How much do Hard Money Lenders make?

Question

Say you start with a $2M capital. Is that enough to start operating as a hard money lender? How much profits can you make in a year?

Dallas Sauer · Answer

@Manuel Jesus You can start lending money well below 2M. The more you have out the more you can potentially make. @Kris L. is right. 15-20k/month at typical rates is pretty accurate depending on the market you are lending in.The biggest thing is making sure that you are not lending too much to put yourself in a bad position if the deal goes south. I would recommend working with an investment broker. The benefit of that is that they typically weed out any bad deals before they reach you and can offer a second set of eyes on each property. Feel free to message me if you would like to discuss more.

Kris L. · Answer

I would think you could pull in $15-20k/month at typical HML rates and fees if none of the deals go south.

Mark Safrin · Answer

Just curious how risk averse you are. Do you have experience in this game? Do you have an underwriting team? Are you prepared to go through the foreclosure process and expense one any and all of your loans if necessary?

From the fact that you are asking this question on BP I'm guessing the answer is probably No! Am I correct?

Are you just planning on lending out $2M and shutting shop when you run out of money while the notes you hold mature and hopefully get paid off?

You could be better off approaching a HML that needs more funds to churn and who also successfully sells notes as soon as the mortgage closes. Even at say (just floating a theoretical amount here) a mere half a point per loan, if the loans are recycling every week you can make a decent amount of money.

Best wishes in your lending career.

Ian Hannon · Answer

Account Closed returns vary and could certainly go higher, but I was referring to someone taking a relatively passive and lower-risk option of investing in a fund that invests for them, as was suggested to the OP in an earlier post. The other option Manuel was looking at was to lend his original 2 million as a lender himself, which would yield a higher return, but has more risk and moving parts than simply investing in a fund. My point was that either path would be good, it just depends on the risk someone is willing to take on.

Congrats on the results you are seeing, it looks like you have a system that is working really well. I would say your returns vs either of those options would be comparing apples to oranges as they are different models completely, but it looks like business is good and I wish you continued success!

Account Closed · Answer

Money that is lent for a week is considered to be "transactional funding". Hard money lenders prefer their money to be out for 6 months to a year. I know some hard money lenders that can't keep fully invested since they aren't finding the right deals. Some wound up with properties they didn't want in the last market drop. Some went out of business because they misjudged and got greedy and the drop in the market bit them. Anything and everything can happen. It's best to start by working with someone who made it successfully through the last cycle.

Mark Safrin · Answer

PS. Noting another poster's words in this thread, let me add:

1. Yes, there are indeed private money lenders who usually sell their notes within a week or so of closing. That is what, for instance, note clearing houses and note buyers are for.  Churning the money quickly back into more loans can be a smart business model.

2. I have been approached multiple times by wealthy investors through BP wanting to either invest in us as previously stated, buy our notes, or to directly fund otherwise excellent loans/borrowers who don't meet our loan criteria for some technicality.  I of course pass such inquiries to our managing partners - but so far I'm not aware of a single such inquiry with whom we have not ended up doing business. So whatever the agreements that were made, the investors are happy.

Best wishes in your investing career.

Ian Hannon · Answer

As @Benjamin Hurwitz mentioned, it comes down to how much risk/return you want to take on. Depending on your market, it would likely be relatively easy to deploy 2 million over 4-6 deals. Your return would be significant, but your risk is high. If you have to foreclose on one of those properties, a large portion of your funding would be tied up, and the foreclosure process can cost 8-12k and take upwards of a year in some places. If you do go with the high risk/high reward route,  it would make sense to only leverage up to 65% of ARV and still have the borrower pay for an appraisal on the front end to protect you both.

If you do invest in a private fund as was suggested, you may get closer to a 6% return instead of 10%, but your risk is mitigated significantly as the money is invested across multiple projects. The experience factor is significant as well.

Overall, I don't think you have a bad option. I have personally worked with private individual lenders and larger hard money lenders both as a borrower myself and a broker and there are pros and cons to both paths. It will come down to how much risk you are willing to take on and how comfortable and prepared you feel taking on the role yourself. Good luck!

Account Closed · Answer

Your Comment: "If you do invest in a private fund as was suggested, you may get closer to a 6% return instead of 10%"

I'm a bit surprised. I  expected better returns than that. I'm getting 13% CoC with less risk, on my model of buying properties with little down and selling to Tenant Buyers and No CapEx. No PM. The numbers speak for themselves

Average Turnkey Cash Flow Per Door In Phoenix
Metro Area No Bank Financing Needed

https://www.biggerpockets.com/forums/600/topics/584916-average-cash-flow-per-door-in-phoenix-metro-area

I have actual deals with actual checks and actual returns. I would guess that there are limited tax write offs as a Hard Money Lender vs owning properties. I'm just guessing on that since I've never really thought about it. But taxes favor owning properties.Plus I get $20,000 Option Fee and I never have a foreclosure, it's a simple eviction.

What am I misunderstanding about being a Hard Money Lender? I've never done that so I don't really know what questions to ask.

Daniel Hennek · Answer

Definitely not easy.

Find the next mortgage broker conference and you'll find a ton of hard money lenders trying to sell their products to brokers.

Mark Safrin · Answer

Details such as how easy and actual % returns are above my pay grade.

But such investors that I am aware of seem happy.

How much do Hard Money Lenders make?

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