Thrifty Thinking: What Does Mailbox Money Have To Do With Retirement?

Remember when you played Monopoly as a kid and itched for your turn to be the banker, dealing out all that cash to your friends who were investing in properties such as Park Place and Tennessee Avenue?

These days, some people are figuring out how to be the bank in real life to provide themselves with more stable and predictable retirement income.

Here’s how they do it: As an alternative to a 401(k) account or investing in the stock market, they become private lenders for people who are investing in real estate. And just as borrowers send monthly payments to a bank or mortgage company to repay the loan, these private lenders receive a monthly check in the mail as repayment with interest – mailbox money.

“Have you ever watched those TV shows where people are flipping houses?” asks Jadon Newman, CEO of Noble Capital (www.Noblecapital.com), a financial advisory firm.

“Private lending is how a lot of flippers are able to flip houses. They end up making a profit, but so do the people who loan them the money.”

The concept of private lenders fronting the capital for a real estate investment is called hard-money lending, and the loans are short-term – typically 12 to 18 months.

For some people, it’s a viable alternative to other means of investing.

“Real estate investment provides more certainty and predictability than many other forms of investment, especially the stock market,” says Newman, whose company matches private lenders with real estate investors.

“Nothing against the stock market, but there’s a lot of risk there.”

Newman says a few advantages to “being the bank” and becoming a private lender for real estate investors include:

• Low risk. Certainly, real estate has its risks, but those can be greatly mitigated if the projects are structured the right way. Newman says that when his company works with investors, the loans are written at 70 percent loan-to-value or lower, giving the investors 30 percent protective equity to insulate them against market volatility. “Since the investment is backed by a tangible asset, there is less speculation and, therefore, greater security,” Newman says.
• Steady cash flow. With fewer companies offering pensions, one problem many retirees encounter is they don’t have that monthly mailbox money coming in. Investors who act as private lenders do receive a check each month.
• Potential for good returns. Borrowers seeking hard money loans often do so because they can’t get conventional loans, or because the ability to obtain money is much quicker. As a result, hard money lenders can charge higher interest rates than what the rates would be for a conventional loan. For example, Newman says the investors he works with usually get a 6 to 8 percent return. “It’s a predictable, reliable return,” he says.

“The biggest worry people have in retirement is that they are going to run out of money,” Newman says. “That’s why it’s important to explore different ways to get a good return on your money, and a lot of people are finding that ‘being the bank’ puts them on the right side of the equation.”

About Jadon Newman

Jadon Newman is the founder and CEO of Noble Capital (www.Noblecapital.com). With more than 16 years of experience in the financial services industry, he specializes in retirement planning, real estate investment and asset management.