Hard money lending. What I need to know?

Question

I’m curious to learn more about hard money lending. I know nothing about it. Wanting to know roughly how much do I have to have to be able to lend out to investors? Also how much of a chance is it that I can potentially not get the money back from the person I lend to? ￼

Beth Johnson · Answer

@Jerry Chetrancolo

The chances of a principal loss depends on a few factors that matter less about how much you need to lend and more about HOW/WHO you lend to -

- how well you evaluated the project, property and borrower. If you don't do your due diligence, you could easily miss out on the equity buffer you expected/needed for protection and be subject to a principal loss or reduced ROI.

- how high of leverage (loan to value) you go up to. A lot of people starting out do "gap funding" which is up to 100% combined LTV (1st mortgage plus your money in 2nd position) which can go downhill very fast if you don't know what you're doing or your borrowers don't know what they're doing. Stick with a very safe equity buffer, when/if you can.

- if you lend unsecured rather than placing a mortgage or deed on the property (which I could never recommend).

- if you don't a "non-recourse" loan meaning you lend to a LLC and don't get a personal guaranty so you can go after the individual(s) in case they don't perform.

Get the book Private Money Lending book on Amazon by Gustavo Gomez. It's an excellent resource for newbie private note investor.

Kyle Altenau · Answer

You'd need to find an attorney to handle the lender legal side of things. I'd also recommend vetting and finding an appraisal company you're comfortable working with. If you don't have lending experience, I'd highly recommend getting appraisals on all of your deals.

How much are you looking to put out in total? If it's a lot and you'll have several loans, you'd also need to invest in mortgage servicing software etc. It may be more cost effective to find a lender that takes money from investors like yourself and lends it out for you. They source the deals, underwrite, close and then service them. For instance, they'll do a loan at 12% and then give you a 10% return on your investment. You'd of course want to vet these companies as well, but it could be a more hands off approach to lending out your money.

Moises R Cosme · Answer

Jerry,

1. What county are you lending in?  What is the median price for single family property over the last 90 days?  On average you should prepare to lend 75% of the median price for property in your market.

2. After estimating the average amount of cash you will need to lend on each property, your next step is to find an interview an Attorney that will close all of your loans.  Do not rely on the Buyer, find your own Attorney; I recommend getting all of their credentials, the title insurance company they write with & insurance info.

3. Work with reputable Buyers; in our case, we work with the same lender each time - makes the process simple for us.

If you found this helpful, check out my profile and send me a direct message if you have further questions.