How Difficult (And Smart) To Start A HML Fund--Am I Nuts?

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How Difficult (And Smart) To Start A HML Fund--Am I Nuts?

John Thedford
Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes

I have been doing HML for a few years. Really enjoy it and the returns have been pretty good. Am I crazy for wanting to start a private fund for HML? I really don't know anything about it except it requires SEC paperwork, etc. Saw another poster on BP just state they are moving forward with their fund but are buying low end properties in the Midwest. I don't think I want to pursue that model. I want to be a paper-boy:)...and reap the rewards. Anyone started or worked for a fund? Is the field too saturated? Last but not least, if we have a total meltdown, I do fear a fund could get wiped out. Thoughts?

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y

@John Thedford  Many hard money lenders create 500 series PPMs to raise capital.

a lot of them raise the capital that way to go as equity so they can get LOC from a bank Like I use to do. banks call them credit facilities. although post 08 they are pretty tough to get.

the issue with raising money in a fund is the lender expects interest day one and continuing through the term of the PPM.. your making short term loans that get paid off.. you will have drag if you can't keep the money circulating constantly.. I have seen others get into trouble doing this and for that reason I never did one.. I only did LOC with bank.. I only paid interest when I tapped the line, I only tapped the line AFTER I had a loan on the books.

Also as new comer your going to have a very difficult time getting anyone to invest and only pay them 6 or 7%.. Friends and family maybe.. But remember you can't advertise with most 500 series PPM's.. so its dog tough.. I see people do it on BP all the time.. but they could get wrung up.. surprised Gully is not on them like a fly on a cake.

Not to say you have to start somewhere .. For me I mentored with a 30 year HML in Oakland circa 1980's and then ended up owning the company. .but it was up and running 250 investors and 50 million on the books.. and in CA you can legally fractionalize the debt instrument so we only paid interest on the money when it was out.

Second version that I started I used the Bank LOC's and we started with 1 million in cash and 4 million dollar line of credit... LOC was 1 point and 6% .. this goes along with our thinking we were lending at 5 and 15 in those days.. so it was a nice delta... ran that up to 20 million in bank LOC's and 10 million in cash... then 08 hit and the world came to a screeching halt.. we were on the hook for 20 million of debt and it was dog tough... Not seeing that happening again.. but I am very cautious now of any debt I take on.. regardless. and for me personally and again for me Personally I would never do a PPM its too complicated costly and anything goes wrong your going to get sued for some sort of security violation.. I want nothing to do with any of that..

One thing you may want to consider then is if you have some very close friends who can pony up some cash you could start a small LLC ( like I did with the 1 million in cash) and go hunting for a bank that would collateralize your loans as you make them.. you may be surprised that you can get a small commercial bank on board with it... I still have 1 million line left from the old days that I can do this with.. but I choose to use those funds for my building endevours here in PDX>

hope this helps.

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  • Account Closed
    Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes
    10y
    Originally posted by @Charlie Fitzgerald:

    Broker to an established lender in the space...less headache...less risk...more consistent income...pm me for more details if you like.

     Out of curiosity, if one was to broker to an established lender, what prevents established lender from stealing clients?

    0Reply
  • Charlie Fitzgerald
    Lender · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
    10y

    Integrity and a broker agreement.  I have borrowers try to circumvent their referral source and come directly to me all the time.  Never happens. 

    0Reply
  • Account Closed
    Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes
    10y

    You are one of the good guys.  I was a mortgage broker for a short time years ago, I would submit a loan to Countrywide's wholesale department only to have my client tell me they got a call from Countrywide's retail department with a lower rate that I couldn't possible meet let along beat.  Frustrating to say the least.  Finding a broker with integrity is like trying to find a 'good' realtor, or a 'good' attorney, or a 'good' CPA ... easier said than done.  I guess it's like any other relationship, you keep looking until you find an honest person.

    0Reply
  • John Thedford
    OP
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    I would probably take everything through a licensed lender..just do the funding. Too expensive?

    0Reply
  • Account Closed
    Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes
    10y
    Originally posted by @John Thedford:

    I would probably take everything through a licensed lender..just do the funding. Too expensive?

     You'll run out of money using only your funds, assuming you do a sizeable scale.

    0Reply
  • John Thedford
    OP
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    That is why I was wondering about raising private funds, the SEC filings, etc.

    0Reply
  • Account Closed
    Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes
    10y
    Originally posted by @John Thedford:

    That is why I was wondering about raising private funds, the SEC filings, etc.

     I think what Charlie is saying is instead of starting a fund simply broker the loans to an other broker that has a ton of money and you keep part or all the points...much less headache.

