Be a Part of the Know! – Private Lending
As the U.S. housing market continues to decline, and as credit becomes increasingly difficult to attain, new investment trends are developing. One of the largest and most profitable trends developing today is the concept of Private Lending. This is not a brand new trend, but the participation in Private Lending opportunities is increasing tremendously. Private Lending opportunities are direct loan investments to established, active, hands-on real estate individuals and companies; these opportunities are not offered to the general public. In other words, you need to “be in the know” to have access to these investment opportunities. In the real estate arena, Private Lending is used for just about any type of project - private funds could be raised to conduct activities ranging from land developments, foreclosure purchases, rehabs, rental or retail home construction, discounted notes, to any other type of real estate activity. Private Lending can also be utilized for just about any size project – from a single family rehab and flip to multi-million dollar deals. With this type of investment, you are lending funds to the individual or company that is controlling the project and not investing in the real estate itself. This is a passive approach to real estate investing that can prove to be very lucrative for the investors and the project manager.
One of the first steps with real estate investing is to determine if you desire to be an active participant in your investments, or if you want to take on more of a passive role. Do you want to own the real property, organize repairs and maintenance, deal with tenants, etc., or do you want to help fund projects that others are doing? Both strategies have their pros and cons, and PropertyVestors offers opportunities for both types of investors.
Today’s market is creating good opportunities for active investors using strategies such as:
1. Buying unique, one-of-a-kind properties that makes sense in any market;
2. Picking up properties at very low prices in absolute great markets that are sure to return;
3. Participating with builders in creating model homes or unique rentals in a great area.
However, a growing number of investors are trying to ride out the present real estate decline with their current holdings and are only interested in investing funds in other projects rather than taking on more real property as assets. And, a lot of active investment opportunities fall outside of the capabilities of individual investors. This is an ideal opportunity to become a passive investor and take advantage of the growing number of available Private Lending opportunities. Private Lending is a great way to pool resources with other investors to take advantage of opportunities that may be out of your investment scope. It can be as simple as forming an LLC with other investors and investing in a project as one entity. When the right project becomes available, PropertyVestors can help you organize this process.
Why are Profitable Private Lending Opportunities Available?
Very simple….. Builders, land developers, rehab specialists, foreclosure specialists, etc, all have access to more deals than their capital or credit can handle. In today’s market, there are some very good deals out there for those with capital, credit, and time. One of the major difficulties for those “in the know” is that even though they may be very solid financially, they do not have enough capital to finance every good project they come across, nor will lenders let them do more than a couple projects at a time; especially now that lending qualifications are tightening up. Private Lending allows active investors to find funding for their projects from passive investors, and in most cases interest rates are higher then you can find elsewhere and the investment is secured by the real estate.
For example, PropertyVestors recently funded a development in West Virginia with $2.4 million from a small group of investors. This investment is returning 20% annually over two years and is secured by the land itself and a government bond. The developer did not want to find the funding through traditional lending, and this approach allowed them to avoid all of the bureaucracy and red-tape of the traditional lenders. The developer is paying a slightly higher interest rate, but the ease and flexibility of the transaction more then makes up for that higher rate. For many Private Lending opportunities, investors can even consider using IRA funds for the investment and get tax deferred returns. The difficult part is that you need to have access to these opportunities, and in many of cases, you must qualify to be a part of the investment.
Fundamentals of Private Lending
In most real estate investments, you are purchasing a piece of real estate and will end up holding title to that real property. In the case of a Private Lending, you are providing capital to companies that own the real property. You are providing the capital to purchase and/or make improvements to the real property, but you do not have ownership in the property. Most of the time, the security in these investments is still the real property, but you do not have any ownership rights. The security could also be other assets, monetary vehicle (such as government bonds), or personal guarantees.
Because of this difference, the laws governing the investment are different. In more traditional real estate purchases, you are governed by real estate laws, and for Private Lending, you are governed by securities laws that are under the jurisdiction of the SEC. Because of this difference, the way such investments are marketed is also different. For a traditional real estate investment like a condo on the beach, you might see billboards, glossy flyers, and every broker in town promoting. In the case of Private Lending, you will not see it marketed publicly. Private Lending opportunities are handled privately among individuals having pre-existing relationships (a closed network). Without going into extensive detail about the SEC and their requirements, one of the most stringent requirements to qualify for many Private Lending opportunities is not only to have access to the projects through a closed network of investors, but also have significant investment capital and/or experience. Although not in all cases, many Private Lending opportunities will require you to be an accredited investor.
What is it?: Accredited investor is a term defined by various securities laws that delineates investors permitted to invest in certain types of higher risk investments (including real estate), limited partnerships, hedge funds and angel investor networks. The term generally includes wealthy individuals and organizations such as a corporation, endowment or retirement plans. For our purposes, we will focus on individuals rather then organizations.
In the United States, for an individual to be considered an accredited investor, he must have a net worth of at least one million US dollars or have made at least $200,000 each year for the last two years ($300,000 with his or her spouse if married) and have the expectation to make the same amount this year. This rule came into effect in 1933 by way of the Securities Act of 1933.
