Why YOU Should Become A Hard Money Lender
Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
Why YOU Should Become A Hard Money Lender
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votesJohn thanks for the mention:
couple items from my point of view
1. always do first position unless you have the money to pay off the first with cash if your going to entertain a second position if you do not have the CASH to pay off the first you can end up losing all your money doing gap funding or second positions. In this business you have to hope for the best and plan for the worst.
2. For sure check your state laws.. if you hold your self out as a lender in any Manner in certain states CA being one you need proper licensure... failure to do so can lead to treble damages.. OR NV are other states.. One lender in Oregon that made HML here on 1 to 4 with no license ( they did 200 of them LOL) and should have known better.. One of my clients was able to payoff and deducted all payments from principal. Borrower was quite grateful for my advice on how to handle a unlicensed lender.
3. As discussed above RAtes are highly regionalized..
4. create long term lasting relationships leverage over rate many times is what flippers are looking for if they want to scale.
5. Great way to start in this is with a really good local HML that will place your money for you.. they make points you make nice rate.. and see how it goes instead of jumping right in.
6. being a real estate agent or broker is a huge advantage as your in the industry and you can do your own comps.. no need for appraisals and all that garbage.
7. AS for starting a HML business you need MAJOR dollars I would say at least 1 million in cash and the ability to get a guidance line or other PPM type investors for another 5 million.. this will give you a 300 to 500k a year salary which is about the minimum you want to work for in this business in my mind.
Other wise its a great option for those that simply don't want to deal with the three TTT's and want better than bank rates.. nothing wrong with very stable great loans making 6 to 9% either... higher the return generally risk goes up.. just like buying rentals... go for high cap rate usually renter / tenant quality is tougher and risk is higher. Same thing here.
59 Replies
- Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes9y
Originally posted by @Jay Hinrichs:
John thanks for the mention:
couple items from my point of view
1. always do first position unless you have the money to pay off the first with cash if your going to entertain a second position if you do not have the CASH to pay off the first you can end up losing all your money doing gap funding or second positions. In this business you have to hope for the best and plan for the worst.
2. For sure check your state laws.. if you hold your self out as a lender in any Manner in certain states CA being one you need proper licensure... failure to do so can lead to treble damages.. OR NV are other states.. One lender in Oregon that made HML here on 1 to 4 with no license ( they did 200 of them LOL) and should have known better.. One of my clients was able to payoff and deducted all payments from principal. Borrower was quite grateful for my advice on how to handle a unlicensed lender.
3. As discussed above RAtes are highly regionalized..
4. create long term lasting relationships leverage over rate many times is what flippers are looking for if they want to scale.
5. Great way to start in this is with a really good local HML that will place your money for you.. they make points you make nice rate.. and see how it goes instead of jumping right in.
6. being a real estate agent or broker is a huge advantage as your in the industry and you can do your own comps.. no need for appraisals and all that garbage.
7. AS for starting a HML business you need MAJOR dollars I would say at least 1 million in cash and the ability to get a guidance line or other PPM type investors for another 5 million.. this will give you a 300 to 500k a year salary which is about the minimum you want to work for in this business in my mind.
Other wise its a great option for those that simply don't want to deal with the three TTT's and want better than bank rates.. nothing wrong with very stable great loans making 6 to 9% either... higher the return generally risk goes up.. just like buying rentals... go for high cap rate usually renter / tenant quality is tougher and risk is higher. Same thing here.
So you helped someone screw over a lender just because the lender didn't have some government "permission" to loan money?
I hope for your sake karma doesn't come back after you
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Cody L. that's exactly right Cody... We are all licensed here in Oregon to do business I have an NMLS license I keep it current although not active now.. this company comes into our state and does 200 loans with no license so yes they should have known better.. they got a cease and desist from the state and were happy to take their principal back.. same with those that want to loan and break the Usury laws.. the law is the law ... so I see no problem with my Karma.. There are 12 states were doing 1 to 4 unit loans in the US require licensure if your going to hold yourself out as a HML.. But hey its just the cost of doing business. they got their principal back .. many lenders would love to get their principal back when they make bad deals... Why do you think lenders need licenses do you think lenders doing loans to Homeowners should just do the loans with no license when its required because some government permission is needed.... If you choose to be in that field just do it right. Not sure many would argue with that...
- Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes9y
Originally posted by @Cody L.:
Originally posted by @Jay Hinrichs:
John thanks for the mention:
couple items from my point of view
1. always do first position unless you have the money to pay off the first with cash if your going to entertain a second position if you do not have the CASH to pay off the first you can end up losing all your money doing gap funding or second positions. In this business you have to hope for the best and plan for the worst.
