Your house is an asset. Well, it is, but not like you think. An asset is something that is generating income for you. Who is your house generating income for? The bank! Yep, your house is an asset, but for the bank, not you. For you, your house is most likely a liability. You owe a mortgage? You have property taxes? Homeowners insurance, and utilities? Those are liabilities. Even if you own your house outright and don’t have a mortgage.
If you rent out your house, if it cashflows, then it is an asset. People rent out rooms via AirBNB, or monthly, or even rent it wholly with annual leases. “But I don’t want to do that,” you say. “Is there another way my house can be an asset for me?”
Why yes, there is another way. You can use a Home Equity Line of Credit and use the funds to invest. “But isn’t that risky? I don’t want to lose my house if I my investment tanks!” That is a possibility with stocks and other unsecured investments. That is why I invest in real estate. I have recourse.
“Now come on. Real estate can be risky, look at the housing bubble.” Absolutely. And if you saw the movie, The Big Short, you’ll see how that happened, and how it happened over time.
Here’s how I do it.
First, I invest for the short term, like six months, not years.
Second, I invest less than 100% of the purchase price. And that is of what the home in its current condition is valued at.
Third, I’m listed as the “loss payee” on the home’s insurance policy so I get paid if it burns down.
Fourth, my loan is recorded as a lien against the property.
The lien gives me a way out if he guy stops paying. Say I loan to another real estate investor, and he can’t finish the remodel, or excuses start coming in instead of payments. I can foreclose and take possession of the property. You can’t do that with stocks.
And if you don’t want to finish a remodel, that’s okay. Since you invest less than 100% of an already discounted property, there is equity. You can sell the property as-is to get your money back, and more if the remodel is further along. You know who buys properties as-is. Real estate investors.
Finally, being shorter term, the market value of the property shouldn’t have shifted much. These days in the Seattle area, we’re still experiencing 10-12% annual growth.
Yes, this is simplified. There are other considerations. Whether you are in a first position lien or a second is important. To foreclose would require a lawyer and extra costs. It could take some time to get control of the property. How well do you know the person whose project you are investing in? What is their track record?
Essentially, private money lending is your opportunity to become the bank, reaping the profits just like a bank would. It’s a great way to generate cash flow and produce a predictable income stream – while at the same time, provide excellent security and safety for your principle investment. You can do what the banks have been doing for years…make a profitable return on investments backed by real estate. There is no other investment vehicle like it.
Interested in more information? You can download our booklet about Real Estate Investing.