How to be a hardmoney lender - without the work?

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How to be a hardmoney lender - without the work?

J. Tyler Moore
Rosamond, CA · Member since 2015 · 6 posts · 2 votes

Hi everyone!

It recently came to my attention that my grandfather has way too much money sitting in a standard savings account earning a pathetic less than 1% interest rate. My grandfather's gears turn in money and I'm sure he'd be ecstatic if I found him a better place for his money. I've talked to him about stocks but he knows nothing about them and naturally he's very reluctant to invest in stocks after the great depression and 2008.

I suggested to him the option of being a hardmoney lender. With returns around 10% and the safety of the loan being secured by real estate he's taken the bait. What I need to know is what options are available to give him access to hardmoney lending without the task of screening and policing so to speak the investors themselves. I'm sure there are companies out there that provide this service. Something like a property management company where they screen the investors that need the loans and help with setting up all the paperwork and generating the deeds of trust etc.

We live in Southern California. On 1 hand a more local "outfit" may be more comfortable. Someplace where he could deal with people face to face so he feels more secure. Somewhere we could go to throw books at people should his money disappear and the deed of trust never arrive... That sort of thing. But on the other hand, if there is a company like this that does business nation wide, it may be better so that he could use a smaller investment initially to test the waters so to speak - somewhere that 25 or 50 grand could fund an entire rehab as opposed to SoCal where real estate is significantly more expensive than the rest of the country.

Comments? Suggestions?

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Michael Noto
Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
10y

I can't imagine the random inquiries the OP will be getting through PMs. Just make sure to seriously vet any offer that comes your way. 

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  • Ethan G.
    Attorney · Katy, TX · Member since 2014 · 397 posts · 215 votes
    10y

    I went heavy into crowdfunding using the portals over the past year and have a portfolio across the county at $5k or $10k a pop (there have been 2 defaults and 2 extensions to be fair that most likely means I will not be paid back all the money in the time I was supposed to and may lose up to a certain amount of my principal).  I then went and did some loans myself here locally, but it honestly was a lot of work sourcing and evaluating deals. 

    I then called up local hard money lending companies and have now invested in their private lender program.  The returns are worse than in crowdfunding and you have concentration of local economy risk, however I like the risk reward there better than crowdfunding.  The local hard money lender I am with structures my investment as a loan to their lending entity (unsecured), but then has an underlying property where my source of funds went to that serve as collateral for the loan if the hard money lending company doesn't pay me.  So it would basically require the hard money lender (who has about $30 million in loans) to go out of business AND the underlying property not having enough equity cushion in it vis a vis my loan for me to lose principal.  

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  • John Blackman
    Developer · Austin, TX · Member since 2010 · 371 posts · 284 votes
    10y

    @Ethan G. I like your diversified approach.  Scatter several small investments and see what works.  Eventually you will find something that works for you.  I have my own bell curve of investments with similar results.  Some missed, most hit, and a few rang true with me and I continue to pursue those types of investments.

    I am curious about your crowd funding experience.  The deals that did not perform, were they specific to one portal or were they spread across multiple portals?  Did they have similar attributes or promoters?  Portals generally struggle with underwriting, and nothing is guaranteed, but debt tends to be the safest even in the event of an asset that doesn't perform as we'll as targeted.

    Thanks for sharing your experience.

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  • Ethan G.
    Attorney · Katy, TX · Member since 2014 · 397 posts · 215 votes
    10y
    Originally posted by @John Blackman:

    @Ethan G. I like your diversified approach.  Scatter several small investments and see what works.  Eventually you will find something that works for you.  I have my own bell curve of investments with similar results.  Some missed, most hit, and a few rang true with me and I continue to pursue those types of investments.

    I am curious about your crowd funding experience.  The deals that did not perform, were they specific to one portal or were they spread across multiple portals?  Did they have similar attributes or promoters?  Portals generally struggle with underwriting, and nothing is guaranteed, but debt tends to be the safest even in the event of an asset that doesn't perform as we'll as targeted.

