Be the Bank: The Untapped Potential of Private Lending for High Earners

Jul 27

Today's volatile investment markets, coupled with an outrageous cost of living, it's no wonder simple bonds are sounding more and more appealing to some investors. Yet, amidst this chaos, there lies a hidden gem for the savvy high earner or high saver—an investment path that sidesteps the madness and the mayhem: private lending. This is a PITA-free (pain in the ass) approach to real estate that offers the stability and returns of property investment without the traditional headaches of tenants and busted water heaters. It's the rare investment strategy where the little guy can dictate the returns, secure investments against tangible assets, and watch the passive income roll in. If you're curious about leveraging real estate's potential without getting your hands dirty. Private money lending as a portfolio enhancement can take you from the nosebleeds hoping to catch some action to a player on the field.

High Net Worth Individuals (HNWI) and High Earners, Not Rich Yet (HENRYs), are always on the lookout for ways to put their money to work with stable and profitable investments. They often find themselves in some of the country’s most unaffordable states with zero interest in acquiring real estate for themselves—a common investor strategy based on outdated economic conditions. I want to shed light on this often overlooked investment opportunity—one that provides stability, returns you can dictate, and a simple concept. Allow me to re-introduce private lending—a concept you are certainly familiar with as it is a simple and ever-present mechanism employed both historically and in modern times.

Why Private Lending?

Private lending, in essence, is about providing loans secured by real estate. It's about becoming the bank - lending money and earning interest on the repayments. It's a practice as old as money itself, yet many high earners don't consider it as a viable investment option. But why should you, a high earner, put your money in private lending?

Passive Income

For starters, private lending is an asset-backed security. Unlike the stock market, you can hope and pray, but you cannot drive. The loan you provide is secured against real estate, providing a safety net in case things go south. This tangible security is a comforting factor that stock investments or cryptocurrency simply cannot offer Second, it’s passive passive. Unlike real estate investing, where you have to deal with the hassles of property management, private lending requires minimal effort once the loan is set up. The interest payments flow into your account with minimal effort required from your side 1.

Vintage Appeal

Moreover, it’s not a foreign shiny object. What’s old is new. It's not a fad or a trend that will disappear tomorrow. It's a practice that has been around for centuries and will continue to be around as long as there is a need for money. It won’t leave you trying to figure out which crypto bro has the best virtual coinage to invest in and lose your cash. This time-tested stability is another factor that makes private lending appealing to high earners 4.

Stability and Returns

Private lending offers better-than-average rates of return. According to the Cliffwater Direct Lending Index for 2021, the annual rate of return for direct lending was 9%, while the American Association of Private Lenders produces a quarterly state of the industry presented by Lightning Docs, a loan origination software - private lenders are earning anywhere from 8-12% fixed rate returns versus (AAPL) just 8% for high-yield bonds and 5% for leveraged loans 5. This makes private lending a compelling option for those looking to diversify their investment portfolios and have more control over their projected returns 6.

The Good, the Bad and the Ugly

However, it's not all rosy. Like any investment, private lending comes with its pitfalls. Everyone knows the age-old advice not to lend money to friends or family. Yet, on the other hand, many promote lending with who you ‘Know, Like and Trust’. Just because you met them at church doesn't make them a saint. Due diligence is crucial in private lending - and money has a way of creating miscommunication, unspoken expectations and revealing a difference in ethics. It's essential to document the loan agreement meticulously, verify the collateral, and ensure that the borrower has the ability to repay the loan 7 8. The framework I use to guide my clients is 3-part: verification of the deal, the person, and the information.

Due Diligence

Once you decide private lending is right for you, it’s important to build skills as an underwriter, know how to comp and find a borrower whose investment and ethical approach dovetails with yours. While you can be more flexible as a private lender than traditional lenders, it doesn’t mean you should toss the baby out with the bath water as you will still want to request much of the same paperwork to assess credit history, income, assets, and cash flow through verifiable documents.

Getting Started

At this point, you might be thinking, "This sounds great, but how do I get started?" Here's the beauty of it - getting started in private lending is simpler than you might think. There are numerous resources available online that can guide you through the process, from identifying potential borrowers to setting up the loan agreement 13.

So, if you're a high earner looking for a stable, asset-backed, and passive investment opportunity, it's time to consider private lending. It's time to be the bank.

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While we’re not here to NOT make money - Earning passive income goes beyond material possessions; beyond achieving financial freedom it’s about time freedom and using it to enhance our connection to what really matters in life. Deep and meaningful relationships are directly correlated to every metric of health and happiness according to the longest running study on happiness by Harvard. And private lending, with its unique set of benefits, could be a valuable tool in your journey towards time and financial freedom to take care of yourself and your relationships. I have a values based framework to develop lender criteria and due diligence processes for private money lenders. Hop on my mailing list and follow me on social media @melpalmer.me for tips, tricks, and pitfalls to avoid.