directly handle tenant and property issues.

Purchase REITs. Similar to purchasing stocks, a real estate investment trust is a corporation that raises money by trading on major exchanges, and it pays investors 90 percent of its taxable profits via dividends.

Buying real estate doesn't necessarily mean dropping a ton of cash into the ground.

Buying real estate doesn’t necessarily mean dropping a ton of cash into the ground.

Besides these options, there’s another that the majority of real estate investors are unaware of: investing in real estate through private lending. As a private lender, you essentially become the bank. You lend your money to other investors (borrowers) and charge an appropriate interest rate for the use of your money. Here are some of the benefits of real estate private lending:

1) Monthly cash flow: The borrower pays you interest every month, which is typically between 8 and 15 percent.

2) Security: Your investment is secured by a lien on a tangible piece of real estate. That gives you collateral when lending your money, aside from just the soundness of the borrower. Typically, you shouldn’t loan more than 75 percent of the property’s current market value, giving you some cushion in the event that the property’s value decreases.

3) Diversification: Real estate private lending gives you the ability to diversify your portfolio — and not only from a real estate perspective. If you want to create current income, it’s another fixed-income option.

4) Lower volatility: You can better manage the market risk if you keep your real estate loans short term.

5) Passive investment: Instead of learning the nuances of real estate development, construction, management, etc., you can lend to other experienced real estate investors who do all the work. You just act as the bank and receive interest payments, and your money is returned at the end of the investment.

Being a real estate private lender is a great way to get exposure to real estate without doing all the work. But you still have to understand some of the risks involved. The market value can cause properties to quickly increase or decrease in value due to local and national factors.

Borrower credit can also be volatile; you need to make sure the borrower is in stable financial condition and can pay back the loan. Also, verify that the borrower’s investment strategy is solid.

Finally, make sure you have good legal representation to draft loan documents, coordinate the transaction, ensure your loan is properly recorded, and see that agreements are in place to protect you as the lender.

Real estate private lending is a great way to get exposure to real estate and generate passive income for your investment portfolio. As with any investment, you need to understand the risks involved and do your homework before jumping in headfirst. But if done right, real estate private lending can generate some of the best risk-adjusted returns in the marketplace.

Jeff Carter is the managing director and founder of Grand Coast Capital Group, where he oversees all aspects of the business. Grand Coast Capital Group is a national private lending firm based in Boston that provides creative short-term financing to real estate investors, builders, and developers across the country.

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Filed Under: Featured, Investing, investment types, Real Estate, successful investing

Comments

  1. Mark Daniels says

    June 1, 2015 at 1:53 pm

    I’ve been looking into real estate and the benefits it would offer me. Reading here, if I were the private lender, then the cash flow that would come in from the loan would be 8%-15%, which is very nice. Just knowing that I would be having residual income is very enticing to me and motivates me to get involved.

    Reply
  2. Veronika Dalton says

    September 29, 2015 at 4:22 pm

    Real estate investments are great for long-term revenue. My family is purchasing condos in a local recreation hotspot and hiring a property management service since they live a few hundred miles away. I think this is a really smart way to generate some extra cash to retire early. They already make some excellent money driving trucks in a mine, and use that to add to their savings.

    Reply
  3. KimberlyGayeta says

    November 22, 2015 at 10:13 pm

    Great post! I strongly agree with your points! Real estate might be too risky but everything invested will surely pay off and yeah, you can definitely earn without doing much work.
    More power to your blog!

    Reply
  4. Christina says

    October 25, 2016 at 2:15 pm

    Your points about passive investment and a diversified portfolio are clear benefits that will stand out to certain visitors. The ability to take your hands off of an investment and have a diversified portfolio will sound inviting to many of them.

    Reply
    • james says

      November 1, 2016 at 11:46 am

      There is no such thing as passive income. All income requires activity to generate it.

      Reply
  5. Sam Elgohary says

    October 26, 2016 at 5:23 am

    Awesome! post, there’s no doubt you can earn from real estate investing but @KimberlyGayeta it’s not true we have to work day and night and even on weekends to gain profits and as @Jeff says you also have to understand the risks involved in real estate. So it’s not “SO EASY” but only for those who understand the terms, conditions, and in-outs

    Reply
    • james says

      November 1, 2016 at 11:45 am

      That was a pretty good article, but it doesn’t say HOW private investors can get started.

      Reply
  6. maria kunis says

    November 21, 2016 at 4:21 am

    Hi AVERAGE JOE !!!

    It’s been really nice to read such post.I really appreciate it.Real estate investing is a key ingredient for creating a long-term investment plan that will maximize your wealth and can even lessen your risk. But it seems like there are limited options available to you, considering most investors don’t have the necessary time or experience to do it successfully

    Keep posting
    Have a great day

    Reply
  7. Durise says

    December 10, 2016 at 1:56 am

    Monthly cash flow is an amazing benefit of real estate investment. Though the real estate sector is such a good place for investing.

    Hi Joe, you did a good job by sharing this article with us. Pretty good article for real estate investors. I enjoy this article, Hope you will continuously share your articles with us. Thanks.

    Reply
  8. Angus Reed says

    February 6, 2017 at 7:37 am

    Thanks for sharing this informative article with us. It is really helps to real estate investor to take an interest in the real estate industry and grow income.

    Reply
  9. Jacob Owens says

    February 16, 2017 at 2:00 am

    Hey
    I recently got the property through private lending company.Private lending involves real estate investor borrowing money from a private individual in exchange for the investor paying interest to the private lender. At the end of the loan term the investor pays back the principal to the private lender.
    Thank you for sharing informative article.

    Reply

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