Investing for cash flow, should you be a landlord or lender? It depends. Yes, it really depends on your goal, risk appetite, and return expectation. You can be both since it works perfectly well with one and another.
Real estate rental naturally comes to mind when one thinks about passive income and cash flow. I am no exception. Imagine the tenants pay off your mortgages month after month, after 30 years, the house is yours forever as long as you don’t forget to pay your property taxes!
Next, I am under the task to identify the rental property that meets 1% rule and can bring me the positive cash flow. Coincidentally, the real estate in my own back yard is very expensive; breaking even can be tough, if not possible.
So the research continues….
One day the light bulb went on, who says landlord is the only way to generate cash flow, how about being a lender? OK, that was not my idea. I just came across to that concept and I like that concept!
That’s how I learned about private money lending. Private money lender is the individual with private cash capital that lends cash to another private party to help or complete the real estate transactions. It’s a form of P2P lending but such private money lending in real estate is asset backed. In another word, the real estate is your collateral.
Here’s the comparison on the perspectives between investing as a landlord and lender.
|Expense-Before Asset acquisition||Various fees including appraisal, property inspection fees plus 2-3% closing fee if you have mortgage||Fees are minimal since most fees are covered by the borrowers.|
|Expense- After Asset acquisition||6-10% of your gross rent goes to property manager, unless you manage your own property,||Loan servicing companies normally charge $15-35 per loan.|
|Tax levy on Asset Value||Property Tax ranging 1%-3% depending on where your property is located.||None|
|Tax levy on Income||Can be minimal since depreciation and mortgage interests can be deducted against the rental income.||Tax on Interest income is paid on ordinary income tax rate.|
|Equity||Equity is built through time, this is the most well-known advantage in this asset class.||None|
|Potential Risks||You didn’t know your numbers and bought it too high, not able to collect the rents as expected; the property value doesn’t appreciate after years of equity building and maintenance expense.||You didn’t do your due diligence before you lend, not able to collect interests as expected and the collateral value is not enough to cover your principle and legal costs.|
|Maintenance Calls||Tenants call you for leaking toilets if you don’t have the property manager||None|
Are you landlord or lender now? I am sure there must be other great pros and cons either being a landlord or lender, feel free to share your insights!