It’s not enough to have money sitting in the bank account. You need to put that money to work. Stocks and bonds are always an attractive way to make money work, but some investors choose the avenue of private lending to increase their wealth. Private lending, or hard-money lending, is when an individual issues loans without being under the aegis of a bank, credit union, or other financial institution. Private lending is, simply put, people helping people. Of course, no service comes without a cost, and hard-money lending does ask higher interest rates of its recipients—you could say that’s the “hard” part. From tax breaks in retirement to stress-free rewards, here are three great reasons to be a private lender.
An old saying you’ve undoubtedly heard is that you should never lend money to a friend and expect to get it back. This axiom often dissuades people from getting into lending—if you can’t trust a friend to pay you back, whom can you trust? But because most promissory notes require collateral, you won’t lose your shirt by making a loan that your debtor can’t repay. While unsecured promissory notes exist, they do so at almost prohibitively high interest rates, and the risk/reward calculus of unsecured notes often dissuades both parties from pursuing them.
Saving for Retirement
By opening a self-directed IRA, which allows for more freedom in your investment strategies than the more limited traditional IRA, you can save for retirement by lending. Writing and purchasing promissory notes will allow you to bank a healthy amount of interest to grow in your IRA. Hard-money lending is an excellent way to get involved in the real estate market at a slight remove. As exciting and lucrative as real estate may be, it can also be time-consuming—and in the case of extreme renovations for house-flipping, almost back-breaking. This way, you can benefit from the success of real estate transactions, and with those investments acting as collateral on your notes, you may only get directly involved if things go wrong for the lessee.
Many business investments require elbow grease, long hours, and high stress. The best reason to be a private lender is that all you’ll have to worry about is the check arriving on time. Even compared to property management, which requires the day-to-day work of being a landlord and interacting with your tenants, private lending is truly passive income. The only catch, of course, is that you need to have the money to lend in the first place.