How to be a hardmoney lender - without the work?

35 Replies

Hi everyone!

It recently came to my attention that my grandfather has way too much money sitting in a standard savings account earning a pathetic less than 1% interest rate. My grandfather's gears turn in money and I'm sure he'd be ecstatic if I found him a better place for his money. I've talked to him about stocks but he knows nothing about them and naturally he's very reluctant to invest in stocks after the great depression and 2008.

I suggested to him the option of being a hardmoney lender. With returns around 10% and the safety of the loan being secured by real estate he's taken the bait. What I need to know is what options are available to give him access to hardmoney lending without the task of screening and policing so to speak the investors themselves. I'm sure there are companies out there that provide this service. Something like a property management company where they screen the investors that need the loans and help with setting up all the paperwork and generating the deeds of trust etc.

We live in Southern California. On 1 hand a more local "outfit" may be more comfortable. Someplace where he could deal with people face to face so he feels more secure. Somewhere we could go to throw books at people should his money disappear and the deed of trust never arrive... That sort of thing. But on the other hand, if there is a company like this that does business nation wide, it may be better so that he could use a smaller investment initially to test the waters so to speak - somewhere that 25 or 50 grand could fund an entire rehab as opposed to SoCal where real estate is significantly more expensive than the rest of the country.

Comments? Suggestions?

I don't know CA laws. Some states allow private individuals to lend money. Other states require a licensed mortgage originator to facilitate the transaction. Doing HML is relatively easy. I do mine. I place ads on CL (and now on BP). When potential borrowers call, I get the property address. If it looks like a secure deal, I take it to a title company. They prepare paperwork, fund the transaction, and record the mortgage and note. This is an easy process and you can find a title company there to handle yours as well. If you have any other questions fees free to PM me. You DO need to learn your CA laws or get help from someone there with knowledge as to your state regs.

EDIT: right after I hit save another post showed above mine referring to some agency in CA. As I had stated, find someone there that knows your laws. You might want to ask @Jay Hinrichs...he has a good handle on various states and requirements.

Windvest is located out of San Diego CA, and they have an option of buying shares to become a percentage holder in their existing portfolio. That is, if he is interested in an established lender in which he can contribute to their funding pool. 

They also offer trust deed investing for individuals if he would rather invest in a single deal rather than a portfolio.

I am not sure exactly where in SoCal you are located, but I would recommend getting his feet wet by working with a local lender. 

Below is a link to the HML Directory if you want to see what lenders are in your area.

Hard Money Lender Directory

BTW, your title includes the words "without the work". Truthfully, HML is very little work and high rewards. Once you get the loan funded, the "work" is collecting the payments (in your mailbox), crediting the borrower (in your acct receivables), and then depositing the check. Be prepared to spend ONE HOUR. It is a tough living, but someone has to do it::)

I would suggest getting started with a very low loan (>50% LTV) to value loan secured on a non-owner occupied residential property (most liquid asset) in an urban area such as San Diego, Los Angeles, or San Francisco. The yield may not be as high as 10% but you will get a taste of the process. Work through a license real estate broker who has significant experience in trust deed investing. I would also recommend using a loan servicing agent to collect the payments (ie. FCI Lender Services or Del Torro) and manage the monthly/yearly paperwork. Once you get comfortable with the process, you can venture out to higher yielding, more risky trust deeds. That being said, stick with 1st trust deeds at >65% LTV. Lastly, I prefer trust deeds over a mortgage fund as you have more control over your investment.

RE: Dodd-Frank. I only lend to business entities. I do NOT do consumer loans. Those are subject to DF as another poster alluded to.

@Michael Noto agreed. I just posted on another thread about paying up front fees to a HML. I told them NEVER pay up front with the exception of an appraisal. Anything else should be paid at closing through a title company.

i would be very careful investing your grandfathers money.The fact is all type of situations can happen to seniors that they might quickly need there funds. THE RISK IN hml loans for the inexperienced is way too high.I think it would be more prudent to find a finacial planner from some of the national brokerage houses

Here's a bit broader explanation of some options, @J. Tyler Moore .

The most passive way to invest in loans, is through a mortgage pool. This is similar to a mutual fund involving in stocks, except the operator will loan the money according to terms specified in their documentation. Some pools loan to small- or big-time house flippers, some against multi-family apartments, large shopping centers, mobile home parks, etc.

