Both the stock market and private money lending have similarities as investments.
The risk to reward of each type must be analyzed before the investment is made to determine what the investor or lender is willing to risk.
In the stock market an investor can pick his poison from different industries, growth and blue chip or income stocks just to mention a few choices.
Once the investor has purchased stocks or bonds he is at the mercy of market forces that could severely impact his single stock or the entire market.
In the final analysis, the value of his stock is dependent on the belief of every other stockholder in that company.
If the stockholders should all decide to sell, the stock could plummet 40% or more in a day.
Same thing with the stock market in general - when investor confidence falters, the market can drop in a spectacular manner in a very short time and erase gains that took years to accumulate.
In real estate investing the investor buys a tangible asset that can be analyzed more easily than any stock.
Except in "overheated" real estate markets, the property value will decline more slowly than the stock market and increase more slowly than individual stocks.
However, for people looking to be conservative with their investments, the vast difference is the velocity of the decline in stocks versus real estate.
Stocks (equities) offer an investor maximum liquidity because they can be sold in minutes rather than weeks or months as with real estate properties.
This same liquidity for equities causes them to rise and fall more sharply than their illiquid cousins, real estate properties.
Equities can give income to their holders in the form of dividends, but so can rental properties and usually rental properties give higher yields and additional tax benefits that stocks do not.
The Sub-prime Mortgage Crisis and the subsequent decline in real estate values was an exception to the fundamental nature of the real estate market.
This huge loss of property values has actually helped private money lenders by their being able to loan on properties with little downside and providing them with higher interest rate returns on their money.
Common costs to borrow private money vary widely but in general the interest rates can be between 6% and 10%, and the closing points can be from 0 to 3 points versus similar hard money loans of 12% to 15% and 4 to 6 points on the closing.
Similar yields for income producing stocks mimic CD rates and currently are in the range of 2% to 3% paid quarterly.
There is also flexibility for the private lenders who can get an interest only return on a monthly basis or all his accrued interest and principal at the closing.
This allows the borrower to have no out-of-pocket interest costs until the closing.
The private lender may even fund a property that gives him a partnership interest in the profit in lieu of charging interest.
Common stocks do not offer any flexibility of how they are paid or how frequently they are paid.
In summary, stocks have similarities to lenders of private mortgage moneys and both should be treated as investments.
For private money lenders, the ease of evaluation of a property (appraisal), the property's stable value (real estate markets move slowly), and the higher yields than competitive investments such as CDs and dividend stocks, make lending money on fully-collateralized real estate an excellent alternative to CDs and the stock market.
To finalize any loans, private money lenders should always get an independent appraisal, both a mortgage and a promissory note, a title policy and carry hazard and liability insurance on the property, all of which should be paid by the borrower and properly reviewed and closed using an attorney.