Can individuals invest with hard money lenders?

Question

Hi All - I would love to get the thoughts of this community around whether individuals can invest with hard money lenders and earn passive income in the process. After all, these hard money lenders also need sources in order to fund potential customers, and so, would love to hear from everyone who has experience in this space.

Thanks in advance!

Jeff S. · Answer

Yes, of course, individuals can invest with hard money lenders, @Asim Sheikh.  In fact, up until about 6 years ago, most HMLs obtained their money using syndicated investment funds.  Then Wall Street, some smaller banks, and many insurance companies stepped in to provide money.  As a result, fewer HMLs used the syndicated fund model.  The pendulum lately has been swinging.

When COVID hit a few years ago Wall Street and many other institutional investors shuttered their HML support leaving many in a lurch.  Months later they returned.  Then when the Fed started raising rates earlier this year Wall Street had other shiny objects to chase and all but shut its HML support down again.  As a result, some HLMs had to close their doors.  Rest assured that everyone using this model is fed up.

The name of the game now, as it probably should have always been, is diversification.  Many more HMLs are now actively forming investor-sponsored mortgage funds than in recent years in addition to obtaining money thru the large, fickle, institutional investors.  It was never difficult, but if you look around, you will be able to find a fund to invest in.  Being accredited is helpful but not always required.

Of course, there are still brokers who fractional their loans enabling you to participate with other investors in specific loans on specific properties.  Slightly less diversification, but a middle ground between a fund and whole note investing.

(As an aside, and to clarify, fund managers make money on the spread between the face of the loan and the investor return, as well as fees – which can be substantial.  Arbitrage is a simultaneous transaction between two or more markets.  This has nothing to do with lending.)

Asim Sheikh · Answer

@Jeff S. - thanks for the detailed response Jeff!  Are there any particular ones that you would recommend, as I have read about Fundrise and similar companies, and have been turned off by some of the information that I uncovered through my research?  It seems that most of these companies tend to garner negative reviews, no matter how much shiny marketing information they tend to share on their sites or on other forums.  Ideally, I am interested in getting double digit returns on my money.  Thanks again!

Chris Seveney · Answer

@Asim Sheikh

Yes. Many HML run funds you can invest in. If you are accredited you will have more options.

Dmitriy Fomichenko · Answer

@Asim Sheikh,

I have been investing with Marshall Reddick, they offers a number of different services and investments but specifically, with regard to investments in private lending, notes or trust deed/mortgages, they provide the client two options, ‘Direct Lending’ and ‘Marshall Reddick Mortgage Fund’.  There are pros and cons to both options but both are offered in order to service clients of all shapes, sizes and investment preferences.  In either option, the investment is the same, low risk, solid LTV, 1st lien debt underwritten by them.

In the Direct Lending model, the client chooses each loan, the client owns each loan, the client is named on the respective loan documents, the client earns 100% of the interest on each loan and Marshall Reddick earns the borrower paid loan fees (to arrange the loan).  Direct Lending is 1 lender on 1 loan, no fractionalization or crowdfunding and is the more active of the two options, especially with a client who desires to fund short-term loans that payoff every 6 months on average.

In the Marshall Reddick Mortgage Fund model, fund management chooses the loan, the fund owns each loan, the fund is named on the respective loan documents and the fund earns 100% of the interest on each loan as well as the borrower paid loan fees (to arrange the loan)….the Fund capital partners earn a respective share of the net income (around 9% per annum).  Due to the nature of this pooled investment fund model, it’s the more passive of the two.

@Patrick Prunty is my go to guy, very knowledgeable and super helpful, you can contact him directly.

I have invested in both models with Marshall Reddick and am quite happy with the results.

Allan Smith · Answer

100% yes. I know several hard money lenders who raise funds from different sources. They can probably pay six or 8% and then make money on the arbitrage. I know a couple well-established ones if you want to reach out to them to start. They lend in tennessee. I've gotten quotes from them on a couple deals I've had. Ended up going with lower cost financing.

Patrick Prunty · Answer

Hi All

Marshall Reddick is here and as always, we look forward to the opportunity to be of service.

Asim Sheikh · Answer

@Dmitriy Fomichenko - thanks for the detailed information!  I will reach out to them and investigate further.

Asim Sheikh · Answer

Thanks @Jay Hinrichs!  Any recommendations on brokers would be greatly appreciated!

Can individuals invest with hard money lenders?

Most Popular Reply