Better to invest in a fund or try to be a private/hard money lender?

12 Replies

I've been spending a good deal of my time on this site lately looking into what it takes to being on the lending side - private / hard money lending, investing in notes, etc... Seems like there are a ton of legal regulations & landmines. I'm trying to do my investing in real estate on a part time basis and the goal is passive income.

Do you think it'd be better to just invest in a fund with a reputable person or company who already has the experience in doing this (whether it be a note fund or a private money/hard money lending fund)? Or worth it to figure it out on my own? Either way I would obviously do my homework to learn what I'm investing in, I'm just concerned about my ability to locate/evaluate good deals vs. someone who does this full time. Any advice is totally appreciated.

If looking for pure passive income I think your best bet would be to invest in a fund with a reputable company.

Account Closed . If the main goal is passive income through lending, find a reputable fund or ask for recommendations for one and invest with someone who already knows what they are doing. Lending is a different animal.

While I have not directly lent money to real estate investors, I brokered hard money loans back before the 2008 crash. I worked real closely with a principal of a hard money lending company that lent nationwide. I accompanied him on several on site due diligence inspections on deals I had sent him and learned a lot about the HML business. When we went on an on site due diligence inspection, we would meet the borrower/s, study the subject, the comps, the market and talk to knowledgeable local realtors to see if we could to get a good feel for the market. Then if we felt good about the deal, we would need to find a good local real estate attorney to act as the local lender's counsel to make sure that we were in compliance with the lending laws in that particular State and jurisdiction and our documents were drafted correctly to be enforceable in that jurisdiction.

Once the loan is in place, you need a system for servicing, accounting, making sure taxes and hazard insurance premiums are paid and.....a system for collections if things go wrong. If things go really wrong, you need to be on your game to legally take the property back and find a way to dispose of it.

Bottom line, to be a lender, your due diligence has to be top notch and you have to know everything you can about the subject property, the borrower and the market the subject is in. If you ask me, there are too many moving parts to handle to start out in lending without any prior experience. You can grow into it with time and experience but I would not start there.

@James Wise Simple and to the point, advice noted, thank you.

@Anthony M. Thank you for the insight into the process, although I know that's just scratching the surface. Quite complex, but at least you seem to have a good handle on it.

Pretty convincing. If I invest in a fund, how involved can I get in the process? Am I shut out from "learning" as I invest?

Account Closed I don't know but I would say if you get involved in with a major institutional fund, you would probably be just another number and most likely be shut out of the process. If you network at a local REIA and get to know local, real life, experienced, reputable investors that lend privately in your local market, they may offer you the opportunity to partner with them on something they are lending on and thus be willing to teach you the inner workings of the lending game since you are vested with them.

Some reputable self directed IRA companies may have some good educational material on how to be a private lender using a self directed IRA...I don't know, I have never looked into it.

You can also learn a lot by reading through membership agreements that funds put out to see how they are structured and how they lend. Reading through legal documents in public records that chronicle a transaction can also be helpful.....even starting out with the promissory note or simply note and mortgage (or deed of trust) on your own house if it is financed and any other documents you signed e.g. your home owners insurance policy when you purchased it.

On top of everything, make sure you have a good reputable attorney if you ever get into lending to keep you away from potential land mines that can sink you before you even set sail.

@Anthony M. Great advice. If I decide to invest through the lending side, sounds like the best way would be to diversify, both with a larger institution and perhaps partner up with a local private lender. I'm looking for passive income, but that doesn't mean I don't want to put in the time to fully understand what I'm investing in. Thanks again...

There's no right or wrong answer here, Account Closed

We know a number of passive cash-flow investors here in LA and we periodically receive legitimate fund solicitations. Most of these are Rule 506(c) Reg. D securities and require you to be an accredited investor. This means you must have a net worth of at least $1,000,000 or earn at least $200k per year over the past two years, if you're single. In general, no credible fund can take your money without an SEC registration. Be careful of anyone that says they can.

In the realm of real estate, the investments range from speculative land development, to foreclosure funds, to large commercial fix and flips, turnarounds, new construction, and even water rights. Of course, there's also oil & gas. I know one cash flow investor who invests in ATM's. My point is to never invest in anything you don't understand, so before you do something like this, you have to vet the fund, the manager, the area, the economy, and the investment itself. Often, you'll never meet or visit any of these since many of are either out-of-state or even out of the country.

A track record and personal reference is crucial here and it can be a tremendous amount of work. Are you comfortable with this and also capable? Do you have the time? The expertise? Personally, we like to stay closer to home and be able to kick the tires.

Lending locally gives you the security of a first trust deed lien, against a property you can see, to borrowers you can get to know and develop a relationship. Don't underestimate this safety. You have tremendous security with this control that you won't get in any fund.

One way to get into lending is to buy a performing first position note from a local hard money lender. Here you'll get to meet the broker and see the paperwork and property. Naturally, you'll want a lending attorney to look at the documentation. As with a fund, you'll generally give up return since someone else found and vetted the deal. Doing this on your own however, is remarkably easy after you've done a deal or two and well described on this board if you do a search. From beginning to end, we spend no more than six to eight hours on any one loan, so it's very time efficient. As you could guess, this business is regulated, as well.

CA SB978 requires that you cannot invest more than 10% of your net worth in any one brokered loan, though you can do an unlimited number of loans. Considering that a typical southern California flip requires $100k to $400 or so (though you will loan less), you can do the math. There is no limit if you become a licensed RE broker or CA finance lender and originate your own notes. Alternately, you could do this in another lender friendly state, but you're really flying blind here and likely well beyond your skill set.

Some brokers also fractionalize their local loans, requiring much smaller investment if you don't mind sharing the loan, and control, with others. These are still secured by real estate local to you, and could be another option depending upon your cash structure.

If this doesn't work for you, there's always Prosper or some of the new crowd funding sites. These tend to be unsecured and/or to unsophisticated investors which, to me, is gambling.

Good luck, Peter.

You might consider attending a local real estate group and consider a Joint Venture with someone. The returns would be better, you could evaluate the property and have your investment secured by the property. You could select a very local property that you could have some involvement with. Food for thought.

Well said Jeff S Na

Account Closed

Thanks for the valuable advice. I have already signed up to attend a few local RE groups in an effort to learn & network.

The good thing is all the options you mentioned seem to be open to me, definitely a lot to consider & so much more to read...

Account Closed I think it depends how much capital you are looking to invest. I'd recommend you diversify -- be it a few funds, a few seperate properties, etc.

Thanks, all great advice everyone. I'll let you know what I end up doing.

I have done both. But I dont have time and knowledge to do due diligence on many properties so the Private Lending has been to people I trust and know. Its more based on person than property, even though I do get the Deed of Trust. Since I only do that on a limited basis, I dont have money working all the time. I also have invested in a fund from an SDIRA account thats paid b/w 12-15% with regularity with no effort on my part. So I definitely like that model a lot. Again, you have to find someone who you trust and knows what they are doing and have to be an accredited investor.

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