Hard Money Lending

[Christopher Martin]

I have a close friend who is a contractor and flips houses.  He has worked with other hard money lenders in the past.  I have been wanting to invest in real estate and he suggested that I become a hard money lender.  I would start small and just do 1-3 deals with him to learn the business.  If it went well I would consider working with other clients in the future, but would just start with him since I know and trust him very well.  I have substantial capital in the public equities markets and would like to diversify my investments, so that is the reason for wanting to do this.  Also, I have some time to invest, and I am hoping that by investing my time I would get a higher return than what is available if I just passively sign up for one of the crowd funding sites that do real estate loans.  

I have researched it, and it seems that you need a mortgage originator license from the state, and to be registered with NMLS to offer these types of loans.  Is there anyone who has formed a similar company that could help me learn more about the steps to getting started?  I would appreciate any feedback.  

[Jeff S.]

There are a few books and many online resources available for learning how to become a private lender, @Christopher Martin.  However, nothing will replace spending an hour with a good lending attorney to get you started with up-to-date info. Education is the key.

Some of the professional organizations, such as the American Association of Private Lenders and the CMA, are good sources of lending attorneys, as well as offering excellent webinars and courses. There are books out there and a few BP posts that could also help you.

Just ensure that your education is broad and authoritative. For example, private lenders can make owner-occupied loans all day long. After licensing and usury, consumer purpose and business purpose, under which owner occupancy falls, are probably the most misunderstood topics in private lending. This is why you must speak to a lending attorney. Maybe you’re not the only one 😊.

We diversify by lending to various borrowers and not into funds. Note that the difference between earning 10% in a fund and 12 to 15% from individuals is not 2 to 5%, but 20 to 50% on a cash returned basis.

Most of the lenders we know who loan their own money and don’t find their own borrowers like we do, keep their pipeline full using brokers who bring them their loans. There is no right or wrong way to do it.

Lastly, and you know this is coming, nothing will change a relationship faster and for the worse than when money is involved. Be careful lending to friends and family.