Hard Money Lending - Newbie

[Trevor Dominique]

Hi BP, 

I am interested in learning more about getting into the hard money business. Let me explain my current situation and any comments or feedback would be much appreciated. 

Currently I own 8 rental units in Northwest Ohio and in Greenville South Carolina. I feel I am really starting to build a good team around me and I want to start doing more flips & BRRRRs, and potentially hard money lending as I mentioned. 

I have a family member who is a high net worth individual who made me an awesome business starting offer. Basically, through his financial advisor, he can set up a private $1.5 million line of credit at about 2% (LIBOR), and he said said we could set up a structure where I could have access to this credit line for a 5% markup interest rate. So if LIBOR stays at 2%, I would pay him 7% annually on the amount I have drawn. This seems like an awesome structure for flips and BRRRs since 7% is much more favorable (I think) then what I would get from a hard money lender myself. 

So then that got me thinking: would this give me any potential to give hard money loans? If I could do it at 12% or higher, I would make the 5% spread plus the points. For example, if an investor needed $300k for 6 months for a project and I could finance that at 12%, I would essentially make 5% interest, or about $7,500 plus points for what would be pretty passive on my end. 

I know if I were to entertain this I would have to spend some time sitting down with my attorney to set things up....so I am not asking for legal advice. Just looking for general advice on what I may be missing here. Thanks for anyone who would take the time to offer me some feedback. Always open to honestly if someone thinks this would not be a smart move. 

[David Ginn]

@Trevor Dominique


I'm going to give you an answer that will be tough to hear and competently against what everyone has been telling you.

Renting homes or apartments is one of the highest risk investments you can get into and doing a cash-out refinance is even higher risk.

Let me explain. In Las Vegas, in 2006 a home could be purchased for $150,000.00. You could rent it for $1300.00 and after taxes and insurance, you would cash flow at over $150.00 per month. Then came the great recession. Prices on that home fell back to $50k. That home could be rented for $600 a month.

So let's look at the dynamics of a falling market. If I came to you and said, “I have a business that's worth $150,000.00. It will make you $150 a month. In two years the markets will fall and it will be worth $50,000.00.” Would you buy my business? You would say to me, “No! Do you think I’m crazy?”

You see in real estate for some reason we seem to think that we can deny all business fundamentals and that somehow, our situation is different. I have heard everything from, “You don't take a loss until you sell." to "It will rent during a down cycle." Most people who hear me say this still believe in defying the odds. They think of all types of arguments to try to prove my business sense is wrong.

Here is an actual example shared with me that happened at the start of the Covid-19 crisis. As you read this, keep in mind that this happened in one of the market segments that people would have said is the most recession-proof.

There was an investor in Texas that owned a 30 unit complex. COVID-19 hit and they stopped all foreclosures and evictions. All the tenants got together and decided to not pay rent. Now, whoever owned that building and had the loan on it just got trashed by his tenants. He and his family's financial lives have been turned upside down. He cannot even get to a judge until June, and then the courts will be so backed up, it could take months to get his tenants evicted.

Also, my local news reported that 1 in 5 market-rate apartments are missing rents right now, and nationally it's 1 in 3. The real issue is clear. You can buy and rent when a market is headed up a bit, just like a business or a stock that you sell before a market starts to fall.

Buy and hold investing is a term that does not make good business sense. There are much better strategies to do in real estate when a market could potentially fall or is falling.