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Private
investor loans can offer double digit returns on your money, and
can be structured to minimize risk associated with your
investment.
Private
investor loans, or trust deed investing, is basically making
loans secured by real estate. As the private investor, you
become the bank and earn the interest on the loan you make.
There are a
couple basic ways to participate in private investor loans.
You can invest in individual loans, where you are the only
investor, you can fractionalize individual loans, or you can
invest in a private money pool. We will take a look at
each of these methods.
Investing in
individual loans has both pros and cons. Typically being
the sole investor requires more capital than if you participated
in a private money pool or a fractionalized loan. This is
because you are funding the full loan amount. The benefits
to this, however, are that you choose the loan you want to
invest in, and you are the only investor on that loan. If
something should go wrong and foreclosure becomes necessary, you
control the process and eventually the property.
Fractionalized
private investor loans offer some benefits, but also come with
some disadvantages. The main benefit is the barrier of
entry. If you are fractionalizing, you do not need to have
the money to make the full loan amount. You can lend in
smaller chunks, which can allow you to diversify more. You
still get to look at every loan in which you participate, but
you are combining your money with other private investors money,
so you don't own the full investment, but a percentage based on
how much you invest.
The downside to
participating in these types of loans comes about if something
goes wrong with the loan. Should the property need to be
foreclosed on, you effectively become business partners with the
other investors on the loan. Oftentimes, these are people
you may not know.
The third way
getting into private investor loans is through a mortgage pool.
This is the most hands off approach, and can be considered the
safest. In this scenario, you invest in a private money
pool. A manager for the pool makes loans from the funds
available, and the investors realize a return loosely based on
the total return of the fund.
The upside to
this is that you do not have to make decisions on individual
loans. Also, you do not live or die by one loan, instead
realizing an averaged return based on all the loans in the
portfolio. The downside is that the returns are typically
less than what you would realize by investing in individual
trust deeds, and you have much less control over how your money
is invested.
If you would
like more information about getting into private investor loans,
feel free to call us directly. We are always happy to
answer any questions that you may have.
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