How Difficult (And Smart) To Start A HML Fund--Am I Nuts?

[John Thedford]

I have been doing HML for a few years. Really enjoy it and the returns have been pretty good. Am I crazy for wanting to start a private fund for HML? I really don't know anything about it except it requires SEC paperwork, etc. Saw another poster on BP just state they are moving forward with their fund but are buying low end properties in the Midwest. I don't think I want to pursue that model. I want to be a paper-boy:)...and reap the rewards. Anyone started or worked for a fund? Is the field too saturated? Last but not least, if we have a total meltdown, I do fear a fund could get wiped out. Thoughts?

[Jay Hinrichs]

@John Thedford  Many hard money lenders create 500 series PPMs to raise capital.

a lot of them raise the capital that way to go as equity so they can get LOC from a bank Like I use to do. banks call them credit facilities. although post 08 they are pretty tough to get.

the issue with raising money in a fund is the lender expects interest day one and continuing through the term of the PPM.. your making short term loans that get paid off.. you will have drag if you can't keep the money circulating constantly.. I have seen others get into trouble doing this and for that reason I never did one.. I only did LOC with bank.. I only paid interest when I tapped the line, I only tapped the line AFTER I had a loan on the books.

Also as new comer your going to have a very difficult time getting anyone to invest and only pay them 6 or 7%.. Friends and family maybe.. But remember you can't advertise with most 500 series PPM's.. so its dog tough.. I see people do it on BP all the time.. but they could get wrung up.. surprised Gully is not on them like a fly on a cake.

Not to say you have to start somewhere .. For me I mentored with a 30 year HML in Oakland circa 1980's and then ended up owning the company. .but it was up and running 250 investors and 50 million on the books.. and in CA you can legally fractionalize the debt instrument so we only paid interest on the money when it was out.

Second version that I started I used the Bank LOC's and we started with 1 million in cash and 4 million dollar line of credit... LOC was 1 point and 6% .. this goes along with our thinking we were lending at 5 and 15 in those days.. so it was a nice delta... ran that up to 20 million in bank LOC's and 10 million in cash... then 08 hit and the world came to a screeching halt.. we were on the hook for 20 million of debt and it was dog tough... Not seeing that happening again.. but I am very cautious now of any debt I take on.. regardless. and for me personally and again for me Personally I would never do a PPM its too complicated costly and anything goes wrong your going to get sued for some sort of security violation.. I want nothing to do with any of that..

One thing you may want to consider then is if you have some very close friends who can pony up some cash you could start a small LLC ( like I did with the 1 million in cash) and go hunting for a bank that would collateralize your loans as you make them.. you may be surprised that you can get a small commercial bank on board with it... I still have 1 million line left from the old days that I can do this with.. but I choose to use those funds for my building endevours here in PDX>

hope this helps.