Becoming A Short Term Lender?

36 Replies

I have some money to invest but just recently started thinking of being the "bank" instead. I've never looked into it so I don't know much about it from the lender's pov.

All I know is I am interested in doing short term loans so I guess that would make me a hard money lender?

Some questions I have are:

  • Would 3-6 month loans be feasible?
  • Can you make good money doing this if you consistently lend compared to owning a buy and hold prop?
  • Is this better or worse than buying and holding or can they not be compared?

For my last question, the reason I'm wondering if you can compare the two is because I don't know if I should pick one over the other. I'd assume holding a rental property long term would be better for net worth over short term lending but maybe income is better as a lender? I don't know. I'm unsure if this decision would be based more on a "whatever fits your goals" kind of thing.

I appreciate any and all feedback :)

cheers

Short term is usually referred to as hard money or bridge loans. 3-6 months is pretty short, standard is 12 months. Usually you make a few points at closing and then the interest-only on the loan monthly with the principal coming due at maturity. 

It's hard to say if it's better or worse, it's a completely different investment. 

Lending is tough, you need to know the market you're lending in, usually you want to have an understanding of credit-risk and be able to pull credit and run background to get a better read on your borrower. Also, most deals tend to require a lot of capital ($50K+).

Most states exempt business purpose loans from licensing requirements but there are still certain rules/regulations you have to be mindful of. If you're just looking to fund a handful of deals a year you  may be OK (consult an attorney) but definitely do your due diligence. 

@George Despotopoulos Hey, George, thanks for the reply.

Hmm. I wonder what I'd be able to do with 3-6 months then.

It's sort of like comparing apples to oranges then I'd assume? I have some capital to invest I just don't know if I'd get better returns short term lending rather than looking to buy and hold multifamily properties.

@George Despotopoulos No ones come to me for anything. I just recently acquired my capital. Trying to figure out what to do with it.

Torn between buy and hold multifamily and lending.

@Ray Hernandez - take a look at 'Fund this Flip'. They have a webpage for folks who want to lend, but FTF does the underwriting. Disclaimer - I do not know this company, just found out about them from these forums.

@Ray Hernandez - ok, I was just wondering. My opinion, I think you're better off investing in a buy & hold. 

Short term lending could be fruitful, but you need to get volume and usually investors want at least 6 month terms, but it's usually 12 month terms. Also, there's the added risk of being compliant with federal regulations & state laws as well as properly assessing/vetting both the borrower and the property.

@Carol C. Hey, Carol, thanks I'll check that out.

@George Despotopoulos Darn. I'd be fine doing 6 month if the return is good enough but yeah that's a lot to consider. This is overwhelming lol.

Hi @Ray Hernandezrelevant thread, skip to OP bullet point 5 if you wish.

Note how secure his private money lenders were in that case. The money wasn't secured by a beat up investment property that could go south, it was secured by his personal home that had gone up in value a zillion percent since purchase. Good position to be in, for the private lenders, no? Someone might bail on a HML secured by a vacant flip gone south, but they are less likely to bail when it's the home the investor's kids sleep in at night. The main investor did quite well on the deal too. Food for thought.

Chris Mason, Lender in CA (#1220177) and California (#1220177)
415-846-9211

@Ray Hernandez Totally, totally different experiences and not really comparable.  Keep in mind lending enjoys none of the tax advantages of real estate, which makes a big difference.

  • Marginal. It's definitely a smaller market.  
  • Yes, but it's work.  IMO, only worth it if you have access to enough capital to scale your efforts, though.
  • Can't be compared.

To do well in the lending game, in addition to controlling your risk and what others have mentioned, you need... 

(A) enough capital to satisfy the demand and 

(B) enough demand to put your capital to work.  

It's work to get these two to balance out - if working with small sums, I don't think it's worth it and I'd rather invest it more passively.  Personally, I have found occasional private lending to be a good networking tool and lead generator for what I'm really looking for - properties I can develop.  I'd rather participate in syndications than create a business of lending.

Also note that lending has none of the tax benefits owning real estate has, which makes a big difference.  Also, access to online HMLs is compressing the total returns as the market gets more efficient.

@Chris Mason Good article and a very good position to be in. Gave me a lot to think about, thanks!

@Justin R. You're absolutely right. I hadn't thought about the tax disadvantage I'd be in while lending! Ok so I'm now leaning more towards buy and hold multifamily but I'm unsure about syndications. From what I've seen the returns are decent. 8% preferred and sometimes 12-15% annualized. But would there be an advantage trying to buy a complex myself and holding it long term or is syndication really the best way to go? 

@Ray Hernandez Just my personal opinion based on experience, but...

Having one or two rentals is just ... annoying.  Not enough current income to move the needle, but all the knowledge required to learn and, if you're self-managing, the always-present "the tenant could move/break/have problem any minute of the day" possibility.  By the time you have 4, 5 ... 10 properties, it makes it worth the time to systematize and gets some meaningful current income.

In short, if I just wanted to invest the money, I'd look into a syndication.  That's where I pointed my sister.  Since I enjoy the management and improvements and tools and growing a business, I chose to acquire my own properties.

As for whether syndication is the "best way" ... it's totally whether the syndicator is good or not.  Can be formal or informal.  For example, friends and family have invested in my properties, which has been great for their needs - ask around your friends and acquaintances you already trust to see what opportunities are there.