2. For sure check your state laws.. if you hold your self out as a lender in any Manner in certain states CA being one you need proper licensure... failure to do so can lead to treble damages.. OR NV are other states.. One lender in Oregon that made HML here on 1 to 4 with no license ( they did 200 of them LOL) and should have known better.. One of my clients was able to payoff and deducted all payments from principal. Borrower was quite grateful for my advice on how to handle a unlicensed lender.
3. As discussed above RAtes are highly regionalized..
4. create long term lasting relationships leverage over rate many times is what flippers are looking for if they want to scale.
5. Great way to start in this is with a really good local HML that will place your money for you.. they make points you make nice rate.. and see how it goes instead of jumping right in.
6. being a real estate agent or broker is a huge advantage as your in the industry and you can do your own comps.. no need for appraisals and all that garbage.
7. AS for starting a HML business you need MAJOR dollars I would say at least 1 million in cash and the ability to get a guidance line or other PPM type investors for another 5 million.. this will give you a 300 to 500k a year salary which is about the minimum you want to work for in this business in my mind.
Other wise its a great option for those that simply don't want to deal with the three TTT's and want better than bank rates.. nothing wrong with very stable great loans making 6 to 9% either... higher the return generally risk goes up.. just like buying rentals... go for high cap rate usually renter / tenant quality is tougher and risk is higher. Same thing here.
So you helped someone screw over a lender just because the lender didn't have some government "permission" to loan money?
I hope for your sake karma doesn't come back after you
Here we go again Cody! What is the problem with laws being enforced? Would you turn in a bank robber? Child molester? Swindler? Where do we draw the line in what laws to honor and others to ignore? Unlicensed lenders breaking laws do not deserve special treatment. They deserve to be reported. There is no pass for anyone to break laws because of their profession.
- Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes9y
I agree to a point. Hard money has really grown the last few years. There unfortunately is growth in defaults as well. Make sure you understand the worst case scenario if a loan becomes delinquent. Your losses might be significant especially if you are in a state where the foreclosure process is lengthy.
- Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes9y
Originally posted by @John Thedford:
Originally posted by @Cody L.:
Originally posted by @Jay Hinrichs:
John thanks for the mention:
couple items from my point of view
1. always do first position unless you have the money to pay off the first with cash if your going to entertain a second position if you do not have the CASH to pay off the first you can end up losing all your money doing gap funding or second positions. In this business you have to hope for the best and plan for the worst.
2. For sure check your state laws.. if you hold your self out as a lender in any Manner in certain states CA being one you need proper licensure... failure to do so can lead to treble damages.. OR NV are other states.. One lender in Oregon that made HML here on 1 to 4 with no license ( they did 200 of them LOL) and should have known better.. One of my clients was able to payoff and deducted all payments from principal. Borrower was quite grateful for my advice on how to handle a unlicensed lender.
3. As discussed above RAtes are highly regionalized..
4. create long term lasting relationships leverage over rate many times is what flippers are looking for if they want to scale.
5. Great way to start in this is with a really good local HML that will place your money for you.. they make points you make nice rate.. and see how it goes instead of jumping right in.
6. being a real estate agent or broker is a huge advantage as your in the industry and you can do your own comps.. no need for appraisals and all that garbage.
7. AS for starting a HML business you need MAJOR dollars I would say at least 1 million in cash and the ability to get a guidance line or other PPM type investors for another 5 million.. this will give you a 300 to 500k a year salary which is about the minimum you want to work for in this business in my mind.
Other wise its a great option for those that simply don't want to deal with the three TTT's and want better than bank rates.. nothing wrong with very stable great loans making 6 to 9% either... higher the return generally risk goes up.. just like buying rentals... go for high cap rate usually renter / tenant quality is tougher and risk is higher. Same thing here.
So you helped someone screw over a lender just because the lender didn't have some government "permission" to loan money?
I hope for your sake karma doesn't come back after you
Here we go again Cody! What is the problem with laws being enforced? Would you turn in a bank robber? Child molester? Swindler? Where do we draw the line in what laws to honor and others to ignore? Unlicensed lenders breaking laws do not deserve special treatment. They deserve to be reported. There is no pass for anyone to break laws because of their profession.
Not going to dignify your comparison of two free people entering an agreement to borrow / loan money with a child molestor.
