How to get Started in Hard Money Lending

Question

Hello Bigger Pockets Family! I have recently been searching out information on becoming a hard money lender and starting out. Podcast, Forums, and book recommendations are greatly appreciated, it seems to be a little harder to seek out “good” information on becoming a hard money lender . Thanks!

David Ginn · Answer

@Anthony Minutoli

Come to a system like I'm currently where you have a lot of peer based ideas and control and you can see the transactions from A to Z. Becoming a hard money lender on your own is going to be a trial by error and there's gonna be a lot of risk.  So what I would say is not so much how to become a hard money lender, but as a hard money lender, you need to decide who you're gonna lend to. That's the bigger question: who are you gonna lend to? And, what asset do they have?

So, as a hard money lender, I would not lend to newbies unless they gave me collateral that I could not refuse. I would be focused instead on lending to those who have a high level of experience who can show me their returns on investments on their last 10 deals so I have a real clear picture as to what kind of money these guys have made on their prior deals. And, if they didn't have 10, I would be looking at 5 deals.  And, those deals better be good because anything below that I'm probably gonna be more cautious on those kinds of deals.

So the way that you become a hard money lender is by identifying good people to lend to. And that's people with experience.  Go look at the work product. Look at what they've flipped.  Talk to people who know them and have an opinion they can share.  See what the person's personality is.  Do your due diligence on it.

In our system, lenders are getting on the calls constantly hearing how the buyers reason.  A good example is tonight where we heard Lauren ask questions on the call.  We heard Josh.  But the one that I would pay attention to most was Todd because he is new on the call. So as he steps into the market and he starts to look at properties and reason, you want to pay attention to his thinking skill set.  How is he thinking.  What he is doing. How is he reasoning through his projects? That to me is really critical when considering who you lend to.

Because, if you're just doing deed-of-trust lending, which in our case we put you in as a manager in the LLC. But if you're doing deed-of-trust lending, that's more passive. And if you hand that guy your money, and he's not really skilled at what he's doing, you're in for a ride that you may not be able to get out of for while. So you really need to know who you're lending to big time.

That doesn't mean you’ve chatted and had a few meetings now and again or that you had dinner together and your families had met up a few times and they're all excited about this new deal that you're going to go on adventure in… You need to get to know that person as in daily relationships, how he makes his decisions or how they are reasoning through deals.  You’ve seen them on multiple occasions in tough scenarios and how they respond to those scenarios.

So as a lender I would be very hands-on with the people I was working with and really gain an understanding of what their environment is and how they treat the people around them.  I think that is going to be quite telling.

Ben Stoodley · Answer

@Anthony Minutoli I’ve answered this question a few times on BP to fellow private lenders looking to enter the space. I think there’s no better time than now! I’d be happy to discuss further but here are some tips:

1. Learn the laws. The best attorney in the industry in my opinion is Geraci, they cover most states and laws change per state. If you’re focused here in CA - make sure you have your licenses and insurances. You can lend in CA if you’re licenses through either DRE, NMLS, or CFL

2.  Know your borrowers. I would recommend starting small with people you’ve worked with or can trust. Always require skin in the game by keeping conservative LTVs. Price based off risk and experience and financials.

3. Provide a solid product. Most private lenders don’t offer a myriad of loan options due to the fact they are private not institutional/corporate. You’re looking at the same things as investors so the more scattered your focus the less quality products / processes. There’s plenty of business out there. Pick a product that suits the types of projects you feel comfortable taking over.

Happy to connect and discuss more.

Good luck!!

Anthony Minutoli · Answer

David,

That was great information, and it packed a punch. I took a while to digest your answer and I appreciate how in depth you went. So if I didn't want to lend on my own do you know of syndications or groups that would specialize in this field is that even a thing? Say if the collateral is THE home purchased at $300,000,  THE home is already under contract. Collateral would be THE home valued at a $300,000 correct? ARV would be at $400,000, the borrower would be asking for $40,000 at 12% or higher and if he/she failed to pay the home under contract would be mine? At least that's what my thoughts were, that's why I asked. But thank you again and if you have any more information on the topic I am all ears over here. Thank you again.

Anthony Minutoli

Anthony Minutoli · Answer

Hello Ben ,

Amazing info, I really appreciate it. Did not expect that elaboration, but it’s spot on. Currently had a really busy end to my year and haven’t got on to the forums in a while. Once again, I appreciate you taking your time to give me a more clear example on what is required , and what to expect . Have a good one!