How Much Money do I need to Invest or Lend?

If there’s one question that I hear more than any other, it’s how much money do I need? I’ll attempt to answer that question in this article.  There are several factors that might affect how much you’ll need, or potentially how much you’d want to invest in private lending or passive investing.

What’s your preferred strategy?

You might not have a preference yet, but ask yourself whether you are happy to forego the potentially bigger win for steady and more certain returns?  If you prefer the riskier strategy with the largest potential upside passive investing is your way to go.  If you prefer to play it safe and have a more certain and known return then lending is probably the way you should go.

If you’re a passive investor it’s unlikely you’ll be able to invest if you’re wanting to place less than $20,000.  It’s very common for operators to have minimum investments set at $50,000 or $100,000.  My typical minimum is $25-50,000 depending on the deal, but I may make an exception down as low as $10,000 for an investor that has the capability to invest on a larger scale but doesn’t want to jump in with both feet on our first deal together (which is totally understandable).  So if the minimum is set higher than your comfort level make sure to have a conversation with the operator about a smaller initial investment.

What’s your investment horizon?

How long are you willing to tie up your capital?  First thing I would say about this is that operators don’t typically offer much flexibility when it comes to the return of your capital, so in reality when you get your money back likely has more to do with market conditions and the other investor’s preferences than it does with your wants or needs.  Unless there is a specified and guaranteed timeline to the investment I would make sure you’re not investing money you’ll need back at a particular time.  Even if a guaranteed timeline is provided I’d recommend some “wiggle room” in your timing in case things don’t go exactly to plan.

Usually debt investments have a more specific timeline, but that’s not necessarily always the case.  Super short term loans, transactional, or bridge capital usually comes with a higher interest rate, but also generally requires a larger amount.  It would be unusual to be able to place $25,000 in a situation like this unless you’re loaning someone a down payment, which would make you second position and a very risky loan.

For longer term private loans some operators may be willing to accept multiple smaller loans to get to the total amount they need.  The additional effort required to do this generally translates into lower interest rates for the lenders, but it will still be much better than what you would get from your savings account!

There is not much of a correlation between investment amount and timeline for passive investments.  In a typical deal with passive investors there will be multiple investors, some investing the minimum and some investing many multiples of the minimum, and all will receive their investment capital back at the same time.

How much is too much?

This is a great question and one that every investor should ask themselves before investing in anything or lending any money.  Most of the time the answer to this question is based on a multitude of factors including stage of life, income sources and stability, net worth, financial obligations and available liquid capital.

For example, a retired person with only social security income and $100,000 in the bank should not invest the entire $100,000, however a person in their 20s with no kids, no debt, and very low living expenses with a steady and stable salary of $75,000 per year is probably safe to invest the entirety of their liquid capital.  What makes the difference?  

Social security will not provide enough income to live off of, especially if there are major unexpected expenses or a need to help out a loved one.  So in that case the retired person probably would want to retain at least $50,000 in case of emergency.  However the person in their 20s has very little in the way of financial obligations, and with a significant and stable earned income stream there is not much reason to retain a large amount of available capital in the bank.

In other words you need to consider your entire financial picture, and make sure you’re accounting for potential expenses that might pop up in the future.  A good rule of thumb is that you never want to invest more than 5% of your net worth in any single investment.  If you’re a real risk taker you might could up that to 10%.  If you are young (plenty of time to bounce back) with no real financial obligations, a low but growing net worth and a decent income you could roll the dice with 50% of your net worth on a single investment, but I’ve never been much of a gambler and I wouldn’t recommend it!