What does mailbox money have to do with retirement?

What does mailbox money have to do with retirement?

By Jadon Newman

Remember when you played Monopoly as a kid and itched for your turn to be the banker, dealing out all that cash to your friends who were investing in properties such as Park Place and Tennessee Avenue? These days, some people are figuring out how to be the bank in real life to provide themselves with more stable and predictable retirement income, often referred to as mailbox money.

Here’s how they do it: As an alternative to a 401(k) account or investing in the stock market, they become private lenders for people who are investing in real estate. And just as borrowers send monthly payments to a bank or mortgage company to repay the loan, these private lenders receive a monthly check in the mail as repayment with interest — mailbox money.

Have you ever watched those TV shows where people are flipping houses? Private lending is how a lot of flippers are able to flip houses. They end up making a profit, but so do the people who loan them the money.

The concept of private lenders fronting the capital for a real estate investment is called hard-money lending, and the loans are short term — typically 12 to 18 months.

For some people, mailbox money is a viable alternative to other means of investing.

Real estate investment provides more certainty and predictability than many other forms of investment, especially the stock market. Nothing against the stock market, but there’s a lot of risk there.

There are a few advantages to securing mailbox money by “being the bank” and becoming a private lender for real estate investors.

Low risk

Certainly, real estate has its risks, but those can be greatly mitigated if the projects are structured the right way. When my company works with investors, the loans are written at 70 percent loan-to-value or lower, giving the investors 30 percent protective equity to insulate them against market volatility. Since the investment is backed by a tangible asset, there is less speculation and therefore greater security.

Steady cash flow

With fewer companies offering pensions, one problem many retirees encounter is they don’t have that monthly mailbox money coming in. Investors who act as private lenders do receive a check each month.

Potential for good returns

Borrowers seeking hard-money loans often do so because they can’t get conventional loans or because the ability to obtain money is much quicker. As a result, hard money lenders can charge higher interest rates than what the rates would be for a conventional loan. For example, the investors I work with usually get a 6 to 8 percent return. It’s a predictable, reliable return.

The biggest worry people have in retirement is that they are going to run out of money. That’s why it’s important to explore different ways to get a good return on your money, and a lot of people are finding that “being the bank” puts them on the right side of the equation.

Jadon Newman is the founder and CEO of Noble Capital. With more than 16 years of experience in the financial services industry, he specializes in retirement planning, real estate investment, and asset management.

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