Real estate investments can be the most lucrative types of investment. Getting loans for such investments are, however, sometimes difficult, especially if the property is in a bad state of repair or the investor has a problematic credit history. Even in the best cases, getting a loan quickly from a large bank can be a challenge. This is where real estate investors may turn to a private lender, particularly a hard money lender. And hard money lenders can make a healthy income from such investments.
In this article, you will learn what a hard money lender is, the advantages and disadvantages of being a hard money lender, and how you can become one.
What Is a Hard Money Lender?
A hard money lender is a type of private lender who provides real estate loans to investors. These loans often come with a higher interest rate and have a much shorter loan term, perhaps as little as 6 to 12 months. However, there are advantages for using a hard money lender as opposed to getting a bank loan. The hard money lender has greater flexibility than a large bank when it comes to drawing up terms. Also, the hard money lender can usually provide the loan faster than most banks.
What Are the Advantages to Being a Hard Money Lender?
There are a number of advantages to being a hard money lender. First, while there is the potential to make a lot of money in real estate investment, owning property can be labor-intensive and time-consuming. By being a hard money lender, the real estate investor puts your money to work without you having to get involved in the logistics of property ownership.
Another advantage is the fact that you are in control of who you lend to and the terms of that loan. You are not obliged to lend to projects you don’t think are worthwhile. And you have the flexibility to work with each investor to tailor the loan agreement specifically to both your needs. This is one of the reasons investors prefer to work with hard money lenders over banks.
Also, since hard money lenders lend money against the value of the property, they are not as concerned as a bank would be about the investor’s creditworthiness. The investor normally puts the property up as collateral against the loan. This means if the investor should default on the loan payments, you don’t lose your money. Because of this, you are more likely to attract investors who would not normally be able to get a bank loan.
Finally, real estate is a fairly stable market. Unlike investing in the stock market, putting your money in real estate is more likely to give you a good, consistent return on your investment.
What Are the Risks of Being a Hard Money Lender?
There are some risks involved with being a hard money lender. These include the fact that you are putting up your own money, so you are limited by the amount of funds you have available. To be sure the property is worth the investment, you need to take whatever precautions necessary to satisfy yourself that your money is not going to waste. This may mean either visiting the property yourself or hiring an independent appraiser. There is always the risk that the project doesn’t work out and the property ends up not being worth as much as the loan.
You will also need to keep up with state and federal regulations since federal regulators, such as the Consumer Finance Protection Bureau, regularly update the rules. This can be time-consuming but necessary if you want to stay on the right side of the law.
How to Become a Hard Money Lender in Florida
You don’t need a background in real estate or finance to become a hard money lender, though it helps if you have a substantial income or extra money to use. This might be from a windfall, such as a lottery win or an inheritance, or another income stream. Here are some things you can do to get started.
Set up your business. Come up with a company name, establish a business address and phone number, and get an IRS employer identification number (EIN). Work with a real estate lawyer to set up your business structure — usually a limited liability company (LLC) — and to make sure you understand your tax obligations. You also need to be aware of the various local and state laws pertaining to real estate lending.
Establish an internet presence. Hire a professional to design and create a web site for your business, and purchase a domain name that uses your company name. Also set up social media accounts on different platforms. If you are going to build your business, people will need to be able to find you easily online. Be sure to include a form on your website for potential investors to complete so you can prequalify projects.
Start small and local. Since you are putting up your own money to start with, only lend to one or two investors. Also, lend to projects close by so you can visit the properties and evaluate for yourself if they are worth the risk. It might be useful to educate yourself on appraising real estate so you have an idea of how to value properties. Once you start making money from your loans, you can reinvest that money into more loan projects.
Invest in some good business software. This will help you keep track of your expenses, produce balance sheets, profit and loss statements, and other useful reports. Your software may also be able to help you with business planning, including developing your underwriting criteria, investment amount ranges, interest rates, and payback periods.
Becoming a hard money lender is relatively easy if you have the financial resources. With an investment of your time and money, you can help real estate investors realize their goals, and make a good living for yourself. If you’re looking for a hard money loan, residential loan, or permanent loan, contact us at Titan Funding to learn how we can help.