For many, wealth creation is both the dream and the goal. Real estate investment is one of the well-known ways to achieve long-lasting wealth. However, investment generally has a golden rule – don’t invest in what you do not understand. Real estate investment particularly requires a proper foundation and knowledge to tap into its lucrative potential.
One issue that investors are often interested in gaining knowledge about, is how the money they gain from a profitable career can be put to use. Simply saving up and leaving your hard-earned money in a savings account serves no purpose in protecting and growing your assets.The option investors commonly consider is reinvesting into properties. We would like to bring to you an alternative you probably haven’t considered: Private Lending.
Welcome to Private Lending 101.
There are certain need-to-know fundamentals for anyone looking to add private lending investments to their portfolio or retirement account. We’ll be looking into these basics of what you need to know about the subject of private lending, which is a great way to add passive income from real estate to your retirement account without owning rental properties.
You should consider private money lending to:
- expand your portfolio;
- invest income, savings or a cash surplus;
- gain a passive income investment.
Private lending is essentially when a private individual takes the place of the bank in the real estate investment cycle.
Private Lending has three fundamentals: a borrower, a lender, and a lot of paperwork. This form of lending involves investors lending their own capital to other investors or professionally managed real estate funds, while securing said loan with a mortgage or lien against real estate. Often, investors in real estate look for some extra cash in order to acquire and/or rehabilitate properties. Sometimes, the goal is to ‘fix and flip’ a home or and in other times, to keep it as a rental. Either way, investors will need cash for the purchase price, closing costs and any renovation work.
Real estate investors need to actively work on securing private money loans to fund their deals. This is where private lenders come to play. Instead of acquiring a loan from a bank in the form of a mortgage, a real estate investor gets the loan, which is secured against a property, from a private investor.
This has benefits for both the real estate investor and the private lender:
For the investor, this serves as a great alternative to traditional institutional lending. It is accessible, fast, and often more flexible on terms than a bank or hard money lender would be. In some instances, the investor might find it difficult to obtain bank financing due to the loan size or might not meet the strict requirements from the bank for proof of income or debt to income ratio. This method of using borrowed money or leverage is also what makes real estate investing so potentially profitable.
On the other hand, the lender enjoys a hands-off way to put his or her cash or retirement account to use in generating dependable monthly income at a great rate of interest, whilst using real estate as security for his or her investment. In many ways, this process can be less risky than owning real estate. Private loans are also very flexible, allowing lenders to negotiate exactly how, and when, they will be paid back for the loan.
Considering this, private money lending is an excellent avenue for passive wealth generation for many decades to come.