If you are like many investors that have seen their stock portfolio values drop significantly over the last few years, you have probably been looking for a safe alternative to the stock market. During your search you may have come across Private Lending (also commonly called Trust Deed Investing). So, what is Private Lending?
Private Lending is simply lending money secured by real estate, but what does that mean exactly? Let’s take a look at an example of what a typical investment as a Private Lender would look like.
Let’s say you happen to know a professional real estate investor that finds great bargains on single family homes and can buy homes at significant discounts. The real estate investor often needs to raise money from private individuals to fund the purchase of the property. You offer to become a Private Lender to that real estate investor and here’s what you agree.
He has found a property that is worth $200,000 that he can buy at a big discount. The property needs some repairs to bring its value back up to $200,000 but he can buy it and fix up the property for a total investment of $140,000.
You, as a Private Lender, agree to loan the investor $140,000 to purchase the property, complete the repairs on the property and market it to a buyer. You and the investor agree that 10% would be a fair interest rate for the money you are lending secured against the property. You also agree to accept payments from the real estate investor for the amount of interest earned by your investment each month.
In this case, you are getting a fixed 10% rate of return on your investment of $140,000 and it is secured by an asset that is worth more than the investment you are making. When the real estate investor sells the property, you are paid back your full investment and the final interest payment.
Can you see why getting a fixed rate of return of 10% secured against an asset that is worth 42% more than your loan amount is a very attractive alternative to investing in the stock market that can go up and down in value?