“The human species, according to the best theory I can form of it, is composed of two distinct races, the men who borrow, and the men who lend.”
Money is moving out of the stock market into other types of investments. Today we examine the trend, plus seven reasons why private lending opportunities are attracting new investors.
Investor Dollars are Leaving the Stock Market
Just over ten years ago, the stock market began it’s recovery from the subprime debacle-fueled crash and the Great Recession. Now, after 300% gains have been realized, investors are heading for the stock market exits at a brisk pace.
“This Stock Market Rally Has Everything, Except Investors,” a recent New York Times headline declares. Indeed, both individual investors and pension funds have been reducing exposure to equities for months now.
The Christmas Eve sell-off contributed to the worst S & P 500 December performance since 1931. Since then, we have seen an impressive rally when it comes to stock prices. However, money is actually flowing out of the market. Reports the NYT, “Every week this year, money has flowed out of domestic stock market mutual funds and exchange-traded funds — as much as $15 billion in the last week of January, according to EPFR Global, which tracks flows into and out of funds.”
While individual investors are moving money into bonds, cash, and other options, share prices are being driven up by huge corporate buybacks. An analysis by Goldman Sachs confirms: last year was a record year for buybacks. Many companies used the new tax cuts to buy back a whopping $910 billion of shares! This year, the buyback trend continues, with companies announcing plans to repurchase hundreds of billions of their own shares.
With corporations propping up their own share values, it is reasonable to question if the post-Christmas stock market recovery is sustainable. Writing for Forbes.com in “When the Stock Buybacks Go Bye-Bye,” Jesse Colombo asks: “If the stock market performed as poorly as it did in 2018 with record amounts of buybacks to prop it up, just imagine how much worse it would be if buybacks were to slow down significantly or grind to a halt?”
Where investors are putting dollars now
Many have gone to cash, and as we wrote in 2018 in “Is Now the Time to Go to Cash?” there is some wisdom in doing so.
Other investors are increasing their share of bonds with the thinking that “stocks are risky, bonds are stable.” But with interest rates potentially still heading up and bonds suffering the affects, we believe this is a poor strategy.
Still others are putting dollars into real estate. With the new tax plan, there are advantages to investing in “opportunity zones.” However, with many signs of a slowing and softening real estate market, one should be very cautious with real estate right now.
So where CAN you earn a return right now? There is a traditional investment strategy you should not overlook: private lending. It may not get the press that the stock market does, but it is one of the oldest, most proven forms of investing.
The Private Lending Trend
Private lending is simply lending capital to another—perhaps someone who can’t get traditional bank financing—in exchange for interest, and eventually your principal, in return. Of course, lending is what banks, mortgage lenders and other financiers do. The strategy has been around for thousands of years, and now we are seeing more individual investors employing it.
A lender can lend money for a variety of reasons to an individual or a corporation. Current private lending opportunities allow borrowers to:
- Purchase real estate (for a mortgage or a short-term bridge loan, until permanent financing is put into place).
- Rehab or improve commercial or residential real estate (again, often with a bridge loan).
- Start or expand a business venture.
- Fund investments in energy through mineral rights leases.
- Refinance credit cards or other debt through peer lending websites such as LendingClub.com and Prosper.com.
In recent decades, “investing” has come to be equated almost exclusively with stocks, bonds and mutual funds. However, there is greater volatility in the stock market, and many good reasons to diversify at least a portion of your portfolio by becoming a private lender. Here are seven:
1. A historically proven strategy.
Private lending has been a reliable way of generating profits and cash for literally centuries. There are records of private lending agreements as early as 3,000 B.C., showing people loaning to others for defined time periods in exchange for “interest” paid in wheat, livestock, shekels of silver, or other commodities. Interest rates of 20% – 40% were common in ancient times, though extraordinarily high rates became known as “usury” and have been discouraged or outlawed.
Fast forward to the Great Depression in the late 1920’s and 1930’s. The stock market in the U.S. was just over 100 years old at the time, and had experienced many crashes and “panics,” as they were often named. But the 22 years preceding the Wall Street crash of 1929 saw an impressive, though deceptive, bull run.
Investors such as John Powell soon learned that what goes up may go down… way down. Powell, grandfather of our friend Kate Phillips, transitioned from a farmer to an investor during his lifetime. After severe stock losses during the Depression, Powell swore off the stock market. Instead, he started lending money to those who needed capital to purchase or temporarily finance properties. For the next three decades, Powell was a private lender. His profits were steady, and he suffered no further losses.
