Arbitrage by definition: The practice of taking advantage of a price difference between two or more markets striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.
And there you have it, a way of making money in real estate in a nutshell, now let’s crack it open and see what’s inside.
An example of simple arbitrage and real estate, making money on the difference as a private lender, would be if you did not have the funds but you have a wealthy Uncle with the funds. The Uncle loans you the money at 2% simple interest then you loan the money to an investor with the collateral being real estate at 8% simple interest. Not a bad investment. Your Uncle loaned you the money as a personal loan then you in turn loan the money on a collateralized investment. The difference of 6% simple interest is your profit. This is how easy arbitrage works.
Now let’s look at arbitrage with your own credit abilities if the rich Uncle does not pan out.
There are many types of credit you can utilize to perform arbitrage.
Line of Credit from a property you currently own. You use the line of credit which has a low-interest rate then invest in a property as a private lender gaining a profit from the difference in interest. You can pay a line of credit with the line of credit (read the fine print from your lender to make sure). You may also have tax benefits, consult an accountant for the specific in’s and out’s.
Credit Offers in the mail, the best ones are the interest free for 12 months or longer. But be careful to read the fine print, make sure the creditor is not charging a fee for using the credit. Also make sure the investment you are lending on can be liquidated before the interest begins from the credit offer. With the use of this type of credit, payments would have to be made, so make sure you can cover the monthly payments with either payments from the loan or from your own source of funds.
Credit Cards you currently have. Credit card companies send convenience checks to some of their customers from time to time. Occasionally the use of the check may or may not be interest free for a period of time. But beware some of the check offers charge a fee, which may be a percentage of the value of the check.
Obtaining a regular personal loan, this may not give you the best arbitrage but as long as there is a difference in interest in your favor then you still have arbitrage. A personal loan normally will have a specific limit with a payment schedule, so monthly payments are something to be considered.
Which ever way fits your situation arbitrage is a way a private lender can make money in real estate with minimal use of your own liquid funds. You can make a profit on lending the funds and make a profit on the use of the funds. So even if you are just thinking about becoming a private lender.
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