Welcome to Asset Accelerator, the weekly letter for people who make good money and want their money to finally make some too. Real numbers, no hype, one idea a week.
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Last week I walked you through rental real estate, the stream I know best. This week, we flip it all around.
Instead of borrowing money to buy property, what if you lent it? What if you got to be the bank?
That’s private lending, and it’s Stream #2.
Here’s the simple version. A real estate investor needs money to buy and fix up a property, and he needs it faster than a bank will move. So they borrow from a private lender at a higher rate, often in the 10- 12% range, secured by the property itself. You put up the money, you hold a note backed by a mortgage, and you collect interest until they pay you back. You’re the bank. And the bank, as you may have noticed, tends to do just fine.
It’s a real stream, and it belongs in a cash flow plan because it doesn’t move with the stock market. But I didn’t want to give you my outside view of it. I wanted the truth from someone who actually does this. So I asked my friend Mitch Messer, who’s been lending privately for years, what a regular person should know before they put a dollar into it.
He gave me a lot. Here’s what stuck with me most.
First, know what you’re actually buying into.
Mitch pointed out something a lot of people blur together. There’s a difference between lending directly on a single note and putting your money into a fund that spreads it across many loans. They’re two different things, with different trade-offs. “It’s like direct stock investing versus mutual funds,” he told me. “You get some things, and you lose some things.”
Either way, he said, do your homework on the people running it. Their philosophy. Their track record, knowing full well that past performance is no promise of future results. And the plain mechanics: what’s the minimum, how many other investors are involved, and this is the big one, how long is your money locked up?
Because here’s the catch most people miss. “Usually you don’t have the liquidity to pull your money in and out at will,” Mitch said. “In most cases you’re locked into this thing for some period of time, in some cases years.” That’s not a reason to avoid it. It’s a reason to only lend money you won’t need back for a while.
Second, know what happens when a borrower stops paying.
This is the question everyone should ask, but most people don’t. What’s actually backing the loan?
Mitch’s answer was refreshingly plain. It’s a note secured by a mortgage. If the borrower defaults, you foreclose, same as any lender. “You get an attorney, you get the paperwork filed, and it goes to auction,” he said. If someone buys it, you recoup. If nobody does, you get the property back and sell it to make yourself whole.
But here’s the part most people never think to ask. It depends enormously on the state. “It’s much easier in fast-foreclosure states, and harder in places like California and New York,” Mitch said. “That’s one of the reasons we don’t lend there.” The same default can take months in one state and years in another. Property location matters as much as the loan itself.
And he reframed the whole question in a way that stuck with me. Don’t just ask what happens if a borrower defaults. Ask how badly you get hurt when one does. In a fund spread across 200 notes, one bad loan barely dents your return. But, he warned, that only works if someone is actually keeping track of all 200, the payments, the taxes, the problems. “It’s a lot of stuff to maintain. You want to make sure they’re up to the challenge, so you don’t miss things.” Diversification protects you, but only if the shop is competent enough to catch trouble early.
Third, understand how everyone gets paid.
This was the most useful thing Mitch said. The kind of thing only an insider tells you.
Even a fund that advertises “no management fees” is still making money; you just can’t see how. Mitch explained it straight: he might earn 12 percent on a loan but only pay his investors 8. That 4 percent spread is how he gets paid. Nothing wrong with it; he was clear about that. But it means when you compare two opportunities, you can’t just look at the fee line. “They get paid some other way,” he said. Some take a spread, some take fees, some take both, plus origination. You have to compare apples to apples and not get fooled by the one that says “no fees.”
And he was honest about the catch on the direct side too, the one he runs. Say you charge 12%. You only actually earn 12% if your money is working every single month. “If only 10 of those 12 months your funds are deployed, you’re getting 10%, not 12.” Keeping the money fully at work, with a steady flow of good deals, is harder than it sounds. Even done right, the idle gaps slow your return.
So here’s where I land.
Private lending is a real cash flow stream, and a useful one, because it pays you well and it doesn’t care what the S&P did today. But ask the right questions before you write the check. How long is my money locked up? What happens in a default, and in what state? And how is everyone really getting paid?
Ask those three, and you’re already ahead of most people who jump in chasing the rate of return alone.
Next time, we’ll group a few of the steady, boring ones: Treasuries, I bonds, and cash that nobody brags about but everybody’s glad to own when the market gets rough.
You made the money. Now make it count.
Your Learning to Be the Bank Investor,
Jim
P.S. A quick thank you to Mitch Messer for taking the time to answer my questions straight, no sales pitch. If you ever want to go deeper on this one, Mitch is the real deal. And you can join him on Nov. 11 at 7pm for a more in depth look at investing in private lending and funds. I hope you’ll join.
About Asset Accelerator
I'm Jim Duffy. For 25 years I've sat across the closing table from families who looked successful on paper but just weren't building anything that would last. I started Asset Accelerator to change that, one reader at a time. My wife Lisa and I are walking this same road ourselves, from earning to owning, and every week I share what actually works. No hype, no gurus, just real numbers and the belief that it's never too late to start. Let's build something that pays you for life.
