Becoming a hard money lender
Member since 2022 · 61 posts · 31 votes
Sounds good. I only fixed some spelling/grammar
Hello all! My name is Jeanette. I currently have 2 rental properties and am looking into the hard money lending game. If I want to be a hard money lender, what questions should I be asking a potential client? What are some red flags? Does anyone have a sample of a contract I could refer to? What are some positive and negative experiences you have had? What interest rate should I be charging? How much money do I need to be a sufficient hard money lender? Thank you for your time in reading this. I look forward to your responses.
So, there's lots to know actually. And I'd really rethink it. I know operating as a lending institution seems lucrative, but it can and will tie up your capital and you can lose too.
If I want to be a hard money lender, what questions should I be asking a potential client?
How many projects have you exited in the last three years?
Where is your credit right now?
How much capital do you have to put towards this project in case needed?
How did you source the property?
Was an appraisal and/or inspection completed?
Do You have a scope of work together?
How long have your projects lasted on average from purchase to exit?
How long do you expect to be in this project?
What are some red flags?
New borrowers. Bad credit. Uneducated investors (numbers aren't real). They don't know the industry terminology. They have no idea about the process. The real risk is execution level. Odds are the borrower didn't find the house and the borrower isn't fixing it up, so the risk is their management of the execution and the ethics of the vendors they are using. What if they are a bad judge of character? There's lots of bad actors in this space and "Private Money" can often be a battle cry for every Tom, Dick, and Harry with a deal in hand to come and apply. I've seen many flips where the borrower had to bring cash to the table to sell. The big number for you as the lender is the loan cap. Institutional lenders go to 75%. That means they will lend up to 75% of the ARV. I can tell you from experience that 75% deals are no slam dunk, you are still on an execution risk based scenario. But if someone say came to you with a legit 65% project cost scenario and they are the builder/GC so they are doing the work themselves and have all the skin in the game. A scenario like that? Maybe.
Does anyone have a sample of a contract I could refer to?
Work with Claude or Chat GPT. Start with a general prompt: I am starting my own hard money business. Act as an experienced contracts lawyer and generate for me a detailed lending contract that protects me as the lender and outlines all the duties/responsibilities of the borrower. My interest rate will be 12% APR. Interest only payments and I will charge 1 origination point and offer a 1 point three month extension after 12 months. Start there and you'll see it will generate you your personal contract. You can even add the name of your lending LLC to it. But then read the contract and ask it to make edit through the prompt and it will automatically regenerate. Then get a real lawyer to read it, or para legal at least. Take their notes back to the prompt and AI will make all the edits for you.
What are some positive and negative experiences you have had?
I have never lent my money for a project, I have borrowed private money for real estate and it isn't cheap. And you better know what you are doing or else the deal can go south fast and money can get trapped in real estate. I've seen it.
What interest rate should I be charging?
You're lending short term, hopefully 12 months max. There will be interest only payments. The rates for these programs range from 9.99% - 12%. I'd go 12% for sure and then work my way down toward 9.99% as you build a reputation with a borrower.
How much money do I need to be a sufficient hard money lender?
Alot. Expendable money at that. If I had one million dollars to lend, I wouldn't want to put no more than 100k in any one deal. Money management is the most important factor for any financial services company. If you have 100k and lend it all in one deal, the deal collapses and now you have a money pit property instead of 100k. What % of the institutional lenders capital is in any one deal you think? Less than 1% most loans. These lenders have hundreds of millions at their backing and they won't go higher than 3 million in any one loan. Read into that and figure out what it tells you.
You have two rentals, why not just continue that way?
Mike nailed the execution risk piece. From the FL wholesale side, I work with cash buyers who use private money to close fast on tax deed properties. The ones who succeed have tight scopes, known contractors, and exit plans before they borrow.
For your first deal as HML, I'd add: ask borrowers for their last 3 project timelines (purchase to sale date), not just flip counts. A borrower who closed 5 deals but took 18 months each is different from someone averaging 4 months. The carry costs eat your interest payments.
On loan caps — we see institutional at 70-75% ARV in FL. The deals that don't blow up are where the borrower has 25%+ skin in the game (down payment + rehab budget). If they're 100% leveraged, they'll walk when it gets hard and you're stuck with a half-finished property.
Start with one deal, max $50-75k, to a borrower you've vetted personally. Learn the process before scaling. Your two rentals are steady income — don't risk them on HML until you've seen one full cycle.