Private money and the real estate investor

What exactly is private money? Why is it so important for a real estate investor to utilize private money for real estate transactions?

Private money is just that. It is money that is borrowed from individuals and not from lending institutions or hard money lenders. It can be a neighbor who loans you money or a relative, and it is a note – a legal document as powerful as a bank mortgage, but there is no bank. That’s the beautiful part of private money. You don’t have to wait for a bank approval and jump through a million hoops to get the loan.

Many times with real estate investors, a deal will come along that is so hot there is much competition. A seller, especially if it is a bank selling a property, will be much more enthusiastic about working with a buyer who has “cash” than one that has to go through the long, tedious process of obtaining a mortgage. When an investor utilizes private money, it is as good as “cash.”

How does a real estate investor go about obtaining private money. There are many ways this can be done. Friends and families may have retirement accounts that are earning very little interest, and that may actually be losing money. However, a private money lender can be an acquaintance or a referral. A real estate investor will typically pay between 8% and 10% interest on money borrowed. That’s a fantastic return, and the best part is that the money is secured by the real estate purchased. A private money lender could actually make out better if the loan defaults than if the borrower performs. The goal is not to default, obviously. The goal is to complete the transaction, pay the private money lender back with interest and then borrow the money again for the next transaction. Private money lenders want and need to keep their money working for them at these high rates of return.

It can be even more beneficial for the private lender if the funds are in a self-directed ROTH IRA because no taxes are paid on the income generated ever for the life of the account.

Retirement Investment Group

What is even more amazing is that as long as the private money lender’s account has been open at least five years and the private money lender reaches the age of 59-1/2, the private money lender never pays taxes even when the money is withdrawn. That has just increased the interest rate of 8% – 10% substantially as the typical 30% income tax is never charged.

If you are interested in learning more about tax free investment strategies in a self-directed ROTH IRA, visit http://www.meetup.com/Retirement-Investment-Group/.