Entry into lending?

[Matt B.]

many of us here are trying to create multiple sources of income, with that said, I was wondering if private investors with let's say, 200K or more of excess capital partner with private lenders or hard money lenders on real estate financing?  

for example, as opposed to starting my own lending company and getting all the required licenses, I could just make an agreement with a lending company and say I have xxx amount of money that you're welcome to use for xxx amount of real estate financing loans, provided I get an X'% guaranteed return. 

private person ----> lender-----> lendee

I want to know if this is a common practice? If this is a common practice, what are usually some of the terms and conditions in this sort of agreement? also in the situation that the Lendee defaults, who would be liable for what?

[Jeff S.]

This is extremely common, @Matt B.. Virtually all the larger hard money lenders operate as a mortgage pool, obtaining their money from either individuals or now from Wall Street. Many smaller lenders operate under this model as well. A good source for these, large and small, is the member directory at The American Association of Private Lenders (full disclosure, we are members but we don’t run a fund). Also, Scotsman Guide. Actually, pretty easy to find. That’s the good news. The bad is that you might have to be an accredited investor to invest with them. Lots of pros and cons.

The great benefit to investing in a mortgage pool is that the operator takes care of everything: finding borrowers, originating the loans, distributing profits, taking care of any defaults, etc. One disadvantage is the industry has become so saturated that returns have been dropping like rocks. Since mortgage pool operators don’t do this for free, your returns might be a lot lower than you expect. There are also some risks.

First, you will not get a guaranteed return as you specified. It might be preferred, but it will not be guaranteed. Also, when you invest in any syndication, you are not only investing in the specific area (some local but others semi-nationally) but also in the operator.

Due diligence here is paramount and you need to know who you are investing with and where. Much has been written about evaluating a syndication, the associated syndicator, the area the loans are made, etc. Do a Google search on how to do this. Mortgage pools have been around for a long time, but most operators are relatively new. It’s a rare lender who’s older than the 2008 market crash, but that would be evidence they know how to survive.

There are other ways to invest in loans without originating them yourself. Many brokers do all the up-front work and sell their performing notes. Your returns will be greater than investing in a pool but then you have to deal with borrowers. In addition, there are many posts here about how to get into the business yourself, and many states don’t require a license. Here you can develop competitive advantages to keep your rates above the norm. It’s a lot easier then you seem to think and with few barriers to entry. That could explain why everyone and his brother is jumping in.

Best of luck to you Matt.