Is a 9% Return Too Low for Private Money Investors?

After the collapse of multiple banks in 2023, established financing dynamics have begun a historically significant shift toward private money. In response to increased regulatory pressure, banks are stepping back from their role as traditional lenders for various loans.

This shift leaves a gap in the market for private financing of business loans and commercial real estate. As banks reduce their risk tolerance and tighten lending standards, private money investors are positioned to meet the growing demand for capital. 

When it comes to loans that banks aren’t willing to finance, what measure of return on investment (ROI) is worth the risk? Is a 9 percent return too low? Let’s take a look at the terms.

The Right Rate of Return

High-yield returns and consistent cash flow are the main incentives for private money investors. Double-digit returns are typical for trust deed investments secured with quality collateral. ROI can vary from 9-15 percent earned annually and, in some cases, even higher. 

The right rate of return will depend on what makes sense for the deal. Fluctuations in ROI are reflected in the loan structure and the length of the loan process. Although setting the bar as high as it can go may sound great, it can create unsustainable pressure for borrowers. Steep interest rates can be a deal breaker.

Is It All About the ROI? 

The short answer is yes. It all comes down to the return on investment. However, good ROI for one investor may not be good enough for another. 

The borrower also has a stake in the terms. Trust deeds are an investment in real estate debt. The private loans are secured by real property, minimizing the risk normally associated with private money investing. 

Many private money borrowers view the high ROI for investors as the opportunity cost. Real estate professionals rely on fast funding to close on investment properties in a competitive market. The short turnaround to sale makes higher interest rates more sustainable for their purposes. 

However, other borrowers may not have an alternative to private money as banks restrict lending standards. Each loan should be structured to meet the borrower’s needs and consider their ability to repay. 

What Rate of Return Is Too Low?

Determining the minimum return on investment will vary by risk tolerance. A 9 percent return may be too low for some investors. Higher returns may come with higher risk. Modest returns may come with reduced risk. 

Due diligence for any private money investment should look at more than the rate of return. Review other loan details for qualitative factors—such as the valuation of collateral—to assess if the risk and reward are balanced. 

Although debt securities do not come with a guarantee, a 9 percent rate of return for a passive investment in real estate is a valuable addition to any portfolio. When underwritten conservatively, trust deeds generate consistent returns with an acceptable level of risk.  

Start Earning Returns 

The supply of capital is not keeping up with demand through traditional financing. Borrowers need commercial real estate loans, whether banks will fund them or not. 

Learn about opportunities to start earning returns with private money investing. Contact us at any time to speak with a Val-Chris Investments specialist.