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
Most Popular Reply
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
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@David Faulkner I am thinking that is for owner occ resi loans.. I think non owner or non owner purpose loans as @Account Closed its a no brainer test.. a guy like me it was tough... just a lot of laws a rules I have never had to follow in my HML career. Nevada you need brick and mortar as well.. there are 12 states that one needs to be cognizant of the laws.. the others its same ole same ole commercial purpose no license required. and here in Oregon is we do a 5 unit or more.. new construction land loan strip center apartment no license required as well.. its only in the realm of properties that I think the feds and state thinks will have the least educated borrowers.
Also in Oregon any loan UNDER 50k Is subject to STRICT usury over 50K no usury.. another one I learned early on when I started.. and yes it totally state to state.
- Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes9y
Dodd-Frank is one law NOT to violate. Penalties can be stiff. I lend on non-owner occupied properties. Most of my borrowers are flippers and they take ownership in an LLC, etc. You can lend on vacant land or commercial and DF does not apply to my knowledge. As @Jay Hinrichs you MUST be in compliance in the state where the property is located. I am NOT sure if you must also be in compliance within your state and maybe Jay has some insight.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@John Thedford unfortunately again every state is different our great state of ORYGUN if you are domiciled here IE your company is based here is does not matter were the property is located if its.
1 to 4 units
Regardless of the purpose of the loan you must be NMLS registered and state licensed..
I know because I was under the impression even though I was licensed that I did not need to report my out of state activity on my state reports.. State of Oregon does bi annual reviews in your office... the gal asked how many loans I did I said none she said really ( remember all my loans at the time were out of state) I said no my attorney said I don't need to as my loans are all out in the mid west.. She says and she opens the code book to show me.. That does not matter were the loan is if its 1 to 4 units regardless of the purpose and you hold your self out as a lender ( and obviously you do since your licensed) then you fall under our jurisdiction and need to conform to our reporting standards and our disclosure docs.
She then says would you like to restate how many loans you made the last 24 months.. I said well since you put it that way about 432 loans I think :) I did not get a fine I was lucky but I learned a lesson... Had I not been licensed I would have got wrung up like the other companies... I did get demerits which meant they came back in 12 months for another audit which I passed...
And like I said I made one post about making a loan in Nevada and got a Nasty gram from that state regulator.. Basically saying we see your licensed NMLS but not in Nevada and if you have made a loan here we need to know and If you did your subject to disciplinary actions etc etc.. I had to sign a notarized affidavit that I had never done a loan in Nevada which I had not.
@Account Closed Mortgage states in my mind are the province of locals most of the time.. Texas is wide open and is Deed of trust and is closer you may want to check there before FLA... although I am not a fan of owning property in Texas personally but that does not mean it can't be a good place to lend if done correctly.
- Accountant · Louisville, CO · Member since 2017 · 80 posts · 34 votes9y
@Bob Rowe You are correct, there are rules associated with using self directed retirement funds for HML. Going with your example, you cannot lend your retirement funds to someone on your disqualified persons list (parents, kids), anyone else is totally allowed. All loan payments are made to the retirement account, thus growing the account. If that retirement account happens to be a Roth, the growth the gains are tax free when you take distribution at 59.5 years old. Also, loans can be secured or unsecured, you write the note, determine the rate, maturity date, etc. Let me know if you need more info.
- Investor · West Los Angeles, CA · Member since 2014 · 230 posts · 239 votes9y
Thank you for this post. Curious if you only lend in first position? Do you do gap funding, equity or second liens? Why or why not. I currently am lending in first position but as an equity position. My returns vary from 10% to 30%. Given the high cost of property in Los Angeles I find it hard to lend in first position. There are plenty of opportunities for gap funding or 2nd liens, however if something blows up I don't have the funds to step in and pay off the first. Thus far I've stayed away from this, however the returns look great.
- 9yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
As a private (HML) that lends in ANY state, I will jump into the "discussion".
Single family, owner occupied homes, all fall under both FHA AND Consumer Financial Protection Agency, whether or not the loan is for a consumer purpose or business purpose. Period. However, as previously mentioned, an owner occupied, or personal residence, securing a BUSINESS purpose loans, while falling under FHA and CFPB, would not fall under Dodd-Frank, and hence not under the NMLS.
Now that we've clarified THAT, what about commercial property and non owner occupied residences? Well, here the Federal Government is out of the picture, UNLESS the loan purpose is consumer, not business. If the purpose is consumer, IT DOES NOT MATTER IF THE COLLATERAL IS COMMERCIAL OR RESIDENTIAL. A consumer loan will fall under the CFBP jurisdiction, regardless of the collateral securing the loan.
Okay, now to 1-4 family non owner occupied commercial purpose. Well, as noted above, the Federal Gov is out. There are a few states which regulate 1-4 family non o/o and not commercial, there are also a few states which regulate commercial and not 1-4 family non o/o, and a few states that regulate both.
The usual method of regulation in these 14 states is the requirement of a mortgage brokers state license to originate commercial loans, with most states carving out exceptions for occasional loans or lenders who do not originate, i.e go through a licensed broker. Among the states that require a commercial mortgage broker/originator to be licensed are Nevada and Arizona. Two states that actually require a real estate broker license to originate commercial mortgage loans are California and New York.
I used to hold real estate broker licenses in Texas, New York, California, and mortgage broker licenses in Arizona and Nevada. I gave up all but my Texas Real Estate Broker license. Now if we want to make a loan in a state (and we lend on commercial property only) that requires licensing, and no exemption exists, we do it through a mortgage broker licensed in that state (most of our deal flow is through brokers anyway).
It has become obvious to me through the years, that since 36 states have no need to require a license for commercial loans, that the states that do do it for one or more of these three reasons. 1- To raise money for the state treasury 2- to "protect" a special interest, i.e. the state residents who engage in that activity and want to become licensed to lessen competition, and/or 3- as a continuation of the socialistic big brother political thinking prevalent in that state.
Now, licensing requirement for consumer or owner occupied loans may be a different situation. Here, there may be more justification for some government regulation (I believe the less the better). No body wants their aged parents or grandparents taken advantage of by a slick talking fraudster. And in truth, I have to acknowledge that although Dodd Frank and CFPB swings WAY too far on the side of regulation, it was BAD BEHAVIOR by major players in the home mortgage industry that gave justification to the pro regulation lobby.
- Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes9y
My borrowers sign business purposes statements.
@Account Closed yes I only lend in 1st position.
- New to Real Estate · New York, NY · Member since 2019 · 7 posts · 0 votes7y
@John Thedford Thank you very much for these insights!
- Member since 2019 · 1 post · 0 votes7y
Hi all. This is my first so I wanted to introduce myself.
I have a little money coming my way soon and am interested in starting to make HML. I'm looking for some help and support in starting out. Anybody out there that can give some advice to get going?
Cheers
Join the conversationCreate a free account to reply, vote on answers and follow this thread.