I think some laws are so dumb and treat free people like children that they are borderline molesting (and are "molesting" if you look at the Spanish word)
- Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes9y
Originally posted by @Jay Hinrichs:
@Cody L. that's exactly right Cody... We are all licensed here in Oregon to do business I have an NMLS license I keep it current although not active now.. this company comes into our state and does 200 loans with no license so yes they should have known better.. they got a cease and desist from the state and were happy to take their principal back.. same with those that want to loan and break the Usury laws.. the law is the law ... so I see no problem with my Karma.. There are 12 states were doing 1 to 4 unit loans in the US require licensure if your going to hold yourself out as a HML.. But hey its just the cost of doing business. they got their principal back .. many lenders would love to get their principal back when they make bad deals... Why do you think lenders need licenses do you think lenders doing loans to Homeowners should just do the loans with no license when its required because some government permission is needed.... If you choose to be in that field just do it right. Not sure many would argue with that...
Correct. I absolutely don't think someone should need a license to loan someone else money.
I loan money to friends and family all the time. Hopefully big brother, with some if you license cheerleaders behind them, doesn't come kicking down my door some day.
Oh. And while I'm admiting to be a carefree lawbreaker, the lady that cut my hair a few weeks ago was - get this - UNLICENSED! Even thoguh the government requires hair cutters to be licensed. Maybe you guys can help me get my money back. Or throw that scofflaw in jail.
- Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes9y
I'm curious @Cody L., I noticed you are a licensed agent in TX, why do you seek government permission (license) if you view it as unnecessary?
- Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes9y
Because HAR requires their members be licensed. Which is their right. And I find being a member valuable to me.
If you're asking if I think you should HAVE to be licensed to sell real estate, absolutely not. But groups like NAR and Realtor™ have every right to convince the public that such designations are important, and then set whatever qualifications they want on membership.
Then the public can decide on their own if that's important to them.
Just like Uber not having the same background checks as a cab co. If that's important to users, they'll let Uber know via the market.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Cody L. Most states have carve outs for private folks that just do a few deals here and there like in Oregon you can do 3 in a year and have no more than 7 in your portfolio.. But when you advertise on Craigslist or website or hold yourself out as a lender and this company did about 100 plus million in the state with no license then well yes you get your hand slapped.
I suspect you have a drivers license even though you probably can drive a car without it.. I am a pilot I have been flying 30 plus years.. but I keep my license current but there are others that fly 30 years on a student certificate.. or are not instrument current and bust those regs.. can you do it sure is it legal no.. its your call on what you want to do.
Same with selling real estate / wholesaling we all know the fine line that runs along..
And I am not ambulance chasing friend comes to me with an issue I look at him and advise what his best option would be to get out of the loan.. I suspect if you knew the law like I did in the same situation and a good friend came to you and asked the same you would have given the same advice most folks would.
Now I will tell you .. a lot of the HML here in Oregon ( becasuse deal flow is very tough) they will follow recordings and if they see same company as Bene they will check and if no license they will file complaints.. I have not seen any lawyers take it up yet.. but anyway.. I was just commenting on the fact is some states you need it to be legal if you don't want to be legal you take the associated risk.. and if your one off no license is generally required.. But Nevada for sure will nail you.. they tired to nail me. .and I just talked about doing a loan on BP and got a nasty gram.. either someone on BP turned me in or they are monitoring it.. LOL.. any way Peace out... I got to go tend to my BBQ
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @John Thedford:
There are -0- tax benefits in HML as far as I know.
Unless you do it through a Solo Roth 401k or self directed Roth IRA LLC, then it'd be tax free ... that'd be the way to go if you can swing the funds IMO.
Question: My understanding is that you have to be a licensed as a mortgage originator and that licensing requirements are quite a bit tougher than RE borker's license in order to charge points on HML and also to increase the rate above 10%. Otherwise, if you go through a licensed loan broker, the typical arrangement that I'm aware of are the broker keeps the points and you keep the interest yield. Am I wrong on that or are you licensed to originate HMLs?
- Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes9y
Originally posted by @David Faulkner:
Originally posted by @John Thedford:
There are -0- tax benefits in HML as far as I know.
Unless you do it through a Solo Roth 401k or self directed Roth IRA LLC, then it'd be tax free ... that'd be the way to go if you can swing the funds IMO.
Question: My understanding is that you have to be a licensed as a mortgage originator and that licensing requirements are quite a bit tougher than RE borker's license in order to charge points on HML and also to increase the rate above 10%. Otherwise, if you go through a licensed loan broker, the typical arrangement that I'm aware of are the broker keeps the points and you keep the interest yield. Am I wrong on that or are you licensed to originate HMLs?