@Justin R. I wanted to buy a mid size apartment because of the scalability. But all good points. I'll look around at different syndications vs investing myself and just weigh the pros and cons for the current goals I have. I enjoy growing a business as well so I may do what you did but I guess I'll see :)

thanks for the help!

This post has been removed.

Originally posted by @Ray Hernandez :

@Chris Mason Good article and a very good position to be in. Gave me a lot to think about, thanks!

@Justin R. You're absolutely right. I hadn't thought about the tax disadvantage I'd be in while lending! Ok so I'm now leaning more towards buy and hold multifamily but I'm unsure about syndications. From what I've seen the returns are decent. 8% preferred and sometimes 12-15% annualized. But would there be an advantage trying to buy a complex myself and holding it long term or is syndication really the best way to go? 

There's a lot of would-be investors in the Bay Area sitting on a ton of equity, but they have killer 3.5% interest rates from 2012 that they don't want to let go of. I've been trying to find some folks that would be open to developing it into what amounts to a 0% down investment property financing model. A lot of the time, the HML 2nd secured by the high equity primary residence would end up getting paid off in short order with via a HELOC, so there'd have to be points in it upfront for the HML for it to make sense. Not being in the hard money world myself, there's also a bunch of compliance stuff that would need to be worked through that I don't know about.

Chris Mason, Lender in CA (#1220177) and California (#1220177)
415-846-9211

@Chris Mason Lot to think about! I'll have to find out about all these laws/rules before I attempt anything. 

Originally posted by @Ray Hernandez :

@Chris Mason Lot to think about! I'll have to find out about all these laws/rules before I attempt anything. 

 @Jay Hinrichs always has some helpful tips/advice/observations. He was on one of the BP podcasts, because he's done, well, everything. 

Chris Mason, Lender in CA (#1220177) and California (#1220177)
415-846-9211

@Chris Mason I've seen him around the forums but didn't know how extensive his background was! Wow! I'll try and get some advice from him since he really has seen and done it all lol.

Originally posted by @George Despotopoulos :

Short term is usually referred to as hard money or bridge loans. 3-6 months is pretty short, standard is 12 months. Usually you make a few points at closing and then the interest-only on the loan monthly with the principal coming due at maturity. 

It's hard to say if it's better or worse, it's a completely different investment. 

Lending is tough, you need to know the market you're lending in, usually you want to have an understanding of credit-risk and be able to pull credit and run background to get a better read on your borrower. Also, most deals tend to require a lot of capital ($50K+).

Most states exempt business purpose loans from licensing requirements but there are still certain rules/regulations you have to be mindful of. If you're just looking to fund a handful of deals a year you  may be OK (consult an attorney) but definitely do your due diligence. 

 California is NOT one of those states that exempts this type of lending.. there might be a small carve out for a few loans a year privately done but if you hold yourself out as a lender your need a license.

@Jay Hinrichs Thanks for commenting! I truly appreciate it.

As for lending here in ca I didn't know that. I can try and see if there is that small carve out you mentioned but if not would you recommend me putting my capital to some multifamily prop? I'm still pretty unsure what to do. I just want to make sure it's put to use as best as possible.

I'm sure I can ask where's the best place to put my money in re to 100 different re folks and probably receive 100 different answers but I am curious to what someone of your experience would have to say.

Ray you can still lend in CA you simply need a RE Broker to run the paper work for you so the state Is happy and they will usually want some sort of fee for their time and risk / effort.

After reading this thread, a few comments come to mind over this common A or B decision.

Without knowing how much it is (no need to say) makes my advice (or more accurately, my opinion) more general in nature but here it goes:

Lending has very little to no tax shelters whereas buy and hold does. Lending in the manner in which you are talking about in CA would require you to get licensed or use a license broker and therefore cost you 1-2 points which is less money that you can earn by doing it yourself as a broker. Now to the benefits of Lending - Lending can be more liquid and the cost to sell less. Lending can allow you to be more diversified and since it is short term, avoid getting caught in large downturns in the marketplace. Lending is way more passive than buy and hold.

That all said, if the amount of the investment is great enough, my advice would be to do both. Use some for buy and hold (I personally would prefer apartments rather than buying a few single family homes) and some for lending/trust deed investing.

In either category, you must know what you are doing, know how to vet the investment, how to vet the sponsor (if investing in a larger fund of some sort), the laws and regulations on the lending side, how to investigate which areas to invest in buy and hold and notes/trust deeds for that matter.

So as you have already said several times, lots to think about . . . 

@Will Barnard Thank you for your honest advice! Means a lot to me.

Yeah I can't believe I hadn't thought about the little to no tax advantages with lending. I was so focused on the liquidity of it. 

I'm very interested in apartment complexes and have been trying to learn as much as I can about investing in them. That said, if you were in my shoes would you advise looking into syndications or trying to find deals to buy and hold myself? I have the time to try and find deals myself so that's not necessarily a problem. I don't mind if I'm not 100% passive. Just want some good returns.

But doing both does seem like a great way to diversify. I get the tax benefit of rentals and more liquidity of lending. Good idea. And yeah I have tons to think about lol. Thanks for giving your input!

@Jay Hinrichs Ah okay thanks for clearing that up. I suppose if the return is high enough I wouldn't mind using the broker.

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