Hard Money Lending

Minneapolis, Minnesota
Private Lending & Conventional Mortgage Advice
2yFollow

Hard Money Lending

Christopher Martin
Member since 2023 · 4 posts · 6 votes

I have a close friend who is a contractor and flips houses.  He has worked with other hard money lenders in the past.  I have been wanting to invest in real estate and he suggested that I become a hard money lender.  I would start small and just do 1-3 deals with him to learn the business.  If it went well I would consider working with other clients in the future, but would just start with him since I know and trust him very well.  I have substantial capital in the public equities markets and would like to diversify my investments, so that is the reason for wanting to do this.  Also, I have some time to invest, and I am hoping that by investing my time I would get a higher return than what is available if I just passively sign up for one of the crowd funding sites that do real estate loans.  

I have researched it, and it seems that you need a mortgage originator license from the state, and to be registered with NMLS to offer these types of loans.  Is there anyone who has formed a similar company that could help me learn more about the steps to getting started?  I would appreciate any feedback.  

1Reply
210 views

Most Popular Reply

Jeff S.
Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
2y

There are a few books and many online resources available for learning how to become a private lender, @Christopher Martin.  However, nothing will replace spending an hour with a good lending attorney to get you started with up-to-date info. Education is the key.

Some of the professional organizations, such as the American Association of Private Lenders and the CMA, are good sources of lending attorneys, as well as offering excellent webinars and courses. There are books out there and a few BP posts that could also help you.

Just ensure that your education is broad and authoritative. For example, private lenders can make owner-occupied loans all day long. After licensing and usury, consumer purpose and business purpose, under which owner occupancy falls, are probably the most misunderstood topics in private lending. This is why you must speak to a lending attorney. Maybe you’re not the only one 😊.

We diversify by lending to various borrowers and not into funds. Note that the difference between earning 10% in a fund and 12 to 15% from individuals is not 2 to 5%, but 20 to 50% on a cash returned basis.

Most of the lenders we know who loan their own money and don’t find their own borrowers like we do, keep their pipeline full using brokers who bring them their loans. There is no right or wrong way to do it.

Lastly, and you know this is coming, nothing will change a relationship faster and for the worse than when money is involved. Be careful lending to friends and family.

3Reply
See this reply in the discussion

12 Replies

Jump to latestLatest
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y
    Quote from @Christopher Martin:

    I have a close friend who is a contractor and flips houses.  He has worked with other hard money lenders in the past.  I have been wanting to invest in real estate and he suggested that I become a hard money lender.  I would start small and just do 1-3 deals with him to learn the business.  If it went well I would consider working with other clients in the future, but would just start with him since I know and trust him very well.  I have substantial capital in the public equities markets and would like to diversify my investments, so that is the reason for wanting to do this.  Also, I have some time to invest, and I am hoping that by investing my time I would get a higher return than what is available if I just passively sign up for one of the crowd funding sites that do real estate loans.  

    I have researched it, and it seems that you need a mortgage originator license from the state, and to be registered with NMLS to offer these types of loans.  Is there anyone who has formed a similar company that could help me learn more about the steps to getting started?  I would appreciate any feedback.  


     It depends on the state. Most states as a private lender you do not need to get a license as you are not lending to owner occupied homes (that is the key never lend to owner occupied).

    The reality is as a HML the return you get compared to investing passively in a private lending fund is not going to be very different. The reason why is in a fund your money is always working 12 months out of the year. So lets say a fund gives 10% on $100k. Thats $10k a year.

    Lets say you get 12% on your hard money. But you have to find a deal, underwrite it then it pays off. If you are invested 10 months out of the year you are getting the same as the fund. The fund has greater diversification as you are not tied to one assets. There are other concerns of course with a fund whereas you are not in control, but in most instances you will get about the same.

    If you eventually wanted to make a business out of this and do it full time, then of course there are a lot more advantages to start doing it yourself.

    7e investments53 Reviews
    WebsiteView Page
    2Reply
  • Jeff S.
    Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
    2y

    There are a few books and many online resources available for learning how to become a private lender, @Christopher Martin.  However, nothing will replace spending an hour with a good lending attorney to get you started with up-to-date info. Education is the key.

    Some of the professional organizations, such as the American Association of Private Lenders and the CMA, are good sources of lending attorneys, as well as offering excellent webinars and courses. There are books out there and a few BP posts that could also help you.

    Just ensure that your education is broad and authoritative. For example, private lenders can make owner-occupied loans all day long. After licensing and usury, consumer purpose and business purpose, under which owner occupancy falls, are probably the most misunderstood topics in private lending. This is why you must speak to a lending attorney. Maybe you’re not the only one 😊.

    We diversify by lending to various borrowers and not into funds. Note that the difference between earning 10% in a fund and 12 to 15% from individuals is not 2 to 5%, but 20 to 50% on a cash returned basis.

    Most of the lenders we know who loan their own money and don’t find their own borrowers like we do, keep their pipeline full using brokers who bring them their loans. There is no right or wrong way to do it.

    Lastly, and you know this is coming, nothing will change a relationship faster and for the worse than when money is involved. Be careful lending to friends and family.

    3Reply
    • Ben H.
      Member since 2024 · 7 posts · 3 votes
      4mo
      Quote from @Jeff S.:

      There are a few books and many online resources available for learning how to become a private lender, @Christopher Martin.  However, nothing will replace spending an hour with a good lending attorney to get you started with up-to-date info. Education is the key.

      Some of the professional organizations, such as the American Association of Private Lenders and the CMA, are good sources of lending attorneys, as well as offering excellent webinars and courses. There are books out there and a few BP posts that could also help you.

