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
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
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