It depends on the state and what your actions are. I don't lend outside of FL because I would have to comply with other state laws which I am not familiar with. In FL you don't need a license to lend your own funds.
- Lender · Newport Beach, CA · Member since 2017 · 15 posts · 3 votes9yI was under the impression from some research that I did a while ago that there were more restrictions on the self directed IRA usage. As in you can not personally benefit from the use of those funds. Your retirement plan can, but not you (under 59 years old). No salary, no personal benefit like it sounds you are getting. I am not a CPA, but did you come to a different conclusion. Thanks and sounds like a great business!
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@David Faulkner correct for California loans... although I have had this argument more than once on BP... there are those that say.. NO but that simply is not correct.. I am a CA. RE broker and have been since 1975.. and that is the license I used for my HML in Oakland years back.. you can now have a NMLS and do loans and or CF ( consumer finance license).. just google any HML in CA and you will see if they are big enough to have a website you will see they have one of the above.
I have not looked close enough to see if there is a carve out for a few a year like Oregon has.
- Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes9y
Originally posted by @Bob Rowe:
I was under the impression from some research that I did a while ago that there were more restrictions on the self directed IRA usage. As in you can not personally benefit from the use of those funds. Your retirement plan can, but not you (under 59 years old). No salary, no personal benefit like it sounds you are getting. I am not a CPA, but did you come to a different conclusion.
Thanks and sounds like a great business!
My retirement plan gets the benefits. It lends the money and receives interest. I don't get a salary as a HML. Eventually I will start taking distributions at which time the gains become taxable as well as the money paid in tax deferred.
- Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes9y
Originally posted by @Cody L.:
Originally posted by @Account Closed:
I'm curious @Cody L., I noticed you are a licensed agent in TX, why do you seek government permission (license) if you view it as unnecessary?
Because HAR requires their members be licensed. Which is their right. And I find being a member valuable to me.
If you're asking if I think you should HAVE to be licensed to sell real estate, absolutely not. But groups like NAR and Realtor™ have every right to convince the public that such designations are important, and then set whatever qualifications they want on membership.
Then the public can decide on their own if that's important to them.
Just like Uber not having the same background checks as a cab co. If that's important to users, they'll let Uber know via the market.
I see, when there is an advantage you follow the law, otherwise, no.
By the way, the public has decided via the lawmakers that a license is required in CA if you do 8 or more loans in a year or charge more than 10%. Anything above 10% is usury, which is illegal. Usury is so important to the people that it's not just a statute, it's in the state constitution.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Jay Hinrichs:
@David Faulkner correct for California loans... although I have had this argument more than once on BP... there are those that say.. NO but that simply is not correct.. I am a CA. RE broker and have been since 1975.. and that is the license I used for my HML in Oakland years back.. you can now have a NMLS and do loans and or CF ( consumer finance license).. just google any HML in CA and you will see if they are big enough to have a website you will see they have one of the above.
I have not looked close enough to see if there is a carve out for a few a year like Oregon has.
So, to clarify, if you have a RE brokers (not sales person, but brokers) license but no NMLS, then you CAN charge points AND you CAN charge over 10% interest in CA? Or this is ONLY for NMLS?
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes9y
Originally posted by @Cody L.:
I used to do a bit of HML. But now it seems that there are so many people looking to loan out money that returns are compressed.
A HML in Houston that used to loan at 12+% is now doing 7-8% with 1 point. Crazy.
Some of us traditional lenders have found brokered/wholesale sources that are getting MBSs containing HML-like loans stamped AAA++, and selling them on Wall Street (letting income of the property take the place of any personal income documentation requirements, etc). That's what makes the comparatively low rate and low/no discount points possible.
I'm not really interested in competing with HML for loans that should be HML, and the ones that don't need to be will find their way to me or someone like me no matter what, so I'm happy to share your comparative advantage over anything getting put in an MBS: speed and collateral standards.
- Speed. Because we have investor guidelines, we can't close in one week like you can. You can do what you want, it's your money. It takes a good underwriter about 45 minutes to know if a deal is going to fly or not, the rest of the time is spent checking boxes. You can skip checking boxes, and simply fund it immediately after 45 minutes plus an appraisal.
- Collateral. Property standards with these guys are a bit lower than Fannie/Freddie, but they still actually exist. You have flexibility here that no one pooling them in MBSs can have. You can lend on a burnt down shack if you want, we can't (unless it's reno, which gets us back to speed/timing issues...).
