As the economic scenario continues to evolve rapidly, an increasing number of people are exploring alternative investment options that can bring better returns than the traditional avenues. High net worth individuals especially are increasingly eyeing private lending as a viable investment opportunity due to its many attractions. An outline of the many reasons why becoming a private lender is so lucrative:
You Are In Complete Control over Your Money
As a private lender, you have the ultimate decision-making powers governing acceptance of funding proposals by borrowers and setting the terms and conditions, including the rate of interest and the loan period. This essentially means that you are in full control over the deployment and quantum of investment. This is a matchless advantage that no other mode of investment perhaps can offer. For example, when you invest in bonds, you cannot exercise any control over what will be done with the money that is supposed to be invested in an opportunity to fetch you the returns, however, as a private lender, you know every detail of the proposal of the investment opportunity where your funds are being deployed. This level of control over your funds helps you to balance your portfolio in a manner that is required to fulfill your financial objectives.
Certainty over the ROI
Perhaps the most significant difference between private lending and other investments is that you know exactly what return you are going to get because the money that you have lent is subject to the terms and conditions specified by you. In any other type of investment option, you have no control over the use to which the money will be put to and nor are there any guaranteed returns except for fixed coupon rate bonds that yield relatively far lower returns. When the money is invested in the stock market or with a financial planner, there is no certainty of the returns you will get; if the markets are buoyant, you will get good returns, however, you may even end up making a loss if the market slumps. According to https://www.forbes.com, it is better not to compete with other players too aggressively and follow a conservative approach when there is market turbulence.
Shorter Investment Period
Normally, when the period of investment is short, the return is low, however, in the case of private lending, the periods of investment are rarely over 12-18 months but fetch handsome returns especially when the advances are made to real estate investors engaged in fix-and-flip operations. Even on a diversified portfolio, it is not uncommon for private lenders like Liberty Lending to achieve annualized returns of 8-12% on their investments. When compared to the CD rates of some of the leading banks that hover around 2%, the difference in the return is extremely lucrative. The shorter tenor of the loans also means that you get back the principal and the interest faster and stay on top of investment opportunities as they emerge.
Strong Collateral
When you are a private lender, you are sure to get more peace of mind, contrary to popular belief. This is because even though you may be lending to individuals without any proven creditworthiness or going through any document verification, the loan is backed completely by a hard asset in the form of real estate. In case there is a problem that is faced by the borrower that leads to a default scenario, the property can be foreclosed and sold off relatively easily without any value attrition since real estate prices tend to be generally stable in the short terms. With a maximum loan-to-value ratio of 65-70%, there is little chance of the investment going bad and the lender losing money. Also, with so much skin in the game, every borrower tries his best to not to default and spoil his market credibility unless forced by circumstances.
Most Passive Real Estate Investment Possible
Normally to benefit from real estate investment, you need to be an expert builder or developer so that you can spot a market opportunity, buy a property that is undervalued, and fix it so that you can sell it off at a profit. Otherwise, you may need to buy vacant land, build a home or a residence or a commercial building that you can either sell or let out to tenants. Whatever is the scenario, it requires extensive experience and exposure to high risk with only the promise of high returns making it worthwhile. However, acting as a private lender you can distance yourself from all this hassle and invest in real estate in a passive mode. You have no responsibility of finding a lucrative opportunity or even get your hands dirty in renovating it. There is no need to find genuine tenants and then go around collecting rent every month, spending time, effort, and money in property maintenance, pull permits or even try to sell it off. All that you need to do is to evaluate the loan application, vet the market value of the property, execute the loan agreement, and provide the funding. The monthly payments come into your bank account automatically, at the end of the period, you collect the principal and you are home and dry.
Conclusion
For individuals with access to a large amount of cash or who can get together a group of high net worth individuals, private lending can be immensely lucrative. Not only is the return on investment easily one of the highest possible in contemporary markets but also, they are assured of complete safety due to the presence of hard asset-backed collateral and complete control over the end use of the funds. In perhaps no other investment method can the investor have an assurance of fixed and guaranteed returns, steady cash flows, and a short investment period that gives the opportunity of rolling the cash over several times in a year for maximization of investment potential. Of course, as a private lender, you will need to assume control over the cost of the funds being invested to ensure that the return on investment is sufficiently lucrative. Private lenders also need to be seized of the local real estate market conditions and possess a method of evaluating deals that minimizes the chances of defaults by the borrowers.