Is It Better to Be a Lender or an Investor in the Real Estate Market?
Is there not much difference between an investor and lender in the real estate market? There’s a big difference between the two. And it is in the way they earn money. Read this article, and in the end, you will know what direction you need to take if you want to make big money in the real estate market.
First, Let’s Discuss the Basic Differences
A real estate investor puts in his money into a real estate property in the hope of earning money in the future. The real estate lender earns money through interest payments. In short, they both earn money in the process. On the surface, there’s not much difference, right? The difference is only in the way they earn money.
Now, Here’s Comes the Nitty Gritty
The question you need to ask is: who earns more in the real estate market—the investor or the lender? For purposes of clarity, we will illustrate the concept by citing a simple example.
Suppose an investor would like to buy a building worth $100,000. But he lacks money to buy the building. So he goes to a bank or a lender to borrow the amount of money that he needs.
The bank or the lender puts up 80 percent of the value of the property. Meanwhile, the investor puts up equity of around 20 percent. It appears that the investor shoulders less than the lender. But if you look deeper, you will get the real picture.
What the Future May Hold
The future may hold two scenarios. Either the property value goes up or the market crashes down. In the first scenario, both the investor and the lender are happy because both will be earning money. But in the second scenario, only the lender is happy since he will still earn his money from the interest. If the borrower can’t pay his loan and interest, he can get the building itself as the collateral. In short, the lender will be ahead than the investor.
Whether the value of the property goes down or up, the lender is fine. But the investor loses his money when the worth of the property is down. He loses the property altogether if the market crashes and he is not able to repay his loan.
The investor is taking all the risks while the lender is always protected no matter what happens.
Other Factors You Need to Consider in the Real Estate Market
Another consideration is the fees. Who pays all the fees? The investor. These fees include the following:
- Title Insurance which protects the lender, not the borrower
- Recording fees for recording all the loan documents
- Property insurance in case of fires
These fees ensure that the value of the property is paid back. To whom? To the lender. He gets paid first before the borrower or investor. And yet, the borrower and not the lender pays all these fees. But these fees protect the lender, not the investor.
The lender is always in a superior position than the investor or borrower. It is the investor who has more to gain if the property value goes up in the short or long term. But the investor is carrying much more risk and costs than the lender. This is the reason why real estate lending is much more profitable.
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