Hard money lenders don't loan money to make 12%. They normally leverage their money with a bank to create a line of credit to dramatically increase returns.
Here's an example:
$100,000 cash at 12% annually is $12,000 (12% Cash on Cash Return or CCR)
Now let's say you take your $100,000 cash and leverage it at a bank to secure a $400,000 line of credit. Let's say you are paying 6% on $400,000 while you loan it out at at 12%, which is a net of 6% on $400,000 or $24,000 annually, a 24% CCR.
Now let's look at the magical origination points:
5 points (%) on 12 month notes for $100,000 cash is an additional $5,000 annually which totals to a 17% CCR on your $100K.
5 points on 12 month notes for a $400,000 line of credit is an additional $20,000 annually which totals to a 44% CCR on your $100K.
44% on your money. You can not beat that return anywhere, and on top of all that its backed by real estate (which currently may be a bad thing in some markets :D)
Now let's look at the drawbacks to Hard Money Lending. You have to have impeccable credit, and you will have to have a strong relationship with a banker. You will also need extensive experience on determining a good deal from a bad deal. If you pick a lemon (whether its the property or the investor you loaned to) and get it back in foreclosure, your returns can evaporate quickly. Hard money lending is about making sure the equity is there (and I mean REAL equity not paper equity) and making sure you are making loans to solid investors. You also need to be well versed in quickly and profitably getting rid of your lemons when you get them back.
Hard money lending should only be done by very experienced investors who know their market well. I have seen several hard money lenders pretty much get pick pocketed by smooth talking wholesalers who were unloading lemons onto the next fish. Getting traditional appraisals won't protect you with what we're talking about here. Good old fashioned in-the-trenches experience in determining the fire sale value of fixer uppers is the only real protection a hard money lender has against being the fish who gets stuck with the lemon.
a 10-15% return on your money that is secured by property...
isn't a bad way to make a few bucks.
Some due diligence on who you're dealing with along with the property you will be funding is important...as with any investment, you will have risk involved.
I'd love to hear from more who've done this. I have been educating myself on tax liens, SFH and multi unit investing so as to diversify away from my current stock / bond allocation -- thinking "he who is willing to get hands dirty makes more money."
I have had decent luck with Prosper.com -- I simply diversify to the max, find as high interest as possible with high credit ratings. Very few defaults and COC of 10% give or take.
I am guessing it's the same way with hard money lending? Dont' just take a 100K and lend it to 2-3 people, create a portfolio, so to speak, of well researched loans .... ??
Much tougher to diversify with hard money. You would typically fund the entire deal. So, if you have 100K and want to do 2-3 deals, you'll need to find $30-50K deals. If deals in your area are closer to $100K, you'll have to just do one at a time.
If you go to your local REIA, and make it known you have money to lend, you'll have more takers than you can fund.
You may want to work with a broker, at least to start. They will do a lot of the leg work and handle the paper.
If you are really going to get your feet wet, I am out looking for Hard Money myself. My deals would be the smaller type (30-80k) each.
Just keep me posted if you jump in please! :) Good luck with your research.
Hard money lenders don't loan money to make 12%. They normally leverage their money with a bank to create a line of credit to dramatically increase returns.
Here's an example:
$100,000 cash at 12% annually is $12,000 (12% Cash on Cash Return or CCR)
Now let's say you take your $100,000 cash and leverage it at a bank to secure a $400,000 line of credit. Let's say you are paying 6% on $400,000 while you loan it out at at 12%, which is a net of 6% on $400,000 or $24,000 annually, a 24% CCR.
Now let's look at the magical origination points:
5 points (%) on 12 month notes for $100,000 cash is an additional $5,000 annually which totals to a 17% CCR on your $100K.
5 points on 12 month notes for a $400,000 line of credit is an additional $20,000 annually which totals to a 44% CCR on your $100K.
44% on your money. You can not beat that return anywhere, and on top of all that its backed by real estate (which currently may be a bad thing in some markets :D)
Now let's look at the drawbacks to Hard Money Lending. You have to have impeccable credit, and you will have to have a strong relationship with a banker. You will also need extensive experience on determining a good deal from a bad deal. If you pick a lemon (whether its the property or the investor you loaned to) and get it back in foreclosure, your returns can evaporate quickly. Hard money lending is about making sure the equity is there (and I mean REAL equity not paper equity) and making sure you are making loans to solid investors. You also need to be well versed in quickly and profitably getting rid of your lemons when you get them back.
Hard money lending should only be done by very experienced investors who know their market well. I have seen several hard money lenders pretty much get pick pocketed by smooth talking wholesalers who were unloading lemons onto the next fish. Getting traditional appraisals won't protect you with what we're talking about here. Good old fashioned in-the-trenches experience in determining the fire sale value of fixer uppers is the only real protection a hard money lender has against being the fish who gets stuck with the lemon.
Great post Ryan.
In conclusion, YES, you can make a great deal of money (without the management headaches) by lending money secured by RE. Of course, as Ryan stated, you should have enough experience and knowledge on how to evaluate the deal and the investor prior to handing over your cash (and leveraged cash).
second the motion on the great response from Ryan. I'm new to this forum however not new to investing. Doug, I've loaned hard money before, however I do it a tad bit differently, I lend it out of my SDRP (self directed retirement plan) I do that for tax free growth on the return of the investment. I also enjoy the rule of 72 that can be applied in hard money lending. I would suggest you enter the hard money lending world for the great returns however do it with extreme caution and hire the best attorneys and consultants to help guide you the right way. Good luck!
Great feedback! Like any investing, there is a risk, however unlike some other forms of investing, you are able to limit some of those risks by doing your homework. While the returns have the potential to be good, and sometimes great, there exists the potential for loss, maybe major loss, if the deal goes sour. I have been a Private Lender at times, used Private Lenders at times and brokered other peoples money for Private Lending as well. My take on it - research it thoroughly, try to leverage your money in the smartest way possible with the greatest chance for highest return, lowest risk and move slowly, only when comfortable. In other words, get others involved (mortgage broker that has contacts for people seeking the funding and attorney to draft docs and oversee the deal, including any escrowed funds if it is a purchase/rehab deal), get a real time appraisal of current value and after repaired value if being rehabbed, have a neutral 3rd party visit the property on a scheduled basis for inspections, and set a conservative max. LTV (Loan To Value) that you intend to lend on either the current value if no rehab is planned or ARV (After Repaired Value) if a rehab is planned. And of course, make sure that you can live with the worse case scenario, just in case it does not turn out as well as you had hopled.