Updated: Nov 12, 2021
To be clear, private lending in short-term real estate flips is lending, not investing. A person or business can make money by either lending or investing, or both. But only one of them can guarantee you a certain return on your money.
To Invest means to commit (money) in order to earn a financial return.
To Lend means to let out (money) for temporary use on condition of repayment with interest.
(Source: Webster's Dictionary)
While these two terms are very similar and often used interchangeably, there is a subtle but significant difference between them. When you invest, you are not guaranteed an exact return on your investment. For example, a stock broker cannot guarantee you a certain return on your stock investment.
But when a person or business lends money at a certain percentage rate, the borrower does guarantee the lender a certain amount of interest for the use of the lender's money.
Securities are regulated by the Security Exchange Commission (SEC)
The fact that an investment can not guarantee an exact amount of return on securities is the reason the Security & Exchange Commission (SEC) prohibits and investigates anyone who guarantees a return on security investments. It is a violation of federal and state law for anyone to guarantee a certain return on securities.
Securities are broadly defined as financial instruments that hold value and can be traded between parties. In other words, it's a catch-all term for stocks, bonds, mutual funds, exchange-traded funds or other types of investments you can buy or sell. Source:Tim Stobierski of Northwestern Mutual, June 15, 2018.
Loans are note securities
It is well settled that loans are obligations that arise in a lending relationship, and are therefore not securities under federal and state securities laws. See Kirschner v. J.P. Morgan Chase N.A., et al., 17-cv-06334 (PGG) (S.D.N.Y. May 23, 2020).
Since loans are not considered securities, (and our loans are never sold or traded), the Security Exchange Commission regulations do not apply to private loans for short-term real estate fix-n-flips projects. Our developers can and do promise to pay our private lenders 12% APR for the use of our private lender's money.
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