- Rate/points. In theory you could match the rate/points made possible by MBS pooling and selling to Wall Street, but I honestly don't think you should. If Wall Street isn't paying you 3 or 4 points on the back-end, go ahead and charge it on the front end, focusing on the folks that need the speed and reduced collateral standards.
Those two areas are where the HML will continue to be able to out-compete our stuff. Beat up collateral, and it needs to fund next week? HML folks can have at it and good luck, I'll be there for the refi when the dust settles. :P
- Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes9y
Originally posted by @Richard Miller:
I have just recently thought about this method of investing as I'm concerned about the bubble. I'm all cash currently and think either this or wholesaling is something semi-safe at this moment. Would you mind providing any details about those recent loans and how they were underwritten?
Using Subject To is a relatively safe way to invest in real estate if a bubble concerns you. It is little money in and like any other investment, when done PROPERLY, ( you've got to know the actual technique not just think you know) it gives the returns you are asking about, safely and with great cash flow to boot. You could lend HML and get a great return.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Account Closed Yes get your Brokers license and U can be a full blown lender of Hard money in CA.. I believe though to do owner occ you need the NMLS though..
- Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes9y
@Jay Hinrichs I'm aware of the MLS only membership available in CA, I was one for quite a while, no need to pay extra to have somebody tell you what to do and what not to do, we already get enough of that in this state. Board services beyond MLS access are a big nothing burger as far as I'm concerned.
You need NMLS if the loan is for consumer purpose (personal, family or household). If the loan is for business purpose NMLS is not needed. All the loans I do are for business purpose so no NMLS is needed. Owner occupancy is irrelevant. The collateral property can be owner occupied or not, use of the loan money is the only thing that matters in determining if NMLS is required.
Always like reading your posts, I learn a lot.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Account Closed Oregon and Nevada go one step further they make no distinction if the property is 1 to 4 regarless of purpose NMLS required.. that's why you will see all the HML in those states with NMLS licenses and why those that don't know any better come into those states thinking they can make non consumer purpose loans without licenses then get slapped with cease and desist and big fine. It was circa 1977 when I made my stink on MLS by the way looooong time ago.
- Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes9y
@Jay Hinrichs You're probably the guy who paved the way for the rest of us to get MLS only access to our local board of realtors:) I didn't get any push back at all when I applied, they actually offered it as an option.
Amazing how different lending laws are state to state. Because of this thread I'm thinking of lending in FL ... 18% Usury limit, no license required, 4pts, 12%, lower loan amounts, no state tax (although, I'd still have to pay full CA income tax). Things that bother me though are that it's a mortgage state, I'm in LA so it's hard to vet borrowers and collateral, I like to meet borrowers face to face at least once, you can tell a lot about somebody in 5 minutes talking in person, but I'll figure something out.
How do you handle out of state lending, or do you even lend out of your immediate area?
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by :
most lending laws were put in to combat the MOB and loan sharking :) Guido loans Arm breaking that sort of thing.. It is comical how we pick the laws we like and follow them and the one's we don't then we complain they are not needed.. And real estate licesnse were not dictated by NAR again they were established by the states and state law NAR came afterword.. just most private business associations see a need and create these associations..
I fought and won the San Jose Board of Realtors on this one.. in the day they said you needed to be a member to access MLS.. Well I have always been my own broker and there was a broker before me who took this to the courts and won. So I was able to get MLS without being a member.. NOw here in Oregon same thing you have to be a member of board to get MLS.. and our brokerage follows suit so for me to hang my Oregon brokers license I have to be a member.. IN CA I am not a member and I am free to do business there as I keep that license active.
@David Faulkner Yes get your Brokers license and U can be a full blown lender of Hard money in CA.. I believe though to do owner occ you need the NMLS though..
Thanks for the info Jay! The only other thing I would throw out there (and please correct me if I'm wrong on this, as I don't claim to be an expert in this area) is that researching a bit more it seems that in CA you may now need a CA RE Brokers license (OR RE salesperson license) WITH a MLO endorsement, which seems to be an extra test and training hours:
http://www.dre.ca.gov/files/pdf/re19.pdf
Not sure of requirements for other states, and apologies if this is off topic a bit. Also, not sure if HML being for non-owner-occupied RE for commercial purposes a RE Broker would be exempt from this additional MLO endorsement qualification, even if over 8 loans/yr and even if you charge above 10% rate with origination points, but I wouldn't want to assume that.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
@Bill Gulley anything to add on this around setting up your business and licensing requirements to stay on the right side of the law? Any guidance as to alternate structures (eg: TIC) to accomplish effectively the same thing as a HML more easily?
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