In most cases, you'll become a fractional owner of an LLC that actually makes the loans. That is your grandfather will not have his name on any one loan or have direct recourse to any of the properties; the LLC will, and the profits are split in proportion to his ownership. In this case, you are relying 100% on the ability of the operator (also called the syndicator) and this is where you should focus your due diligence.

Real estate loans are not your grandfather's only options. He could invest in real estate syndications that develop property and/or spread their money among many developments. Like stocks, there are even funds of funds, which begins to get very confusing.

I know neither you nor your grandfather want to originate your own loans (for the maximum return) but other options are to speak to some local hard money lenders and directly buy their local loans. In this case, you really want to check out the lender as well as the borrower and the property. Once you trust the lender, you might be comfortable relying on their judgment alone, but this takes time.

In the case of buying a 1st position loan, your grandfather becomes the lender and must worry about getting paid and the possibility of foreclosure. Probably not for him.

A third option is to find a local broker that originates fractionalized notes. These are legal in CA and several other states (though I would only do this locally). This is a middle ground where granddad's name will be on one 1st position note along with his percent interest. Majority will normally rule here and the broker will normally be responsible for maintaining control, making sure the note is serviced, etc. Again, you have to trust the broker and also check out the borrower.

In some cases, but not all, your grandfather with have to be an accredited investor. If he's in CA, state laws such as SB 978, could also apply. This will limit the amount he can place in any one loan. That's a good thing.  Also, for your grandfather's sake, please, please, please, be careful of all the unsolicited message you will receive here since you said he has money to invest.  To broker loans in CA you must be licensed in CA.

Good luck to Grandpa!!!  He's lucky to have you as a granddaughter. 

I would second Jeff S Na comments. Not trying to be inflammatory, but I'd be very surprised if the HML industry survives the disruption that's beginning with the crowd funding sites.

If you've got net worth, money to invest, and want to hold real estate debt (or equity), look at PatchOfLand or RealtyShares or any of the others.  Make sure you understand the structures they use to hold each investment.

Originally posted by :

If you've got net worth, money to invest, and want to hold real estate debt (or equity), look at PatchOfLand or RealtyShares or any of the others.  Make sure you understand the structures they use to hold each investment.

 These are good options to consider if he is considered and Accredited Investor.  They will do all the underwriting and servicing and you can simply invest.  You can also diversify by investing in multiple deals, I believe the minimum is only $5k per deal.

Adam

@J. Tyler Moore Look up Bruce Norris and the Norris group in LA.. his son post on BP he is a renowned speaker and much sought after for his HML acumen.

Also FIBI is a great group there in Manhatten beach if you are close to that area.. They have guest speakers all the time and some pretty quality one's as well ( I know I get invited once a year to present  LOL)..  When I start my presentation I will ask for a show of hands of how many are Realtors about 60% raise their hands then I will ask how many are private money lenders and about 80% raise their hands.. You will find a lot of folks to talk with

As for servicing a HML I for one don't think you need any servicing company if your doing your own under some exemption ... Most HML are set up to service for you though. but if you do your own its just not that tough your doing a short term 12 month loan its a commercial purpose loan so they can just send the payment to you directly. Some may want servicing if they are doing 3 to 5 year deals.

And the benefit of doing business locally is Grand Dad and you can drive by the asset walk around look at it and decide if you want to lend on it.

@Justin R. I agree that Crowdfunding will have an impact and take market share from local HML but it won't devastate the industry... lenders and borrowers once they get established will maintain those relationships for Many years. A great local HML will take care of their best borrowers to the point that those borrowers just wont want to jump through the hoops of getting vetted by the Portals.

I have had the same clients for going on 20 years.. there is more to HML than fees and rates.

Jay is correct, and the portals fee structures are not competitive with most hard money lenders in my case. I do have many deals under my belt and a strong track record so the HML are willing to give me a very competitive rate.

Also the crowdfunding portals take too long and the structures to cumbersome.

Time kills deals.

@J. Tyler Moore join us at our BP LA meetup, it is not really for HMLs, but @Jeff Greenberg might be able to help you with syndications, he mentioned some 25/50k buy-ins there are also more options for your grandfather outside of HML. If he is looking for less work, that could mean lesser returns because you have to use a vehicle, either platform, person, or professional service, not exactly 10% but way more than 1%.

Personally, if you'll allow me to throw a slight outside curve, I'm noticing some big hedge funders going to cash for the 3/4% waiting and looking for a viable place to park it. I kinda tune my guitar strings to the beat of those distant drums if you get my drift. Could it be time for the RE industry overall to start cooling its jets somewhat? 