    Thanks for sharing your experience.

    The two defaults were concentrated in one portal and it was the portal I would've expected the least (based on my interactions with folks there, etc.) and the two extensions were each at different portals.  

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  • John Blackman
    Developer · Austin, TX · Member since 2010 · 371 posts · 284 votes
    10y

    Too be completely transparent, we had a project that we crowd funded on iFunding that went long, but we did hit our preferred return.  So we failed to deliver on schedule, but I'm glad that we will still hit our pref even for the extended duration.  Our incentives were properly aligned though, and we will make much less as the pref ate up the promoter return as it should have.

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  • Ethan G.
    Attorney · Katy, TX · Member since 2014 · 397 posts · 215 votes
    10y

    I am still monitoring the two defaults in my portfolio and looking at the process the portal goes through as well as the ultimate results in terms of recovery and length of time.

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  • James Cheung
    Investor · South Pasadena, CA · Member since 2016 · 22 posts · 11 votes
    10y
     @J. Tyler Moore: You need to better define how much work are you willing to do.  There is no such "without the work' in anything you do. 

    I am not an attorney.  Comments here are for your reference.  You should seek an attorney to set up your lending practice properly as there is a LOT of work when the deal go south.
     
    I made a couple of private money loan myself here in Los Angeles and can share with you from first hand
    1)  you do NOT need license to do HML or private money loan in CA. 
    2)  But if you do more than a few loan a years (I forgot the #, say 5?) you either need a license  http://www.dbo.ca.gov/licensees/finance_lenders/default.asp or  have a real estate broker to broker the lending for you.  Yes, you do not need a license if there is a real estate broker handling the deal for you.
    3) If the interest rate is 10% or more, you have to worry about usury law.  But if it is a non-consumer loan, i.e. non-home owner occupied, you are ok to charge 10+%.
    4)  if it is non-consumer loan, DF does not apply.
    5)  when everything goes well, there is no work.  When the deal goes south, there are more work than you can handle.  You should seek attorney advice or mentor who does HML before ink your first deal.
    6)  Making a loan is the first step.  Then you need to servicing the loan, i.e. getting paid.  You should definitely hire a servicer to do the collection for you.  You can get sued by not servicing it properly.  You don't have the time to learn how to do it right.

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  • Account Closed
    Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes
    10y
    Originally posted by @James Cheung:

    3) If the interest rate is 10% or more, you have to worry about usury law.  But if it is a non-consumer loan, i.e. non-home owner occupied, you are ok to charge 10+%.


     Pretty sure this isn't true, in California.

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  • James Cheung
    Investor · South Pasadena, CA · Member since 2016 · 22 posts · 11 votes
    10y

    David C: thank you pointing this out.  I over-simplified this.   If it is backed by a real estate asset, you can charge 10%+, which is exempted.  But CFPB is such a wild card that I would not deal with owner occupied mortgage.  It will be a lot of work to foreclose on the house if it goes south

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  • Mike F.
    Investor · Denver, CO · Member since 2015 · 570 posts · 521 votes
    10y
    Originally posted by @Karen M.:

    My advice is not to spend your grandfather's money and work on your own personal finances.  Just because you found out your grandfather has money does not mean that it is up to you to manage it, especially if you have no experience and track record. 

     Couldn't agree more. It's going to be pretty stressful on all family relationships the moment somebody has to explain to grandpa how much money he lost. It's one thing to be completely inexperienced and risking your money it's quite another to put your grandfathers money at risk.

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  • Ethan G.
    Attorney · Katy, TX · Member since 2014 · 397 posts · 215 votes
    10y

    I am an attorney but I'm not giving any legal advice here.  However, I find people here are so conservative on legal matters, it is pretty funny actually.  Guess it keeps lawyers employed.  

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