Is lending hard money a good way to "invest"

[Doug P.]

Would this be something I could do in addition to my current business? Is it as profitable as it seems? Could I turn this into a full time business with enough $$?

[Ryan Webber]

Hard money lenders don't loan money to make 12%. They normally leverage their money with a bank to create a line of credit to dramatically increase returns.

Here's an example:

$100,000 cash at 12% annually is $12,000 (12% Cash on Cash Return or CCR)

Now let's say you take your $100,000 cash and leverage it at a bank to secure a $400,000 line of credit. Let's say you are paying 6% on $400,000 while you loan it out at at 12%, which is a net of 6% on $400,000 or $24,000 annually, a 24% CCR.

Now let's look at the magical origination points:

5 points (%) on 12 month notes for $100,000 cash is an additional $5,000 annually which totals to a 17% CCR on your $100K.

5 points on 12 month notes for a $400,000 line of credit is an additional $20,000 annually which totals to a 44% CCR on your $100K.

44% on your money. You can not beat that return anywhere, and on top of all that its backed by real estate (which currently may be a bad thing in some markets :D)

Now let's look at the drawbacks to Hard Money Lending. You have to have impeccable credit, and you will have to have a strong relationship with a banker. You will also need extensive experience on determining a good deal from a bad deal. If you pick a lemon (whether its the property or the investor you loaned to) and get it back in foreclosure, your returns can evaporate quickly. Hard money lending is about making sure the equity is there (and I mean REAL equity not paper equity) and making sure you are making loans to solid investors. You also need to be well versed in quickly and profitably getting rid of your lemons when you get them back.

Hard money lending should only be done by very experienced investors who know their market well. I have seen several hard money lenders pretty much get pick pocketed by smooth talking wholesalers who were unloading lemons onto the next fish. Getting traditional appraisals won't protect you with what we're talking about here. Good old fashioned in-the-trenches experience in determining the fire sale value of fixer uppers is the only real protection a hard money lender has against being the fish who gets stuck with the lemon.