Personally, I like diversification. If he's sitting on substantial holdings I'd have he or you, depending on who's handling his financial affairs, seek out a qualified and experienced CFP and have them spread his holdings around a bit. That stated there's nothing wrong with keeping an appreciable amount of cash sitting on the sidelines.

The older you are the less you should be concerned about larger % ROI type speculation and the more important it is to preserve capital. Even if you're not adjusting to inflation who cares? If you're getting up there in years the whole idea is to have your nest egg outlive you so you don't have to become dependent on others.

As far as HML's are concerned I'd sooner put my $$$ with an experienced HML before I'd try taking on all the responsibilities and nuances of managing such an undertaking on my own. Additionally, the laws in Cali require that you have a BRE license to engage in HML in RE.

My 3 cents worth adjusted for inflation.

Originally posted by @Jay Hinrichs :

@J. Tyler Moore Look up Bruce Norris and the Norris group in LA.. his son post on BP he is a renowned speaker and much sought after for his HML acumen.

...

@Justin R. I agree that Crowdfunding will have an impact and take market share from local HML but it won't devastate the industry... lenders and borrowers once they get established will maintain those relationships for Many years. A great local HML will take care of their best borrowers to the point that those borrowers just wont want to jump through the hoops of getting vetted by the Portals.

I have had the same clients for going on 20 years.. there is more to HML than fees and rates.

Totally agree on the relationships and value of a good lender from the borrower's side, and I can see the case for people who want to be HMLs and use their own capital. I meant to say that for people looking to place capital (like the OP), I don't see any reason to place it with a traditional HML or become one yourself. The crowdfunding sites offer too many benefits to the capital holder.

At a meta level, HML is such a local, inefficient market ripe for disruption as many other markets have been. I too would prefer the higher returns that an inefficient HML market provides, but I count the days numbered.

I've placed capital with both traditional HML funds and through the crowdfunding sites, but I certainly haven't been in the game as long as Jay has!

@Justin R.    happy new years eve.. can't argue with anything you said..

some of the barrier to entry for portals though has been Licensure... Like here in Oregon you must be NMLS licensed to do 1 to 4 units regardless of use of property or entity.

Same with Nevada and other states... So the next things Portals will do is start to get licensed the NMLS really consolidated Portland HML and put a lot of private folks out of the game the state got quite aggressive with cease and desist letters to the bigger private folks. Realty Shares has taken the time and effort to get licensed in Oregon I know.

But the West coast is a very competitive HML environment regardless if CF or traditional.

@J Tyler Moore, it's great to hear you're going to help your grandfather with his investments.

Since he knows nothing about real estate, and it sounds like you are a beginner, I would recommend some caution first. Yes, the yields on hard money loans are extremely attractive right now. At the same time, if you choose poorly you can still lose lots of money. Even with the protection of being able to foreclose on the property, your money can be tied up for months or years longer than you expected. So it's important that both he and you fully educate yourselves on the risks, before proceeding forward.

Having said that, if hard money makes sense for his portfolio, then there are several ways you can do it. Several people have described the traditional hard money loan process, where you source the loans yourself, or go through some sort of local investing group. These have certainly worked  for many people. Again, this is not a "fire and forget" type of investment strategy, because either you or him will have to educate yourself on a lot of real estate fundamentals, to avoid taking unnecessary losses. But it may be an option.

Real estate crowdfunding is another potentially good option. The advantage over the previous methods is that you have a wider pool of markets to invest in, because many of the marketplaces are national. This means you can diversify your portfolio against a downturn in the local economy. For example, Houston and Wyoming were booming for the last several years, but recently have had a downturn due to the dropping of the oil price and the damage that's caused to the fracking industry. If you choose a national portfolio via crowdfunding, you can avoid this sort of risk that would devastate a completely local portfolio. Plus, since you only fund part of the loan, you can diversify into many more individual loans, then you can if you are forced to purchase the entire loan. Again this gives the portfolio more protection and safety.

If real estate crowdfunding is a good option for you, then there are a few different routes you can go. First, if you are willing to learn about doing due diligence on individual properties, and also willing to constantly manage the loans as they turn over, then sites like Patch of Land,, Peerstreet, are great choices. This is a more active approach.

However, if you're not willing to do the learning necessary, or if the management of individual loans is too much, than the other option is to invest in a fund that picks the properties/loans for you and manages them. Many charge a very reasonable fee for this valuable service. If you go that route, then the key issue is making sure that you do due diligence on the management company, to make sure you feel comfortable with the choices that will make on your behalf. The advantage of going this route is that it's a very passive investment that you don't have to do anything about once you pull the trigger.