      Just ensure that your education is broad and authoritative. For example, private lenders can make owner-occupied loans all day long. After licensing and usury, consumer purpose and business purpose, under which owner occupancy falls, are probably the most misunderstood topics in private lending. This is why you must speak to a lending attorney. Maybe you’re not the only one 😊.

      We diversify by lending to various borrowers and not into funds. Note that the difference between earning 10% in a fund and 12 to 15% from individuals is not 2 to 5%, but 20 to 50% on a cash returned basis.

      Most of the lenders we know who loan their own money and don’t find their own borrowers like we do, keep their pipeline full using brokers who bring them their loans. There is no right or wrong way to do it.

      Lastly, and you know this is coming, nothing will change a relationship faster and for the worse than when money is involved. Be careful lending to friends and family.


      How do you find good brokers?
      0Reply
  • Robin SimonBusiness Member
    Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
    2y
    Quote from @Christopher Martin:

    I have a close friend who is a contractor and flips houses.  He has worked with other hard money lenders in the past.  I have been wanting to invest in real estate and he suggested that I become a hard money lender.  I would start small and just do 1-3 deals with him to learn the business.  If it went well I would consider working with other clients in the future, but would just start with him since I know and trust him very well.  I have substantial capital in the public equities markets and would like to diversify my investments, so that is the reason for wanting to do this.  Also, I have some time to invest, and I am hoping that by investing my time I would get a higher return than what is available if I just passively sign up for one of the crowd funding sites that do real estate loans.  

    I have researched it, and it seems that you need a mortgage originator license from the state, and to be registered with NMLS to offer these types of loans.  Is there anyone who has formed a similar company that could help me learn more about the steps to getting started?  I would appreciate any feedback.  


     As long as you stay 100% business-purpose (i.e. no live-in flips or anything sniffing of owner-occupancy), the NMLS/regulations do not apply in most states and you will likely be good on the regulatory piece (as always, there are exceptions and you should always consult with a pro/research)

    [email protected]
    Harpoon Capital514 Reviews
    WebsiteView Page
    0Reply
  • Ronald Isgate
    Attorney · Doylestown, PA · Member since 2015 · 103 posts · 65 votes
    2y

    Pennsylvania Real Estate /Hard Money Lender Attorney Here

    I represent quite a few hard money lenders.  You need to check to see if your state requires a license - most states do not.  You need to hook up with an attorney who regularly represents hard money lenders - you need to make sure your loan docs are compliant with state laws and are binding on the borrower.  There is more to a loan package than a mortgage and note (such as personal guarantees, assignments of rents, enviro indemnifications, etc. etc.).  You should sit down with an attorney to go over these items to get a foundation for moving forward. 

    1Reply
  • Christopher Martin
    OP
    Member since 2023 · 4 posts · 6 votes
    2y

    Thank you all so much for these replies. Very helpful!

    0Reply
  • Ted Spradlin
    Member since 2022 · 7 posts · 1 vote
    2y

    Agree with all the comments above. 
    Licensing: 
    Check with the state regulator where the subject property is located to see if you need a license. You probably won't, but it's good to have a discussion as it could answer questions that you hadn't considered. 
    Some states (OR, CA, ID, UT, AZ, & a few others) require that if you are not a licensed lender, you place the loan through a licensed mortgage broker.   
    Loan Docs: 
    Escrow officers can draft simple loan docs. However, if you want a personal guaranty, you might want have an attorney draft docs. 
    My company (mortgage broker) drafts loan docs for 65% of our loans, using both Geraci Docs and Doss Docs, depending on the circumstances. Our closing manager drafts loan docs, lender's instructions, vesting (borrower & lender), and much more. There's a lot to it, especially when multiple properties and entities are involved. Geraci & Doss Docs make the complex seem easy.  
    Loan Servicing:  
    Will you service the loan yourself or use 3rd party servicing? We use FCI in Anaheim Hills. They handle payments, payoffs, and year-end tax information. 

    Good luck on this new endeavor!

    0Reply
  • Mike Klarman
    Specialist · NJ · Member since 2022 · 1k+ posts · 649 votes
    2y

    So, if you're talking about holding the notes yourself. Best way to do it is open a Private Lending LLC. And like you said it will be all about who you work with. You're not a big box lender with billions in capital. You want to do the right loans with the right investors.

    That means having superb underwriting on the asset, the neighborhood, the RE stats of appreciation, days on market, and other trends.  The last 6 months of sales date for the exact bed/bath makeup of the subject.  

    You also need strong recourse in case of default. Take the property and any other assets of the LLC up to the value of the loan amount.

    1Reply
  • Nicholas L.Pro Member
    Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
    2y

    @Christopher Martin

    genuinely curious what the appeal is - obviously lending to a trusted partner is one thing, but having to vet individual deals and run the risk of a 100% loss to get a 12% return seems... intense.

    the crowd funding sites are a non-starter with me - i will either buy actual real estate that i control, or index funds.  

    0Reply
  • Craig De BorbaPro Member
    Investor · FORT WORTH, TX · Member since 2020 · 19 posts · 5 votes
    2y

    @Christopher Martin following, I am also interested in the same.

    0Reply
  • Jacob Sherman
    12 Penns Trail Suite 138 Newtown, PA 18940 · Member since 2023 · 1k+ posts · 319 votes
    2y

    Depending on which state . For business purpose fix and flip loans you do not 

    0Reply
  • Owen DashnerPro Member
    Lender · Omaha, NE · Member since 2008 · 1k+ posts · 1k+ votes
    2y

    As others have mentioned above, the large majority of states do not require B2B lenders to be licensed.  You also need to be aware that usury laws (how much interest you can charge as a lender) vary from state to state as well.  Feel free to DM me if you have questions.  We set our hard money biz up in 2020 and went through a lot of research.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free