    0Reply
  • John Thedford
    OP
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    I see. The downside to that is giving up all the steady interest income. If I borrow funds at 7-8% and lend at 12% plus points and keep the spread? Enough profit to be worthwhile?

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  • Account Closed
    Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes
    10y
    Originally posted by @John Thedford:

    I see. The downside to that is giving up all the steady interest income. If I borrow funds at 7-8% and lend at 12% plus points and keep the spread? Enough profit to be worthwhile?

     I've never done that, only lent my own money and brokered some loans to other brokers.  I'll let the experts respond, other than to say that it strikes me as a pretty thin spread between borrowed (7-8) and lent (12) monies.  The 0% you pay for your fund money idea gives a much better spread:)

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  • John Thedford
    OP
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    @Account Closed

    Forgot...actually 12% plus 4 points origination fee

    0Reply
  • Darren Eady
    Rental Property Investor · Lindon, UT · Member since 2015 · 862 posts · 438 votes
    10y

    @John Thedford

    You can either become a hard money lender yourself, which requires starting a company, website creation, legal assistance, program creation all to find yourself marketing a product that you have possibly little experience in, and potentially losing money for awhile . . . OR . . . you can work with a hard money lender that has been through all of that, knows what they are doing, and could use your funds to reimburse their loan money disbursed, and see if they will part with their performing mortgage notes. It allows you to BE THE BANK without actually buying the bank! Thanks!

    0Reply
  • John Thedford
    OP
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    Thanks @Darren Eady

    I am already doing some HML. Just wondering how I could take it to the next level if I decided I want to work that hard.

    0Reply
  • Darren Eady
    Rental Property Investor · Lindon, UT · Member since 2015 · 862 posts · 438 votes
    10y

    @John Thedford

    Next level is sell the notes so you'll collect your money back and lend more often.  

    0Reply
  • John Thedford
    OP
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    Thanks @Darren Eady

    Almost all my notes are written for one year. Most pay off early. I don't think they would be very marketable having only 1,2,3 months seasoning. Besides that fact, because I charge points, the APR can go through the roof with an early payoff. I have no complaints with how things are going, just wondering if I could change strategies somewhat to increase income. I have become pretty fond of HML even though there have been a few issues along the way. I am only lending MY funds, so at this point I can do that legally in Florida. If I start lending for others the rules change. Thoughts?

    0Reply
  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    10y

    Why was Charlie's post deleted? Because he said "PM me"? Some times I don't get it.

    Regarding the topic at hand, some posters have indicated they lend their own funds as I have done... I think to answer your question, though, is that a lot of it depends if you are planning an intra-state or inter-state operation. Huge difference for people like me in NC...

    0Reply
  • John Thedford
    OP
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    @Darren Eady

    Most of my notes are written for 1 year or less. I don't know how marketable such short term notes are. Thoughts?

    0Reply
  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    10y

    @John Thedford are you just into RE notes? Curious if you consider other collateral, like cars. I only ask because from the small sample (3) of people I talked to, it seems the return on auto notes (originated from used car dealers, sold at discount to investors) can be good. One guy cautioned of repo problems... but I think that was because he 'serviced' what he sold and held notes to maturity. He really didn't want to talk to me. Probably because he was making a killing;)

    0Reply
  • John Thedford
    OP
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    @Chris Martin

    I see a few people constantly advertising on CL for investors for their car lots. I haven't researched that space. At this time I am originating 1st liens and most pay off within 3-5 months though some will not pay off for one year. I like the RE aspect and the fact that I put out 100K in one transaction.
    I am getting 12% plus points and have a few customers that are now repeats. I have had a few tough ones, was able to collect, and of course no longer lend to those:) We all have our specialty and what we are comfortable with. Thanks for asking my friend. 

    0Reply
  • Darren Eady
    Rental Property Investor · Lindon, UT · Member since 2015 · 862 posts · 438 votes
    10y

    @John Thedford

    Personally I find the short term performing notes are better for some people that don't want to tie up their money too long, even though the love the return on their money.  When they are repaid, they will usually be right back for another note a year later.

    I can't tell what you are lacking in from your posts.  What are you looking for more of, less of?

    0Reply
  • John Thedford
    OP
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    @Darren Eady

    I am doing short terms right now. Just curious if I am missing something as far as selling the notes and then lending it again. I don't think this works for me because most pay off quickly. I do want to grow my PL business and that is why I posted the original question as to starting a PL fund. If it is a LOT of work and time consuming it probably isn't for me. I like my freedom too much..

    0Reply
  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    10y

    @John Thedford Have you looked in to crowdfunding as a solution? I'm not familiar with FL rules, but just went into practice and even if you stick to all accredited investors (which IMO is a good idea) the regulations give some structure that can (again IMO) put people on the regulatory bypass.... a 'fast track' of sorts.