For example, for me, I don't want the majority of my hard money loan portfolio invested in tiny, individual loans that I have to micromanage constantly (because I don't have the time). So among other things, I've invested in the Broadmark hard money loan funds, which are currently yielding about 11%, and have several hundred loans in them. So if any single loan defaults, it doesn't have a very large effect on the entire portfolio. One of them is focused on the Pacific Northwest and the other focuses on the metal of the country, so there is some geographic diversity affect there, if you own both funds. I invested in them directly, however your grandfather can also invest in them through a crowdfunding site.

My advice is not to spend your grandfather's money and work on your own personal finances.  Just because you found out your grandfather has money does not mean that it is up to you to manage it, especially if you have no experience and track record. 

He could loan money on prosper or lending club. At his age, I would only invest a small portion but it would give him something to do and get much better than 1% returns.

Asa

Such a great thread! Some thoughts on so many great comments.

1. Grandpa's money - my Dad has a saying, it's called "hard money" because it took someone a lot of work to get that amount of cash together (after taxes) to lend it out. Just be careful. He has to be comfortable with it. The vast majority of my trust deed investors have a background in real estate. Diversification for them includes notes and rentals. It's not for everyone and it can be work, especially if something goes wrong. And if something does, I'd hate for him to cut you out of the will because you suggested it. :)

2. 10% and different lenders. The hard money space has had a HUGE disruption. the biggest thing I've seen is a change in the rates due to competition from hedge funds, commercial lenders, and crowd funding. There are always trade offs to consider and hard money lenders, crowd funding sites, and the hedge fund lenders offer different things. So I do agree we will see some lenders disappear as the market shifts. However, I think there's room for all. Local hard money lenders offer local expertise (market, borrower and lending experience), fast funding, whole FIRST notes (or minimal fractionalization), and have long track records with borrowers. Here, you're adopting a team. That is especially important when there's a snag in a deal. The large hedge funds offer some really interesting products, often aimed at landlords with portfolios but they are expanding. Remember, however, they have to target a nationwide product so often times will have to be more conservative. They've changed the program's a ton, but their ultimate goal is packaging the loans up and selling on Wall Street. I can't tell if the space is working enough for them or if they will switch gears and target consumer loans as it's such a big market. Local commercial lenders are stepping up in a big way and I see them as major competitor to hedges funds. At last in long-term business loans. Finally, crowd funding is great for those who have very little money to Lend or want to in smaller pieces. Read the fine print! Some of these investments don't involve the first trust deeds, you actually have a claim to the cash flows, nothing more.  It is such a new product, we don't exactly know what it looks like if the market turns south.  Many of these companies are set up differently so you really have to read the fine print. No single entity is exactly the same. 

3. Becoming a lender. Depending on where you are at and how you are structured, you will be regulated by a different entity.  For instance, we are a threshold broker and we are regulated by the Bureau of real estate in California. We don't pool money or else we would be regulated by the Department of Corporations. Both of those structures involve some planning and involve different levels of expense and experience (brokers license, annual reporting, audits, etc.). We belong to the California Mortgage Association because honestly, this business changes every year, and they help us stay up-to-date on regulation changes like SB978. Not only do we have to watch things like Dodd Frank, we have to look at the state of California and what they require.  We get audited quarterly by someone that reports back to the BRE.  I realize that this is our business so we're probably dealing with a lot more volume than you are talking about, but a comment was made that it's no work and I would disagree.  For longer-term loans you also have to make sure that the borrower has the correct type of insurance on the property and also that the taxes are being paid. 

If you're only doing a loan here or there, I think you can do it on your own but if nothing else, I would work with an attorney with experience to do the correct paperwork and make sure you're not committing usury. I also like the idea of using a servicing company. I've watched people go off on their own and lose money. They make mistakes on loan to value, chose the wrong borrower, invest in weird inventory, not use an appraiser, doing what they think is a non owner occupied loan, etc. and I can almost guarantee they don't know some of the things to ask or check. it's especially ugly when a loss happens in those IRAs! 

Local lenders have boots on the ground and provide a tremendous service. Yes, OK, obviously I'm a Hard money lender and I'm speaking from my own perspective. Shop local! Can you do it on your own? Yes, of course? Same with property management. But, adopting a team of experts has its benefits. Tried and true, through booms and busts, these pros have a track record working with both borrowers and private money through thick and thin. 

Happy New Year all.