"How do I become a hard money lender," you ask?
There's probably more to it than you expected. But don't fret. It's not that hard.
However, before we get into all of that, check out this video on how to operate in this business in a way that will MAKE you money, and safeguard your money at the same time.
Click the link here to view it from YouTube, if you want --> Detroit Investment Opportunities: Safely Make Huge, Passive Profits with Private Lending
Note: The ideas I talk about below don't necessarily have to be assessed in the order they're listed in. Please also seek the guidance from an attorney and a CPA before you embark on this opportunity.
Hard Money Lender and Private Lenders
The label "Hard money lender" is sometimes used interchangeably with "private lender."
They're similar, but not the same.
From my experiences, hard money lenders charge higher interest rates than most private lenders do, and they usually charge points on the front end as well.
Plus, hard money lenders tend to run credit checks on applicants, and will fund any deal as long as the applicant and the property meets their criteria.
With private lenders, there's more of a personal relationship between the borrower and the lender; there aren't credit checks or points involved.
There's a few other differences, but I'll stop there and get back on-topic.
How Much Do You Have to Lend?
The amount of money you have to lend should be the first thing you look at.
The answer to that will guide you into determining a lot of things you'll need to consider, such as the areas and the types of properties you're going to be able to lend on/in.
Speaking of criteria, let's go ahead and talk about that real quick.
Establish Lending Criteria
You have to establish your criteria.
For example, what's the max loan-to-value ratio you're willing to lend?
What will applicants need to fill-out to apply with you?
Figuring-Out Your Criteria
If you're just getting started, a simple way to figure out your criteria is to look around to see what other lenders are doing in your area.
You can find them by running a Google search for something like "[your city] hard money lender." That should bring up some existing lenders in your area.
Give them a call or look at their websites and find out what their lending criteria is.
Write down the criteria of each lender you find or contact, and then analyze their criteria.
You should notice some strong similarities between the multiple lenders.
There's probably a reason why their criteria is what it is.
Every real estate market is different, so it's crucial that you're only looking at lenders that lend in the market you plan on lending within.
What You Might Find
Really quick, I wanted to give you some expectations regarding what you're probably going to find from a terms standpoint when you're gathering info on other hard money lenders:
- You will probably find that lenders are charging about two points upfront. That means they're charging two percent of the total loan amount when the loan is originated.You will also find that the terms of the loans will tend to have a range of 6-to-24 months.
- If the borrower is trying to do a flip or rehab on a residential home, you'll probably want to make the terms for about six months or so. That way, they're encouraged to focus so that they can get in-and-out of the deal. Six months is usually a good sweet spot. You figure that it's going to take a month or two for rehab, and there's always a chance that the end-buyer's lender is going to need 90 days of title seasoning.
Find a Good Real Estate Attorney
If you can, find someone that's experienced working with lending concerns, like an SEC attorney, for example.
I don't do anything real estate-wise without consulting our attorney first.
Number one, the stakes are too high to be guessing on things.
Secondly, understanding legal jargon isn't my specialty; finding and financing deals are what we do best.
Attorneys can be expensive, but sound legal guidance will probably save you money, heartache, and sleepless nights in the long-run.
It's crucial that you have someone on your side that can help you navigate the laws in your state.
There's nothing like having that assurance that you're doing things in a way that will make you money, and not lose it.
Caution: Don't get frustrated if it takes you some time to find a real estate attorney that's familiar with hard money lending. Hard money lending is a small niche.
To make money lending, you have to have borrowers.
Here are a few ways you can find and meet real estate investors to lend to.
Local REIA Meetings
Your local Real Estate Investor Association (REIA) meetings might be the best method of all.
I can't think of any other place that allows you to find and introduce yourself to multiple real estate investors in such a short period of time.
If you want to find out when and where the REIA meeting takes place in your target area, run a Google search for something like "[the name of your target city] REIA."
Build a Search Engine Optimized (SEO) Website
This method will take more time to find prospects than going to REIA meetings.
The benefit to doing this, is that eventually it will bring prospects to you, instead of you having to constantly be out promoting your opportunity.
A website will help your website (hopefully) show up on the first page of search results when people search Google for phrases that deal with hard money lending in your target areas.
For example, let's say you want to lend money in San Francisco. If your website is optimized for a phrase like "hard money lenders in San Francisco", your website could potentially show up on the front page of Google when people search for that phrase.
Search for them on Google
You can also run Google searches for terms like "[your city] real estate investor," or "[your city] real estate blog", or other similar phrases.
You should find webpages in the search results that show the names and contact information of investors in your target area.
Then, you can email or call them so you can introduce yourself.
If you're on LinkedIn, you can run similar searches to find people and groups related to real estate investing in your target markets.
Knowing the Area You're Going to Lend In
It's crucial that you're familiar with the areas that you're going to lend in.
The deal, and the area where the deal resides is more important than the financial credentials of the potential borrower.
In a hard money lending deal, you and the borrower become partners; you're not just a lender.
For all you know, that potential borrower might not know what areas to avoid. If they present you a deal/house that sits in a war zone, you need to be able to recognize that.
When you're considering lending money, you have to be constantly asking yourself "would I mind owning this house, in the area where it sits?"
You never know, you just might end up owning it if the borrower defaults.
There's more to knowing the area than just knowing the good and bad neighborhoods.
