Why Private Lenders needs Real Estate Entrepreneurs
“The Most Powerful Force In The Universe is Compound Interest”
– Albert Einstein
I love great quotes, don’t you? What do you think of this quote from Albert Einstein? Seriously I would love to hear your thoughts so leave me a post on my facebook wall or email me at firstname.lastname@example.org.
In case you forgot what compound interest is: “Compound interest arises when the interest gets added to the principal,” so that the interest that has been added also itself earns interest. This addition of interest to the principal is called compounding interest. A retirement account, for example, may have its interest compounded every year: in this case, an account with $100,000 initial principal and 20% interest per year would have a balance of $120,000 at the end of the first year, $144,000 at the end of the second year, and so on. Millions of people are earning 2% or less in money-market accounts and CD’s so it is important to know the return.
Get over it! Everyone has a money problem. You either don’t have enough money or you have too much; but either way you have a money problem in today’s economy. If you know how to make money in real estate by collecting income producing properties or can flip houses for capital gains, then you can help solve the problems that millions of people who are afraid of losing their money right now and are sick and tired of earning that 2% in a CD or money market account.
The stock market has a history of sharp drops that started with the crash of 1929 which led right into the great depression, but others also include “black Monday” in 1987 and more recently the 9-11 attacks in 2001. But even as recent as 2011 the market has been extremely challenged.
Some of the headlines from 2011 include:
“Fear drives perfect storm of selling”
“Dow drops over 500 points, 9th largest drop…”
“Stocks down 10% in just 10 days”
“U.S. loses top credit rating”
The issues domestically that have resulted from unlimited government spending spree’s and economic issues in European countries such as Italy and Greece have further challenged the ability of the stock market to not lose value. Today the Dow Jones is hovering in the 11,250 range and my point is that it was also in this same range of value several different points since 1999. In November 2011 the market dropped 6% in just 30 days. People with money in the stock market have serious money problem. They struggle with what to do with their accounts, do they pull the money out now and take the loss at the end of the year or do they leave it in the market hoping to regain a portion of their loss. The challenge is that is very hard to make up for the loss; in other words the market has to have a huge rally to get you back to break even and start to produce any sort of positive return on investment.
If you are very wealthy and have $5M invested in the 30 stocks that comprise the Dow Jones Industrial Average, you would have lost $300,000 in one November 2011 if you sell the stock. If you don’t sell the stock you are gambling future losses and trying to determine how big of a market rally you really need to regain your $300,000 of losses in November 2011. Many well off people are likely losing sleep as their stock market investments are dropping quickly and they don’t know what to do with their money. That is why the wealthy are also having money problems.
If the money is taken out of the market where can you put it where it is safe and secure and maybe earn a reasonable return? For many people the answer to this question was to move their funds into bank CD’s. At least the funds will be secure up to the FDIC limits ($250,000 per depositor) and they cut off the losses from the stock market. But, can they handle the prospect of having nearly no returns on all that capital? A CD sounds like a safe and secure investment, but the safety and security will cost a lot in the way of virtually no returns on investment.
In December 2011 CD rates are not providing much return on investment. If you have $100,000 to invest you can earn between .5% and 2.0% if you are able to invest in the CD for one to five years. Generally the longer the term and higher the balance will lead to a slightly higher return. But also remember that if you want to use the invested capital before the term expires you generally have to pay penalties and will lose most of your interest anyways. The CD rates generally provide a return that is near the anticipated inflation rate so the owner of the CD is safe and secure by FDIC but in reality is not earning much of a return.
People who have moved funds from the stock market into a CD certainly have money problems. If you have moved $100,000 from the stock market and placed it into a three year CD earning 1.5%, how much money will you have when the three-year term expires? Exactly $104,599.85. The $4,599.85 in interest will likely keep up with inflation and that is about it.
This is what is happening in today’s economic climate, balances are not growing any faster than the inflation rate. Millions of dollars are moving out of the stock market and investors are looking for new alternate ways to earn a reasonable rate on their investment so they can get their plans for retirement, college savings and so on back on track.
Everyone does have a money problem. This includes those who have lost jobs, the middle class that is losing their retirement savings, the wealthy who are paralyzed with fear about losing their wealth and even our own Government continues spend more than they receive.
As a successful real estate investor you should have no problem finding a half-price house right now, fixing it up and renting it or flipping it. You can find ways to provide a fantastic, safe return and solve a problem for someone with money sitting on the sidelines right now.
You should be able to offer private lenders, which could be a self directed IRA of course, a nice and safe return of 6 -8% and let them earn more than banks are getting on mortgages today. They have a nice, safe and passive investment and you do all the work to buy, fix up and manage the property. Or, maybe you could offer equity. This will create a huge return for your private lender in the form of 15 – 30% annually.
Understanding compound interest along with knowing the economic climate we face today should help you structure real estate deals that are very successful for both the real estate investor and for the private lender. It is a nice win-win scenario where we help each other and both mutually benefit.
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