From Where Do Funds for Private Investment Come?
Every Private Investor has a different portfolio and the sources of funds that Private Investors use for funding loans are many and varied. Let’s take a look at some of the more common forms of funding capital.
CDs, Passbook Savings, Money Market Accounts
Many Private Investors convert their CDs, passbook savings, and Money Market accounts to Private Investment sources. This is an easy source for a Private Investors to tap. Not only are these easily accessible sources but also tapping them for Private Investment makes for sound and good investment practice. As we illustrated in the section, “Private Investment Risk vs Security”, the only advantage these sources bring the investor is that principle and interest are guarantied. However, this advantage is quickly lost due to the extremely low rates of return. Remember the Ole Fella who changed the hundred dollar bill for a twenty? The price of keeping investment funding in insured savings is the price of lost revenue and over time it is very costly.
Stocks are another very popular source that Private Investors use to fund investments. As illustrated earlier in the Table: Stocks Vs. Private Investment, five very sound reasons for using Private Investment over stocks are given. As the table illustrates stocks offer no security, they are not insured, purchased at market value, returns completely speculative, and the collateral is completely intangible. Private Investment, on the other hand, offers the Investor a fully secured investment vehicle with collateral that is fully insured against casualty loss, purchased below market value, provides fixed returns, and the collateral is a tangible asset. With Private Investment offering the investor so many advantages, it is no surprise that informed investors pass over stocks and choose Private Investment as a preferred invest vehicle.
Another important source of funds that investors can tap for Private Investment are retirement plans. Unbeknownst to most people, IRAs and many 401Ks can be used to invest in many different investment vehicles. To use retirement plans as funds for Private Investment the investor must establish or rollover an existing account with a Self-Directed Retirement Custodian. See our information on self-directing retirement funds.
Self Directed Retirement investing is a very lucrative way to build wealth because the tax advantages can add significantly to one’s portfolio. The serious investor will take the time to learn about self-directing their retirement funds. Failing to do so is very costly over time. Time is a critical element in retirement planning.
We are not a Self-Directed Custodian but we are happy to assist you moving your funds into a Self-Directed Custodian Account.
Life Insurance Policies
Other sources of funding that Private Investors can tap for Private Investing are life Insurance and annuities. These policies often provide the holder with investment opportunities that offer very attractive rates. The spread between the interest paid to the insurance company and that earned by Private Investing can be quite lucrative. Often these sources of capital are never tapped by the policyholder because of taboos against borrowing. There is a big difference though between borrowing for consumption or to bale out a friend or relative and borrowing for business capitalization. To borrow with the intention of using the money to earn money is a good and sound business practice.
Trust funds and other inheritances are excellent sources for Private Investment. These funds are going to be spent or invested. There are few investment vehicles that offer secured, hassle free, and high rates of return. Private Investment offers all of these.
Another source of funds is equity in a home. Home equity loans often provide very attractive interest rates and just like with borrowing on an insurance policy, the spread between interest paid and interest earned by Private Investment can be a source for building wealth. The project case we have been referring to in this booklet was funded with 100% home equity funds.
Borrowing against one’s home is not always advisable. If one’s home were to be placed in jeopardy should the Private Investment go bad, than the home equity loan should not be considered. In the case sited in this book, the Private Investor had sufficient means to pay against the home equity loan had the borrower defaulted, therefore, the Private Investor’s home was never placed in jeopardy. Though one should consider the home equity loan with caution, equity loans are a good source of funding for the investor who has unused equity that is just setting there not earning anything and who has the means to handle home equity loan payments in the event of borrower default.