2. Predictable returns.
When you invest in the stock market, you are essentially placing a bet that the price will go up. Historically, this may be true more often than not. Yet historically, we can observe times when this has gone horribly wrong! Nobody thought that Enron was going to go under, or that there was a possibility of the stock market losing more than 40% in a Financial Crisis.
When you loan money as a private lender, you have an agreement that specifies how much you’ll be paid and when. Properly constructed and with the right borrower, this can deliver predictable returns, such as a monthly or quarterly check.
The exception? If your private lending deal is not properly constructed or vetted, there is a chance of loss. That does not necessarily mean that you’ll lose your capital, but in cases where the borrower pays you directly, a foreclosure may be required to get your cash out of a property. (In this scenario, you could earn additional profits for your trouble.) However, many clients prefer to work with companies that will manage the transaction and pay them directly.
3. Excellent cash flow.
In addition to passing the test of time, banks and other institutions that operate as lenders are some of the most profitable businesses in the world. Unfortunately, many people tend to be borrowers, not lenders! So if you’ve got money to lend, congratulations, you can put it to good use.
In this low-interest environment, you can earn more than what your bank is paying, without the unpredictability of the stock market. And if interest rates at banks go up, so will interest rates for private lenders! That’s because there will always be people who need to borrow money outside of mainstream channels.
Today, our clients who want more income from their existing assets can earn high single digit interest rates by becoming private lenders. In some cases, the monthly income is contractually agreed upon, so you know exactly what cash flow you can expect.
4. A secured investment.
If you are lending on real estate, your investment will likely be secured by the property itself, perhaps with a first deed of trust, although there are several different ways that private lending deals can be structured. Some private lending deals, such as mineral rights leases, may use company assets and equipment as collateral.
If you are doing a private lending deal yourself, you will definitely want an appraiser to verify that the collateral is worth much more than the amount you are lending. The lower the loan-to-value percentage, the more security you have for your investment.
Note that not all private lending opportunities (such as those through Prosper or LendingClub.com) are secured by a real asset. In the case of peer lending, you won’t have collateral. The borrower’s income and good credit are your “security.”
Not only does private lending help diversify a stock heavy portfolio, it also helps investors diversify with different types assets, or real estate investments in different locations. Of course, it is handy to do business locally. But you might live in an area where it is difficult to earn a decent ROI. Read, “Is Your Real Estate Portfolio Diversified?”
And of course, you can practice private lending with different types of assets, such as a real estate bridge loan, a fractional real estate equity investment, or a collection of peer lending loans. (You’ll want to diversify into many small loans with peer lending to reduce your risk.)
6. Leveraged investment opportunities.
It could be considered a form of arbitrage: By investing money you have borrowed at a lower rate to earn a higher rate, you can expand your investments. A couple examples:
Let’s say you have a daughter who is getting settled in her first home. She purchased some furniture, window coverings, and appliances from various stores on credit. Now she’s got $6000 of debt at rates of about 21%!
You hate to see her paying 21%. You borrow $6000 against your life insurance policy at 8% to take care of the debt, and she happily agrees to pay you back at 10% interest. You are obtaining a 25% improvement on the rate, and she is saving interest big-time:
That’s a small, simple example. Let’s look at a large, lucrative one. You leverage your whole life cash value as collateral and borrow $50k from a bank at 5%. Then you put the money into a bridge loan earning 7%. The interest rate you are earning is 40% greater than the interest rate you are paying to the insurance company:
7. You look like a genius.
When—or if—you tell your friends you are going to be a private lender, chances, are, they’ll be concerned for you. They’ll tell you it’s risky (and the risks can be high if you do it yourself!) People may even try to talk you out of it.
But when you’re experienced at finding private lending opportunities, and you tell your friends that you’ve been collecting cash flow for years without the losses or stress of the stock market, they’ll think you’re really smart! (And of course, you are!)
Would you like to turn an existing asset into steady, reliable cash flow?
Use the investment strategy with the longest track record in history! Contact Partners for Prosperity to discuss what private lending opportunities might work best for your situation. We work with several different partners who have excellent track records of helping investors put their dollars to work. Accredited or non-accredited welcome, and you can even use qualified funds.
To find out more about our investment philosophy, including generating cash flow through private lending, we invite you to download our complimentary Prosperity Accelerator Pack.
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