Private Money411 Magazine - The Source for Real Estate Finance | Page 15

Is Owning Investment Property the Best Way to Generate Income from Real Estate? Insights by GCA Equity Partners, LLC Why I Like Private Lending Private lending simply means providing loans that are secured by real property. The investor/lender earns money by collecting interest for their loans and in some cases can also profit from appreciation in the property that they are lending against. Private lending isn’t for every investor, but the following are some of the reasons why I like it as part of my real estate investment strategy. 1) The returns can be as good, or better than those you get from renting property. 2) Your loan is secured by the equity in the property you are lending against. 3) Since you don’t own the property, you don’t have to manage tenant or maintenance issues. 4) You can invest in loans made against a wide range of property types. 5) Many different lending models are available from one investor / one loan to pooled funds. I Want to Share a Secret with You… I used to believe that the only way to generate income through real estate investing was by owning property and renting it out. I bought (and later sold) single family rental houses, fixed them up whenever necessary, and found tenants for each of them. What I quickly learned was that being a landlord wasn’t as easy as I expected. I had to deal with tenant issues and maintenance problems, and pay for “extras” I hadn’t really considered like insurance and property taxes. (I quickly found out why landlords like to complain about the “three Ts” – tenants, toilets, and taxes!) I didn’t realize that there was another way to create income through real estate investing – a way that more sophisticated investors had figured out which earned them solid returns without the hassles of owning property directly. It’s called “private lending”. Different Private Lending Models The most basic private lending model is to provide first mortgages to individuals or entities that need them to buy or refinance a property. In this case, the loans may be structured in two ways. First, as fully amortized, meaning principal and interest are repaid together on a regular, periodic basis. Alternatively, as interest only, meaning only regular, periodic interest is paid during the life of the loan, with the principal repaid in a single balloon payment at the end of the loan. Another model is to provide second mortgages to borrowers, typically for a higher rate of interest and structured as fully amortized or interest-only loans. These second mortgages can be higher risk since, in the event of a default, foreclosure, and/or property sale – the first mortgages are paid off first and any remaining money is used to pay the second or further subordinated mortgages. A third model is known as shared equity. In this model, the lender provides the borrower with a loan in return for interest and a share of the appreciation in the property when it is resold. Shared equity models typically only apply Continued on pg. 17 PAGE 15 • 2015 Private Money411