Someone once said if someone offers me a guaranteed return then it guarantees they will make more. And if both parties are satisfied then it’s not a bad arrangement. Individuals need to be savvy with their money.
When I first began to investigate this thing called private lending I was concerned that it was a scam. Yet the more I looked at it I realized that anyone who has ever opened a savings account at a bank, invested in a CD, or has an IRA is a private lender. In each of those instances there is someone or some institution that will pay us an interest rate so they can use our money to make more for themselves. As I said before, that’s not a bad arrangement but it did beg the question, could an individual safely make more for themselves.
Banks have existed for centuries for a good reason – they are profitable. Individuals can do this and participate in some of the same benefits through something called “private lending.”
What is a Private Lender? Private lenders are individuals with money to lend for investment purposes. They may or may not be wealthy, but they do have excess cash or assets available over and above what they need to live on. These individuals are willing to lend for a higher return than they can get with bank CD’s or money markets. They usually lend against assets but will, at times, lend unsecured.
Private money lending became very popular as interest rates on traditional Money Markets and CD’s dropped below 5%.
People with extra cash started looking for higher interest rates. So if they could get the high interest rate and enough security (collateral) they were willing to do loans without personal credit or the need to be worried about credit scores. That started the revolution that you see today where private money lenders are as big and popular as other types of lenders were 10 years ago. This trend toward private money will remain as long as the rate of return is greater than bank interest rates.
Though a private lender can be found in the art world, the auto industry, the antique’s arena it is most often found in the real estate market. I will confine my investigation to the real estate industry.
One warning that I must immediately give is you should never give your money directly to the real estate investor. Instead send it to a 3rd party like the closing attorney or title company. If someone asks you to give him or her your check directly then do not even consider doing business with him or her. When the funds are distributed at the closing table to the investor it assures you that all the proper documents were signed and recorded for your protection.