    Seems like you are doing everything right. I think I'd be tempted to keep it to myself and just borrow funds from friendlies and banks (collateralize the notes in a credit pool) since you have a good track record.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @John Thedford  Many hard money lenders create 500 series PPMs to raise capital.

    a lot of them raise the capital that way to go as equity so they can get LOC from a bank Like I use to do. banks call them credit facilities. although post 08 they are pretty tough to get.

    the issue with raising money in a fund is the lender expects interest day one and continuing through the term of the PPM.. your making short term loans that get paid off.. you will have drag if you can't keep the money circulating constantly.. I have seen others get into trouble doing this and for that reason I never did one.. I only did LOC with bank.. I only paid interest when I tapped the line, I only tapped the line AFTER I had a loan on the books.

    Also as new comer your going to have a very difficult time getting anyone to invest and only pay them 6 or 7%.. Friends and family maybe.. But remember you can't advertise with most 500 series PPM's.. so its dog tough.. I see people do it on BP all the time.. but they could get wrung up.. surprised Gully is not on them like a fly on a cake.

    Not to say you have to start somewhere .. For me I mentored with a 30 year HML in Oakland circa 1980's and then ended up owning the company. .but it was up and running 250 investors and 50 million on the books.. and in CA you can legally fractionalize the debt instrument so we only paid interest on the money when it was out.

    Second version that I started I used the Bank LOC's and we started with 1 million in cash and 4 million dollar line of credit... LOC was 1 point and 6% .. this goes along with our thinking we were lending at 5 and 15 in those days.. so it was a nice delta... ran that up to 20 million in bank LOC's and 10 million in cash... then 08 hit and the world came to a screeching halt.. we were on the hook for 20 million of debt and it was dog tough... Not seeing that happening again.. but I am very cautious now of any debt I take on.. regardless. and for me personally and again for me Personally I would never do a PPM its too complicated costly and anything goes wrong your going to get sued for some sort of security violation.. I want nothing to do with any of that..

    One thing you may want to consider then is if you have some very close friends who can pony up some cash you could start a small LLC ( like I did with the 1 million in cash) and go hunting for a bank that would collateralize your loans as you make them.. you may be surprised that you can get a small commercial bank on board with it... I still have 1 million line left from the old days that I can do this with.. but I choose to use those funds for my building endevours here in PDX>

    hope this helps.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    3Reply
  • John Thedford
    OP
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    Thanks so much @Jay Hinrichs

    You are a wealth of information. Glad to have you here on BP to help us new guys learn! You have me convinced I only want to do this with my personal funds and possibly a couple of family members. 

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @John Thedford  don't give up your dream.. make some appointments at local commercial banks. and see if you can get 50 % leverage.. we got 4 to 1..

    Its worth a try.

    now again to be fair and balanced like fox news.. I had been with my banker at that point for 12 years and I had strong partners.. although as we got rolling I got another 12 million LOC with only my PG.

    But they got me started.

    you will also need to check on licensing NMLS and all of that.. When I got my mortgage bankers license I simply wrote into the state gave my qualifications and they sent me a license :)  and in CA you simply need a RE brokers license which of course I have had since 1975 .. then it comes down to contacts and networking.  when you have a lot of money to lend it gets quite a bit more competitive then when your a local lender making a few deals here and there.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    0Reply
  • Jeff S.
    Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
    10y

    Sounds like you're buying yourself a j.o.b., @John Thedford. You're just trading earning a lot of money from a few deals with a handful of borrowers to relatively small amounts from many deals. Obviously, at some point there is a crossover, but it will not be without a lot of work. Managing your fees and keeping the pipeline full is the name of the game in this business. Are you sure that's for you?

    I suspect it's really the action you like. If so, you don't necessarily need a fund. You could sell your notes, keeping the points & fees, which I would do first, or you could hypothecate them. The latter involves a PPM but you don't necessarily have to raise money. It allows you to loan the money over an over as others loan to you, using your notes as security.

    Credibility won't come from 3 month seasoning. It will come from the track record you've developed with reliable borrowers as well as wise underwriting and strong relationships. In the case of a hypothecation, you still retain ownership of your notes.

    In this case, you might consider attending the American Association of Private Lenders conference in November. I'm an on again off again member. It's a legit organization with hundreds of members, including many fund managers and lending attorneys. The free advice you will get is almost worth the conference price. I know several fund managers who consult/teach burgeoning fund operators how to get started and they might be there. Unfortunately, personal business will take me elsewhere this year but I've attended and enjoyed this event in the past. I even wrote a review on it somewhere on this board.

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