Balance Between Security and Risk
As we consistently stress, it is important to have a good balance between risk versus security. Too little security and the investor has a higher probability of losing the investment principle, i.e. signature loans such as credit cards. Too much security and the investor runs the risk of losing financial ground due to interest rates that are less than economic growth rates, i.e. CDs, Money Market, any federally insured savings. No matter what the prevailing rates may be those who have their investments in CDs or other insured accounts it is almost certain that their rate of return is less than the economic growth rate. In other words, the CD investor is losing financial ground rather than gaining. Remember the example of the Ole Fella changing a $100 or a $20?
Real Estate the Premium Security
As we mentioned earlier, real estate is an excellent source for securing a private investment because over time it appreciates. That is not the only element that makes real estate attractive and as we know even depreciating real estate can still provide the Private Investor valuable collateral when appropriate loan to values (LTVs) are employed.
One important element is that real estate is tangible. Real estate cannot get up and walk away. It is where it is and there it will always be.
Another element that attracts Private Investment in real estate is that real estate can be completely insured against casualty and loss. If the building burns to the ground the insurance pays off the investor.
Private Investors also like lending on real estate because the return on investment is never in doubt. The security instruments spell out the payments and terms before the loan is made. There is no guesswork or hoping for returns that never materialize.