How to become a Hard money Lender /other better options for investment

15 Replies


I am curios to know on how to become a Hard money Leander, what are the requirements and process ?

not sure, what other better options would be available for investment with not getting involved full time.

Well being a hard money lender is more of a full time job.  Perhaps you are just looking to invest in which case just find a hard money lender to work with.  They will do the work finding the deals and underwriting them and you provide the capital.  

There is a forum here for lenders "Bankers, Lenders and Mortgage Brokers" probably some threads in there that you can read for more information too.

@Ron Singh  

Every town of any size will have a local HML... that has been doing it for years.

find said lender most broker investor funds.. have them present you deals.. do some due diligence just like you would any RE purchase then pull the trigger.

there are others that have PPM funds ( I prefer on the investor side to own the whole note) that you can invest in their fund.

In some states you can fractionlize the beneficial interests in the Note thereby investing in multiple notes the broker will pro offer you.. that can spread risk but in the case of a default can also be a mess.

To make money at HML though if your just taking in broker fee's you need a substantial amount of cash or cash investors .. In my mind 5 mil is the minimum to make a decent living.

Originally posted by @Jay Hinrichs:

In my mind 5 mil is the minimum to make a decent living.

1 mil x 12% = $120k/yr is not bad, why do you say 5 mil is needed?

Originally posted by @Ron P. :
Originally posted by @Jay Hinrichs:

In my mind 5 mil is the minimum to make a decent living.

1 mil x 12% = $120k/yr is not bad, why do you say 5 mil is needed?

 There's a lot of work that is involved with keeping the money active.  If you have 1M, you may only have 500K loaned out at any given time.  On top of that, no matter how good of a job you do underwriting loans you'll eventually sustain some losses.

@Ron Plata You have to know that HMLs bring a lot of REI knowledge to the table and they make a lot more than 12% on their money. It's not a crazy idea to think, "well why don't I just become an HML if I have a large sum of money to invest and they make such high rates of return?" but there's a lot more to it than just funding deals and raking in the cash.

As a new investor, (add more to your profile if you aren't) I think it's the last place to try to start, if you aren't doing it along side an experienced pro to "show you the ropes." I think a good HML knows how to evaluate/analyze every type of deal you can think of and position themselves to confidently hedge against risk and consistently make exceptional returns.

Hi experienced investors and guru's , 

What are the risk involved in lending money to HML's ? is there any safe way to make sure i get back my money and promised interest ?

Originally posted by @Ron Singh :

Hi experienced investors and guru's , 

What are the risk involved in lending money to HML's ? is there any safe way to make sure i get back my money and promised interest ?

The biggest risk is DEFAULT - meaning your borrower does not pay you. This is why, hard money lenders lend only up to 65% LTV (loan to value). For example, a house is worth $150K, the HML will lend only $100K for repairs and acquisition. Moreover, the lender would want the borrower to have some skin in the game - 20% or more plus the points upfront. In this way, if the borrower defaults, the HML gets the property because it's the collateral to the loan.

Hi Ron,

I agree with the DEFAULT risk as mentioned by Wendell De Guzman .  If your customer does not have a good handle on the construction cost, your funding becomes a greater At-Risk factor and potentionally reducing the profits anticipated. 

@Ron P.  

if its your own money and your already making 250k a year working or Seagate or some other company.. then 120k a year is fine.. if your going to make a living as a HML 120k a year is wages at best and not near worth the risk's.

It takes some years to get the point that you can mitigate risks... I know in my line of work which is basically that as a HML.. I won on 97% of my deals. but I have a few that did not work as expected... But the one's that did not work were not loss's I just made no return and I have 30 years at this.

 a lot of hML comes down to gut and experience. .

@Ron Singh  

  The risks  well let me start with the Paul Simon song   50 ways to leave your lover.

Well in HML there is 50 ways to lose your money !!!

So that is why its preferable and probably wise to hook up with a very good HML and shadow them..

I don't know any in the bay Area as there has been a lot of turn over since I left in 1999.. But Dick Cocker was one of the best he was in Los Altos.

and to get started you may want to look at the NOrris group in Socal I know they are very good.

In addition you need a RE brokers licnese or nMLS license if you are going to do more than a coupel a year.

I think investing in HM loans (aka trust deeds, mortgages) is one of the best most secure investments.  Much more control then the stock market, much better returns then bonds, less hassle than rentals.  It's like a dividend because you get a payment every month.  Vs investing in say Index funds they go up and down like a roller coaster and you get no monthly dividend.  

If you are going to invest through HM brokers to bring you deals, #1 you have a choose a HM lender with a lot of experience and integrity.  Find out how long they have been in business, do a background check, check their license, get references, etc...  Best to find one that has been though multiple real estate cycles (didn't just get in the business in 2009).   

There is a lot to look at when choosing which deals to lend on that are bought to you.  You need to cherry picky the best.  If it's a flip you need to look at the flippers track record, get some links from or Redfin of before and after from flips they have completed.  Check how much cash reserves they have in the bank.  Make sure there is a personal guarantee.  Check credit, get a loan application, get a rehab cost estimate, etc...  

The #1 thing IMO is getting the valuation right so in case of default you have plenty of equity.  You need to find a way to really zero in on the value, this can be trickier than it seems especially if the property is out of your area.

Also you need to get familiar with everything you need in the loan package (note, deed of trust, title insurance, hazard insurance, business purpose statement of loan, HUD 1 settlement statement, etc...).

Unfortunately there are very few books or seminars that address passive investing in mortgages and trust deeds. The best one I have seen is George Coats "Smart Trust Deed Investment in California". It's a 22 year old book though. The main concepts apply in all states. It is very difficult to get properly educated on all the risks related to trust deed/mortgage investment. There are a lot of landmines to watch out for. Paying a experienced long time mortgage attorney in the state you plan to lend in to sit down with you and go though everything that can go wrong may be a good step. Papersource has some decent info on not investing that can be applied to DD in HML.

I personally only invest in 1sts, only investment property (NO owner occupied), only SFR's, and only in a house I wouldn't mind owning if I have to take it back.

I had invested in real estate for a decade+ before I started investing in trust deeds and I also have a background in conventional mortgage lending. And I still find it overwhelming sometimes with everything you have to look at to mitigate your risks before investing in a trust deed/mortgage. And I still am probably taking many risks unbeknownst to me ("the unknown unknowns"). If you are totally new to real estate it may be daunting to invest in private mortgages. Or ignorance can be bliss until something bad happens. Most people that I know that invest in notes and HML's, had invested in real estate for many years prior. So they had a foundation in real estate concepts.

For any HMLs looking outside of the US:

Inviting Interest From Funding Sources For Int’l Real Estate – Int’l LENDERS ONLY - no 3rd party agents or brokers need respond

Currently, I am open to funding sources for real estate-based equity loans.The loans would be corporate, non-recourse, non-status, interest only and based on 80-90% LTV.

Please reply to [email protected] will need to include a copy of your license/registration as a lender and a link to a working website.

@Frank Szabo

   pretty aggressive terms... these are for US backed asset loans ?

The equity loans would be for real estate outside of the US.

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