5 Benefits of Private Lending: Why Passive Investors Are Loving This Strategy

What Is Private Lending for Real Estate?

‍

Banks are the most well known source of capital for real estate acquisitions and improvements. With private lending, individuals essentially act as the bank – loaning money to fund an acquisition and/or improvement of real estate while earning a fixed interest rate on their money loaned.

‍

Let’s start with the fun side – the benefits. I’ll share the biggest benefits our private lenders love and I’ll also share the drawbacks of private lending compared to an equity (ownership) investment.

‍

5 Benefits of Private Lending for Real Estate

‍

1. Set Interest Rate = Predictable Passive Income

‍

One of the biggest advantages of private lending is the predictability of returns. Unlike equity investments, which heavily depend on a business plan executing well, private lenders receive a fixed interest rate. The interest rate is set at the beginning of the investment and remains unchanged throughout the loan term. Whether the real estate project is wildly successful or a flop, your rate of return is pre-determined and still owed, mitigating risk. In the case of our private lenders, they are typically earning double-digit interest rates.

‍

2. Backed By U.S. Real Estate

‍

Private lending with Voyage Investing is secured by real estate in the U.S. through a Deed of Trust, which is recorded in the county where the property is located. This document legally states that our investors have a loan on the property, serving as an extra safety net. The real estate cannot be transferred to a new owner without those loans being satisfied, giving our investors an added layer of protection.

‍

3. First Paid Back In The Capital Stack

‍

When you lend money backed by real estate, you are the first to get paid back. Debt investors hold a senior position in the capital stack, meaning they get paid before anyone else including the property owners. In contrast, those who hold an equity position are only paid after all debts have been satisfied, making their returns dependent on how well the business plan performs. With private lending, you are paid your interest regardless of the project outcome.

‍

4. Shorter Investment Horizons

‍

Private lending investments typically run from a few months to a few years, often wrapping up within one year. This is a shorter duration compared to equity investments, which may require several years before yielding returns. Some investors appreciate this flexibility, as it allows them to adjust their investment strategy as needed.

‍

5. Zero Hands-on Work

‍

You are BUSY. The last thing you want to deal with is tenants who haven’t paid rent, a broken septic system, or the bureaucracy of county planning departments (trust me on this one!). Private lenders escape all the headaches of real estate projects. Instead, they earn double-digit returns backed by real estate while leaving the hands-on work to those who live and breathe it daily.

‍

The Drawbacks of Private Lending

‍

While private lending has many advantages, it’s important to consider some key potential drawbacks:

• No ownership benefits: Private lenders do not own the real estate they lend on. This means they don’t share in benefits of real estate ownership such as potential appreciation or potential tax benefits like depreciation.
• Illiquidity: Unlike publicly traded investments, private loans are not easily bought or sold. Private lenders must be prepared to hold their investment until their loan matures.
• Returns might not be as high: With private lending, you are earning a set interest rate for the entirety of your investment. This can be a great thing, especially since our private lenders tend to earn double digit interest rates. However, there are cases where ownership (equity) investments result in higher returns over the entire project lifespan compared to the return on private loans. With private lending, you are choosing the lower risk and security of a known interest rate over the potential upside of an ownership investment.

‍

Final Thoughts

‍

Private lending can be a powerful tool for generating passive income, protecting capital, and diversifying an investment portfolio. It offers predictable returns, asset-backed security, and a hands-off approach that many investors find appealing. While it does carry some risks, careful selection of lending opportunities and partnering with experienced real estate operators can mitigate potential downsides.

‍

If you’re looking for ways to put your money to work passively, make sure you join our Capital Club