You also want to know which areas have higher levels of demand from home buyers than others.
You make your profits when the house gets sold or refinanced. With that in mind, it's in your best interest to lend in areas where there's demand, and to not lend where there's little-to-no demand.
Stick to One Area
If you're just starting out, stick to lending in a specific area; preferably somewhere local. That way, you can physically visit the properties you're lending on.
Once you get the hang of things, then you can branch out to other communities, if you want.
Learn the Foreclosure Process
You might have to foreclose on the home if the borrower defaults, so it's smart to get acquainted with the foreclosure process.
The process varies from state-to-state, so it's best to get familiar with what to do (and how much it'll cost you), so you don't get blindsided.
For example, you need to find out if you can execute a foreclosure by advertisement in the state you're going to be lending in.
If you can, that's good to know, because it's a lot simpler (and cheaper) to foreclose this way instead of the traditional route.
SEC Requirements/Usury Laws
You'll also want to make yourself familiar with the SEC guidelines and rules in your state concerning lending practices.
Usury laws are a concern as well. You also want to get familiar with the Usury laws in the state(s) where you're going to be lending money.
These laws determine the amount of interest you can charge someone for a loan, and they vary from state-to-state.
These laws protect people from being taken advantage of by lenders that charge ridiculously high interest rates.
If you overcharge people per the Usury laws, they might be able to get out of paying you if you try to go after them for defaulting on the loan.
The last thing you want to do is make a costly mistake, only to find out that you could have avoided that mistake by getting some guidance from someone that knows the law.
There's just way too much money at-stake, here.
As far as what legally-recorded documents you're going to need, all you're going to really need are a mortgage or deed of trust (depending on what state you're in) and a promissory note.
You might want to make the repayment terms on your loans interest-only.
This benefits you as well as the borrower.
From the borrower's perspective, interest-only payments are going to be lower than if they actually had to pay on the principal with each payment.
Your benefit is that the principal remains the same throughout the loan. This is a good thing, because the amount of money you're owed on the back end when they sell or refinance doesn't change.
Plus, the amount of your payments remains the same, because it's based on the principal, which doesn't change.
Consider Pooling Your Money with Other Investors
If you're just starting out, you might want to consider pooling your money with other people that might be interested.
That way, you're not risking just your own money.
Once you figure things out and get more comfortable with the process, maybe then you could venture out and start doing some projects on your own.
Fund a Cheaper Property
If pooling with other people doesn't sound good, try funding a smaller-sized loan.
It's just not smart to risk more money than you have to, if you're just starting-out and learning the game.
Start and Stay in Just One State
I don't see the need in trying to operate in multiple states as a hard money lender as a beginner.
There are way too many real estate investors in a concentrated area to have to deal with the complexity of operating in multiple states or areas.
Not to mention how much the laws vary from state-to-state, and that you need to know about the areas that you're lending-in.
Find a Broker
It makes it a lot easier starting out, if you just find a broker who is experienced managing portfolios for hard money lenders already.
It just makes things so much easier as a novice.
Here are some of the reasons why a lot of hard money lenders lend through brokers:
- They take care of most (if not all) of the rules and regulations concerns you might have
- They'll set the lending criteria for you.
- They'll set-up and administrate your approval process for you.
- You can leverage their existing connections and marketing initiatives to find borrowers.
Look Over their Shoulders
Although working with a broker has its perks, you don't want to just put everything in their hands, and not monitor the situation.
A lot of brokers (but not all) are more concerned about getting the loan closed than they are about protecting your money.
So definitely make sure you're looking over the broker's shoulders to make sure that they're evaluating the values of the properties right and things of that nature.
The value of the property is CRUCIAL to you making the money you're trying to make as a hard money lender.
The same thing applies in-regards to them finding borrowers for you. I wouldn't put it solely in the broker's hands to find borrowers for you.
Don't forget that they probably have other lenders that they have to "share-the-wealth" with when they get leads on prospective hard money borrowers.
It's cool to have their help to help you find business, but you might want to have your own little marketing campaign going as well.
Brokers Aren't All the Same. First and foremost, hard money lending is a small niche, so it might take you some time to find a broker that deals with hard money loans.
Also keep in mind that every broker isn't the same. Some might be open to doing hard money loans, but they may not have the connections and clientele to get borrowers for you consistently.
When you're talking to brokers, make sure you find out just how many hard money loans they've done in the past.
Funding Deals for Existing Hard Money Lenders
You might also want to consider becoming a funding source for existing hard money lenders.
Sometimes, they run out of money to lend, and they can leverage your money.
The benefits of this approach are obvious. You can leverage their marketing, relationships, and experience to make the lending experience less-risky and time-consuming for yourself.
Of course, you're going to make less money than if you were operating alone, but you have to weigh the options for yourself.
Requiring "Skin in the Game" from Borrowers
Most hard money lenders nowadays require borrowers to put some of their own money into the deal.
As the lender, it lowers some of your risk.
It makes the borrower a little more motivated to work hard to make sure things go as planned.
Credit Scores/Cash Reserves
It's assumed in the lending industry that a higher credit score equals less risk.
As a result, hard money lenders tend to scale the amount of down-payment they require from borrowers on their credit score, along with the amount of reserves they have in their bank account.
What in particular interests you in becoming a hard money lender? Do you know anyone personally that has been a hard money lender in the past? Leave a comment.