Double-digit ROI is Possible!
The number one conversation stopper we hear when speaking to potential investors is: “It’s not possible to get a double-digit ROI!”
What is an ROI, or “return on investment”?
Any increase in value over the amount of principal you have invested is your return on investment. This is measured by an interest rate referred to as the annual percentage yield, or APY.
People tend to be incredulous to hear that any monetary growth vehicle can do much better than 10-12% APY. Why? We’ve concluded that people are simply conditioned to accept low ROIs.
Savings accounts earn less than 1%. CDs are barely up to 2%. Mutual funds can yield you 8%. A good stock can get up to 10-15% but you can never forget that you can lose that much overnight if the stock tanks. Traditionally, the higher the APY, the higher risk of all the cards falling down.
Unless you are diversified across many various types of platforms and products, you will be subject to average-level APYs and potential losses. When factoring losses against gains, you may be surprised that you are netting single-digit returns, all things considered.
The general population sees this systemic financial glass ceiling laid out before them year after year after year. Any claims that vary from what is collectively considered “the norm” are typically regarded with skepticism and even outright hostility. You may even come across hit pieces from time to time vehemently against bona fide private lending. All based on a rigid (and ignorant) assumption that: “It’s not possible to get XX% APY!”
Before outright dismissal of what could be fantastic opportunities, one would do well to look at facts. Let’s look at one that by itself should put this reasoning to bed.
Question: Is it possible to make double digit returns?
Answer: Yes. Banks and 3rd party lenders do it all the time.
According to ValuePenguin.com*, average personal loan interest rates ranged from 10% to 28% in 2019. Wait…what’s the high number? 28% percent you say? I thought the mob had just agreed that it was impossible to make those kinds of ROIs?
Now, to be fair, any unsecured loan is going to have an interest rate that is calculated on factors such as: FICO credit score, yearly income, and other factors. Chances are you won’t be paying the highest rate. But some people do.
*Reference: Personal Loan Rates 2021
“Well, maybe that’s just the banks,” you say. “Only the worst credit scores get socked with those rates,” you also add. Let’s look around a bit more and see if we can find any more evidence to the contrary.
Let’s imagine you are redoing your kitchen. You don’t have the liquid capital to outright buy everything, so you go to Lowe’s and sign up for promotional credit financing. As of the time of this blog’s writing, Lowe’s has 6 Months Special Financing available*.
*Reference: Lowe’s Promotion
The fine print states—
“Offer applies to purchase or order of $299 or more on your Lowe’s Advantage Card. Interest will be charged to your account from the purchase date if the promotional purchase isn’t paid in full within six months. Minimum monthly payments required. No interest will be assessed on the promotional purchase if you pay the promotional purchase in full within six months from the purchase date. If you don’t, interest will be assessed on the promotional purchase from the purchase date.”
In other words, if you don’t pay off your balance within the 6 month grace period, the interest rate will be back-charged on the full purchase price regardless of how much has been paid off to date. That will put a dent in your wallet. But what’s the interest rate they are currently charging?
If you are a new account, here’s what they say—
“Standard APR is 26.99%.”
Wow! A 26.99% return on investment for Lowe’s to make an investment in you. Not bad if you own or are a shareholder in the company! And that’s the finer point to grasp. No one bats an eye when they see the fine print for a credit card or loan application stating that worst-case scenario interest is north of 25%. If you are like most people, you figure you’ll get it paid for and avoid the crushing blow. The thing is, life happens and a lot of people get stuck paying the high rates. Ka-ching for the credit companies.
When a bank or 3rd-party lender lends you money, they are making a private stake in you. They have evaluated and accepted the risk you afford them and they feel they have a very good chance of making a tidy profit on you.
Now, is your life regulated by the SEC? Do you have to procure a prospectus for Lowe’s to look over before they decide to invest in you with a line of credit? Of course not. This is a private lending deal.
The exact same scenario exists in reverse when you become the lender and privately place money with a company or fund in the private lending marketspace. As we can see, from the above store and banking examples, getting a double-digit ROI is not only possible, it’s very real.
“Why would a company pay me XX% to borrow my money? Isn’t that kind of stupid?” you may ask. The same question can then be asked of any of us that apply for in-store credit cards. Are we stupid? Don’t answer that. The fact is, when you can’t afford something all at once, you need to finance it. If you want it badly enough, you’ll pay for it.
Here’s a very relevant detail about the private lending sector that may have escaped your notice. When you or I go to Lowe’s, sign up for credit and agree to these high-interest APRs, we are likely using the money up after we receive it by purchasing items that will not appreciate in value or may be outright consumed. Now, if you are improving your home, your home value will increase but likely not by the amount you have just spent. Perhaps over time, as your neighborhood housing values increase, you could recoup your full investment. For the moment, however, you are spending the money and once it’s gone, that’s it.
What many people overlook is what is called opportunity cost. Opportunity cost is what anything of value would have earned for you should you have kept it. The easiest way to understand this is to reflect on the fairy tale of the Golden Goose. As long as the goose was alive, golden eggs were produced. The goose is more valuable than the eggs. If you ate the goose, no more eggs. That would initiate an opportunity cost. How many eggs would have been laid if you hadn’t cooked the goose?
Not growing liquid capital creates an opportunity cost. How much would that money have earned you if you would have grown it instead of spending or sitting on it?
Let’s see this from another direction.
If you would borrow money from a lender at, say 10% APR but instead of spending it, you put that money to work for you in a vehicle that produces a fixed, APY of 12%. Over the length of the term, you would net a 2% gain! In this scenario, you recovered your opportunity cost. This is called arbitrage. When they say: “You have to spend money to make money,” this is what they mean.
Private Lending Designed for You to Profit
Properly cultured and vetted private lending vehicles are set up to do exactly this. Capital (your money + the other people’s money) is put to work in ways that generate more capital for the borrower. In this way, they can not only pay you back with interest, they are able to profit some themselves. This profit can, in turn, be put to use again and again. Every time growth is recycled back into the vehicle, compound growth occurs. Over time, a lot of wealth can be generated for the borrower and the lender (you).
Of course, any growth vehicle carries risk. We see that in the stock market everyday. Ever look at your portfolio in the morning and practically have a heart attack from the drop in value? That’s risk. Not all stocks are good investments. Not all private lending opportunities are good either. You need to do your due diligence.
The types of vehicles we provide education on have various levels of lender protection; one protection in particular is that the borrower never borrows more than the equity that has been collateralized against the borrower’s own loan.
Translation: Real-value assets such as real estate or equipment are pledged as collateral against any unforeseen default. The borrowers also make sure to only create debt up to a certain percent of the pledged equity. This keeps the risk at a definitive minimum for you and them.
That, along with other layers of protection and risk-mitigation can make this type of growth vehicle appealing. Try getting that out of a stock. You, the lender, always assume the risk in the stock market. If the company you invested in goes belly up it’s: “Thanks for playing!” and you get the short end of the stick.
If you would like to learn more about how your capital can grow in a stable, predictable and fixed-rate asset growth vehicle earning a double-digit ROI, send us an email or simply schedule some time with us on our calendar. There are no fees to work with us. We are here to provide you with financial literacy and tools so you can be in the driver’s seat of your finances.
We’d love to chat and answer any questions you may have!