Those who have been following us know that in addition to our normal salaries, we’ve begun to set up multiple side income streams. These include my work as a part time Air Force reservist, rental income, dividends, and capital gains from stock trading. As you can see, we really like the idea of not relying on any single source of cash flow. Another one that is becoming a nice source of income for us and that we hope to continue to grow is private real estate lending.
Although we have two rental properties, I actually prefer our private lending arrangement as a method to profit from the real estate market. For now, it is truly our best source of passive income. The only work on our part is signing and scanning documents, setting up wire transfers, and periodically checking in with the developer for status updates.
How we got started
About four years ago, I reconnected with a high school friend through Facebook. He had begun flipping houses a few years prior and had built up a nice business as a professional flipper. I had always been interested in this (thanks, HGTV), so one day I began picking his brain for insights. Eventually, I asked if he ever accepted external funding from investors. Fortunately for us, he did.
Soon thereafter, we entered into our first business agreement: a $30,000 loan to fund his next rehab. Per the contract, our funds would be returned with interest once the house was renovated and sold. Initially, we were told to expect the project to last roughly 4-6 months. It hit a few snags along the way, and a little over a year later the project finally closed out. In exchange for borrowing our money for 420 days, our initial lump sum was repaid along with $8,400 in interest – a 24% annualized return!
We could get used to this
Since that initial project, we have closed out four more loans and earned an additional $13,184 in interest. The average duration of these four loans was 195 days. Each individual loan ranged in value from $20,000 to $50,000. Interest rates fluctuate based on market conditions and poor stock market performance has driven rates down as investors look for other avenues to build wealth. Our current negotiated rate is 13.5%, which we’re satisfied with.
Earlier this week, we opened up three more loans to go along with an existing one that is nearing completion. This brings the total value of our outstanding loans to $110,000, earning $40.68 per day in interest.
The chart below shows our 2015 earnings, a conservative projection of our 2016 earnings, along with an annual goal of $10,000. Although our initial estimate for this year has us falling just shy of our goal, I think we will make it if a few rehabs take a little longer than I projected.
This type of investing is probably not for everyone. First, it may require a fairly large amount of capital that needs to be available at a moment’s notice if a deal arises. Secondly, you really need to find someone you can trust with your money. We were fortunate to be presented with an opportunity to work with someone I had known for 15 years at the time we signed our first contract. Three years later, our business relationship is still going strong and our agreements mutually benefit one another. We provide resources (cash) to help fund his business operations, and in return we are paid interest based strictly on the loan value and project duration. He’s under contract to return our money at a set interest rate whether his flip is profitable or not. We are completely hands off during the renovations.
The major risk we face in this investment is that his company files for bankruptcy and cannot repay the loans. This is a risk we have accepted. Additionally, we try not to overextend ourselves on any single project. The average value of our nine loans to date is just under $33,000. Each project has its own timeline so we are generally seeing new starts and closings every few months.
Over the last three years, we’ve found private real estate lending to be a steady source of passive investment income bringing in $21,584 in that timeframe with another $1,900 in unrealized interest on active loans. We have a strong relationship with our business partner and trust his expertise to choose projects that will be profitable, thus allowing his business to thrive.
If you are interested in working with a real estate investor, please perform due diligence and be sure to understand the terms of your agreement and the risks involved. Under the right circumstances, private real estate lending can be a nice way to diversify a portion of your investments from the stock market which, as we’ve seen the last few months, can be quite a bumpy ride.