The exact definition comes from the federal securities laws, Rule 501 of Regulation D , and is as follows:
1. A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
2. A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.
Why?: The SEC has established criteria for preventing people who perhaps need more investing experience from investing in unregistered securities and/or real estate opportunities that are less well known than stocks and bonds. The idea is that the SEC is trying to protect investors that lack the needed investing experience and/or disposable capital to get involved in higher risk investments. There are some assumptions that go along with being an accredited investor. An investor who meets the foregoing standards is considered an accredited investor, and should also meet at least one of the following criteria:
A) The accredited investor or his professional advisor can be reasonably assumed to have the capacity to protect his own interests in connection with the transaction by reason of his business experience or the business or financial experience of his advisor.
B) The accredited investor can reasonably be assumed to be capable of bearing the economic risk and can reasonably be assumed to not require immediate liquidity pursuant to his investment in the project.
C) The accredited investor can reasonably be assumed to have net worth adequate so as investment in the project does not exceed ten percent of the investor's net worth.
Benefits of meeting these standards:
- If you fit into this category you may be eligible for many investment opportunities that other investors are not allowed to participate in.
- The key is that many higher risk, and thus higher reward, investments are only available to qualified “accredited investors.”
- The main benefit to qualifying is that you gain access to investments, and greater returns, that “average” investors can not access.
- Quite simply, it comes down to convenience and privacy for the investment managers. By marketing investments only to accredited investors, a fund or company can avoid many of the filing requirements to which most public companies are subjected.
Utilize Self-Directed IRA’s to Increase Profits with Private Lending
In the September issue of InvestingSherpa, we introduced Self-Directed IRA’s as one of the most powerful and under-utilized investment tools available today. Self-Directed IRA’s are gaining notoriety, and more and more people are using their IRA funds to invest in partnerships, franchises, mortgages and real estate. At the same time, the investment tool is not widely known or used; only 4% of all IRA’s are categorized as Self-Directed. A tremendous amount of wealth is held in retirement accounts, yet only 4% of these accounts allow the investor to direct the investments! The tools are available that allow you to take control of your investments and your savings for retirement. Diversification is key with any investment strategy, and this diversification does not mean just diversified stocks, but also diversified with real estate. It is time to take control of your investment strategies and your retirement. A Self-Directed retirement account will give you more control and more options with your money.
Federal Reserve Chairman Ben Bernanke attributes much of today’s housing slump to the recent rise in mortgage rates. Rising numbers of mortgage defaults and mounting foreclosures are key factors that have forced many lenders to increase their rates, cancel promised loans, and even go out of business. Many would-be home buyers have discovered that credit is increasingly hard to come by.
The housing slump is not bad news for all, however. A growing number of investors are taking advantage of the ailing lending market to expand their own investment portfolio through Private Lending. By providing cash leverage at better credit rates or through less-stringent loan qualification requirements, private individuals are filling the gap created by skittish mortgage companies.
Once the domain of the wealthy elite, Private Lending has been discovered by those with a moderate amount of funds in their IRAs and 401(k)s. Thanks to the Employee Retirement Income Security Act of 1974 (ERISA), retirement account holders can “self-direct” their funds into a wide variety of investments, including Private Lending. These self-directed accounts enable investors to diversify their portfolio into potentially more secure and lucrative areas outside the volatile stock market.
At PropertyVestors we have been seeing a tremendous increase in Private Lending. Our investors are finding self-directed retirement accounts a lucrative way to invest in safe opportunities while still obtaining double digit returns. With the flexibility self-directed retirement accounts provide, investors can take immediate advantage of market trends, such as the one we are currently experiencing.
Some private lenders work directly with borrowers, while others work through mortgage brokers or real estate companies eager to move properties. Many private lenders looking for investment opportunities check out websites like Prosper.com, an online community of lenders and borrowers that works similarly to eBay. Although Prosper is still in its infancy stage, PropertyVestors does have a group created to take advantage of this growing trend. Most of our Private Lending at this point is done through traditional promissory notes. In addition to funding a development in West Virginia, we are actively funding projects in Charlotte, NC and Richmond, VA with organizations that have a successful business model in place.
Despite current economic ills, Private Lending offers the promise of excellent investment returns today and the potential for even more profitable opportunities in the future.
Use Private Lending to Grow Your Net Wealth with Smart Strategies from PropertyVestors
PropertyVestors is an investment group of CEOs, entrepreneurs and savvy real estate investors that are taking active steps to maximize their profits, while minimizing their risk by creating a diversified real estate portfolio. Investors are able to easily apply diversity in real estate geographically and by asset class through its various investment strategies and types of inventory.
Furthermore, PropertyVestors enables investors to capitalize on different market conditions. The strategies include conservative, Private Lending options; moderate with preconstruction syndication; and aggressive with developer deals in emerging markets, coastal regions and waterfront properties.
With PropertyVestors, you can take advantage of a new investment model and innovative real estate strategies. Education is also provided on how to take advantage of 1031 exchanges. PropertyVestors’ real estate strategies and ongoing education can position you build your net wealth, while minimizing risk.
To learn more about these topics, visit www.propertyvestors.com, sign up with the investment group by becoming a FREE Basic Member and receive our eBook: “Capitalizing on Real Estate in Today’s Economy” and the monthly newsletter “InvestingSherpa.” For general information about PropertyVestors or its offerings, email invest@propertyvestors.com or call 1-877-90-BUYER.
About The Author
Sarah Barry is the founder of PropertyVestors (www.PropertyVestors.com). PropertyVestors is a successful real estate investment group that creates above-market returns at below-market risk. Access to PropertyVestors' three smart real estate strategies enables investors to achieve double to triple digit returns on their real estate investments.
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