How to become a hard money lender

7 Replies

Somebody in my network has been successful as a flipper. I have liquid capital I'd like to diversify away from stocks and into RE. We've already agreed on rates, and I'm going to ensure all the paperwork protects me just like it would any other lender (proper contracts, personal guarantee, etc)

The part I'm unsure of is what type of entity it should be under, just a regular LLC? And if the LLC exists purely to lend money, do I need some sort of license? If so, are these difficult to apply/get approved for? I'm located in Texas, flipper(s) will be out of state.

Originally posted by @John Teachout :

What benefit do you perceive you'll have by lending via an entity? (vs, just in your own name?)

Asset protection/limited liability.

Possibly some tax benefits as well, though those would be quite minimal -- not the main goal of this, just mentioning that it'd at least offset the cost of setting up the LLC

Originally posted by @Zee Anon :
Originally posted by @John Teachout:

What benefit do you perceive you'll have by lending via an entity? (vs, just in your own name?)

Asset protection/limited liability.

Possibly some tax benefits as well, though those would be quite minimal -- not the main goal of this, just mentioning that it'd at least offset the cost of setting up the LLC

Pretty sure your tax liabilities would be exactly the same if you have an LLC as they're typically a pass through or "disregarded entity".

@Zee Anon you can create a regular LLC, it's nothing different for hard money lending. Since you are in Texas, you will have to register in other states as a "foreign entity" and abide by their states rules. I hope you have an attorney you are working with, and if not, I can recommend one for you for any Texas deals you may do. You will need to work with a local attorney in each state that you are lending in though.

 I do hard money lending in TX and AZ. It’s fairly simple. As long as the funds are being funded from your personal money, you do not have to have a mortgage brokers license. And you also cannot lend on primary residences.

I work with HML/PMLs. If you have never lent money on REI assets, you probably should talk to a few who have, then talk to a lawyer who does this for HMLs in the jurisdiction where you plan to lend. It is a whole new world. The answers on licensing and entity selection are dependent on the state where you are doing business.

First thing, you gotta know the law, both state and federal, related to lending money on property in the state where the property is located.

As for asset protection or tax liability, don't take advice here.  Talk to a lawyer about asset protection and your CPA about tax liability.  Way to specific to your individual situation.

Originally posted by @Zee Anon :

Somebody in my network has been successful as a flipper. I have liquid capital I'd like to diversify away from stocks and into RE. We've already agreed on rates, and I'm going to ensure all the paperwork protects me just like it would any other lender (proper contracts, personal guarantee, etc)

The part I'm unsure of is what type of entity it should be under, just a regular LLC? And if the LLC exists purely to lend money, do I need some sort of license? If so, are these difficult to apply/get approved for? I'm located in Texas, flipper(s) will be out of state.

You will not get any tax benefits from your LLC and as far as liability protection, there is nothing to protect when you are the lender only and have no ownership of the property or anything to do with the construction/rehab. So you are better off lending from your personal name.

As to a license, you need a license in the state in which you intend on lending only if you are intending on charging above that state’s usury limits. Each state has different usury limits and you are exempt if you are licensed.

I highly encourage you to speak with your CPA/attorney regarding the use of an entity and if it is right for you as well as the legal docs to protect you (deed of trust, promissory note, personal guarantee rider, and all other disclosure docs you should have for the state you intend to lend in).