There are 7532 ways into the business, @Brian Plajer, and these depend on the amount of money that you have, the risks you want to take, and the amount of time you want to spend.
The two broadest categories are performing and non-performing notes.
If you have enough cash to purchase a home in your area, you can originate performing 1st position loans to local, experienced
(sorry Beth. Ha.), full-time house flippers, and hold them yourself. As you might have read in my post referenced above, this is exactly what we do. State law will dictate licensing, usury, and other restrictions which is why you must speak to a lending attorney first to get educated. Note, lending attorneys are not the same as real estate attorneys, many of whom are only versed in conventional loan closings.
Compared to other loans you could make, your risk here is relatively low and after a short learning curve, your time commitment will be minimal. Depending upon how fast you get repaid, your annualized percent return should be in the low to mid-teens. For me, time is important. From the first phone call to getting repaid, I estimate we spend perhaps 6 hours total on any one loan. That includes our financial evaluation of the property and also visiting it – which we require.
If you only have enough money to lend on the rehab, DON’T, (and never loan earnest money). Yes, I know the Bankers Code, partnering, gap funding, yada yada, and all that, but these are generally 2nd position loans or lower and easily wiped out in foreclosure or bankruptcy. I know several who specialize in lending in second position, some consistently behind us, and their returns are great. One sold a computer company and wouldn’t blink at losing $50k or $100k if it happened. Could you withstand that? Would you mind lending to a stranger, in second position, out-of-state, on a house you never saw? There are some who actually advocate this.
Alternately, if you don’t have a lot of money, and it’s legal in your state, you might consider participating in a fractionalized loan. These are perhaps the greatest idea in lending since compound interest and there are licensed brokers who specialize in arranging them. Your name would appear on the note and deed-of-trust or mortgage as the lender beside several others (ten max in CA), along with your pro-rata ownership. This could be recorded in first position like any other purchase money loan. Much safer than doing seconds but of course the returns will be lower. Here, in addition to the house and borrower, you must also check out the broker.
Similarly, I’m on the email list of a handful of brokers and I get offers every day to lend on all type of properties, in various lending positions, terms, and interest rates. Here, these brokers find the borrowers, do their own due diligence, and would arrange the loan in my name. It’s pretty much one-stop-shopping but clearly requires a lot of due diligence on my part.
Alternately, you could buy non-performing notes. These are a world of their own and can be quite rewarding. Those I know who work these generally buy a portfolio of notes at a time for relatively low dollars each. Some percent of these loans will be total losers, some will provide modest returns, and others will be grand slam home runs. Annualized returns can range from zero into the many tens to hundreds of percent or more. I’ve observed that those who buy these work hard and they tend to do this full time. Could be for you if you’re willing to put in the effort.
Then, like everything else in real estate, you can lend with OPM and take a cut. That’s what many licensed brokers do. There are also affiliates. Go to the website of many larger lenders and there will often be a tab leading you to their affiliate program where they train you in their processes. Here, you’re basically a commissioned salesperson. I suspect many who call themselves lenders on this board are actually affiliates representing multiple lenders.
Hope this was actionable and sorry it was so long.
