Unless you’ve been living under a rock, you’ve almost certainly heard everyone talking about the recent downturn in the stock market, driven by the Trump administration’s new tariffs and a steep decline in consumer confidence.
Americans have watched their IRAs value plummet over the past few weeks. For those who are about to and those who have already retired, this makes the concept of retirement financially difficult, if not impossible. And for those who are younger with retirement still looming far in the distance, optimism for the future is all but gone.
Does this mean that the American Dream, and with it, hopes of a comfortable retirement, is dead?
Absolutely not.
I still believe that the American Dream and our prospect of a comfortable retirement are still alive and well, but our path to achieving both requires a different approach than what has worked for the past several decades.
Today, economic conditions necessitate investing in assets that have intrinsic value beyond the emotional whims of the market. Those whims have led to the economic chaos that we’re experiencing today, so as investors, we need to steer clear of the assets that are prone to being manipulated by them.
Real estate is one of the few assets that is generally not subject to this erratic volatility, and because of that, it’s a far superior asset in general, but especially in today’s market. Now, when we talk about real estate investing, most people think of buying a property and then either holding it to rent out, or flipping it for a quick profit, and there’s a lot of merit to these approaches, but there’s another strategy that offers significant returns — with far less risk, effort, and time required on your part.
That strategy is to become a private lender, funding the deals other real estate investors are engaged in. In this equation, you simply provide the capital while they do all the grunt work, and earn a healthy profit in the process.
So in this article, I’m going to outline some of the reasons why you should be investing using this strategy, rather than the stock market or even traditional real estate investing.
How does private lending work?
As I mentioned earlier, private lending, also known as private money, is simply the process of lending your own capital to real estate investors, and earning your return from the interest you charge on the loan.
There are several ways to structure this type of investment. Some private lenders have a standard structure they’ll use for every transaction, while others will tailor their terms on each deal, based on factors like local or national market conditions, property details, and their relationship with the investor.
These loans are typically short term, ranging from a few months to a few years, unlike traditional mortgages which range from 15 to 30 or more years. This means a lender can redeploy their capital more often, generating profit far more quickly. They also come with a higher interest rate than a traditional mortgage one would get from a bank or even an investor specific DSCR loan — often a double digit interest rate.
In order to minimize risk, you’ll need to have a reasonable knowledge of real estate so that you can accurately underwrite the deals you’re funding. You can partner with a more experienced real estate investor, but being overly dependent on someone else does increase your own risk. Ideally, you should be knowledgeable and develop the experience necessary to analyze an opportunity from a technical perspective as well as trust your gut on your instinct alone. This is a powerful combination that leads to success in lending.
What are the risks?
I want to set realistic expectations here, because like any other investment, private lending does come with risks. Let’s be honest — if something sounds too good to be true, it almost always is, so anyone telling you that this is a risk free opportunity is lying to you.
That being said, private lending is one of the safest options because you’re lending on a property that an investor has already vetted.
This is a process called underwriting. Then, you will also conduct your own underwriting. And finally, your investment is secured by the asset itself, so if the investor doesn’t follow through on their payments to you according to the terms of your agreement, you have the legal authority to foreclose on the property. While that’s the least attractive outcome in most cases, it can lead to even greater profits in the long run, but this typically takes longer and is more costly to you in the meantime.
So in an ideal scenario, you’ll lend to an investor, they’ll do whatever they’re going to do with the property, then refinance or sell it with traditional funding, and in that process, your principal will be repaid. Along the way, you’ve earned a healthy profit from the interest payments up to this point.
How can I get involved in private lending?
A lot of people think they need to have tons of cash sitting in a bank to become a private lender. It’s an offshoot of the myth, “it takes money to make money.”
It’s true that you need money to lend in order to become a private lender. That much is obvious. But that doesn’t mean you need hundreds of thousands of dollars sitting around in a savings account at your local bank.
One way around this perceived limitation is to leverage your IRA account. Approximately 55.5 million US households, or 42.2% of all US households, reported owning individual retirement accounts (IRAs). These IRAs include traditional IRAs, Roth IRAs, SEP IRAs, and simple IRAs, according to the Tax Policy Center. So how does an IRA play a role here? It’s a simple process of converting your IRA into a self-directed IRA, where you’re able to invest in any type of assets you want — including private loans.
This is especially attractive in today’s market, where most of us are already facing significant losses in the stock market with no sign of recovery in sight. While the stock market is failing, the real estate market in most areas is still strong and growing. That gives you a tremendous opportunity to continue to earn a return on your investments while other asset classes are flatlining. The compounding effect from this can be significant, potentially changing the trajectory of your retirement in a way that impacts future generations in your family.
But having a modest IRA account is just one part of the equation. You still need to get your capital into the hands of real estate investors in order to earn a return on it. This is the hard part because there isn’t a consolidated marketplace like there is with the stock market, and beyond that, you still need to vet each investor on a case by case basis. (This is in addition to underwriting each deal, by the way.)
If you’re not already involved in real estate investing, this can be an uphill journey in the early stages, but once you’ve found a solid investor and you both enjoy working together, they will typically bring a relatively steady flow of deals to fund because like you, they’re constantly working to grow and achieve more.
To vet these investors, you’ll want to start by meeting, either in person or remotely over Zoom, to get a sense for their knowledge, investing strategies, and personality. If everything looks good here, next you’ll want to do a little research on them. This is critical because often, people who aren’t very good at what they do can still be very convincing and persuasive. So you’ll perform a search for their business and personal name to look for anything that may be a sign of problems. Dig deep here, going at least to page 10, and analyze every single entry in the search results. And be sure to look at the News and Images tabs in both Google and Bing.
This can help to uncover details that may have otherwise gone unnoticed until it’s too late. Keep in mind, you’re not just looking for problems here — you're also looking for positive signals. Is this person regularly asked to speak at real estate industry events? Have they won industry awards? Are they frequently cited in the media, or better yet, do they have a column at major media outlets sharing their expertise? These signals help you to identify their true level of expertise, and often indicate that they will be a safer bet with your capital.
And finally, dig deep through their social media profiles on all major platforms, looking not only at their posts, but also the comments posted by them and others. And with X, formerly known as Twitter, you can easily review their replies on other people’s tweets as well. While you should scroll through their timelines, you can also use the search feature with certain keywords to find things you would have otherwise missed because there’s simply too much information to review everything. The key here is to use keywords that will give you some insight into their behavior and beliefs. Which keywords you search will depend on what matters to you.
Is private lending right for you?
Ultimately, you need to make this decision based on your expertise, risk tolerance, and time available to engage in the strategy, but if it’s a fit, private lending can be a game changer for you and future generations of your family.
It provides a powerful path to a significant return on investment that outperforms the stock market even in good times, but especially in a volatile market like we’re all facing today, so this could be a far superior path for many investors.
Are you one of them?
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Tatiana Zagorovski is a real estate professional who specializes in helping people who have damaged credit achieve the dream of homeownership through creative financing by working with private lenders. She can be reached at Trio Realty Partners.
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