Being a hard money lender or investor?

Question

I'm new to the flipping strategy and am aggressively learning. However, I know people who have a proven track record of successfully flipping.

I have accumulated several hundred grand which could be used to lend hard money or invest.

1. What would I need to do to invest this with a flipper to ensure my money was protected?  While I may want to trust someone, I may not know them extremely well and wouldn't want to find they'd moved in the middle of the night :)

2.  What are typical terms?

3. Should I create an LLC?

Jeff S. · Answer

Lending terms are regional, @Steve S.   The most reliable answer will come from those local to you.  Real estate clubs are a good place to find this information.

You got some good and telling information from @Bryan L.    and @Michael Siekerka   -- presumably two active borrowers.  The first questions everyone always asks are what are your annual interest rate, points, fees, LTV, note duration and a few others.  I'm not trying to minimize any of this but once anyone has found a great deal, what we've found they're really concerned with are how fast you can fund, and the granddaddy of them all: are you reliable.  Nothing matters as a lender if you can't close a loan. Nothing.  This is not a business where you can afford to over-promise.

Several of us listed our processes in a step-by-step, how-to, format here: I would like to become a Hard Money Lender. Any resources?  This should give you a good start.

Jeff

Bill Gulley · Answer

Steve,   Best way to make 200K in financing without a finance and RE background is to start out with 400K.

Financing is a highly regulated business, if you have money I'd say speak to your attorney.  I don't mean to be snide, but your question is so broad that a direct answer without volumes of books being written is impossible.

Instead of you trying to be a lender why not just find a mortgage broker and loan your money to them and let them carry out the professional stuff required? :)

Steve S. · Answer

awesome. Thanks jeff. Ill take a spin through that this morning.

Steve S. · Answer

not sure how to edit but meant great insight as expected not unexpected of course

Steve S. · Answer

thanks for the info so far. Great insight as unexpected. I'm looking more to be a private lender to use the terms some of y'all have used above.

Michael Seeker · Answer

Hey Steve, if you're lending to some folks you know I would consider it a private loan, not hard money.  You can figure out the terms of the loan and just talk to the title company/closing attorney and make sure that all appropriate documents are drafted and filed (mortgage, note, assignment of rents, etc.)

If you are wanting to get into hard money lending (advertising yourself as an HML to a wide range of investors) then you'll want to formulate a business plan and a set of lending guidelines and stick to them.  I don't know what you mean by "several hundred grand", but I don't get the impression you really have enough to be a HML unless you can leverage with a local bank for access to additional funds.  Let's say you've got 500K in the bank...in my area, that might be enough to do 1 loan or at most 4 or 5 at any given time.

As a HML, borrowers will expect you to be able to fund multiple deals throughout the year.  If I'm the borrower, I don't want to jump on a deal expecting to borrow funds from you only to find out that you need 2 other sales to close before you'll have the capital to do my loan.  If I ran into a situation like that with my HML here in KY, I'd probably never consider doing business with him again and would look for money elsewhere.

You may want to do some searching on the forum if you're curious about what type of terms to offer - there have been lots of conversations about this topic.

Bryan L. · Answer

@Steve S.  Welcome to BP.  There's plenty of HM lenders on here and plenty of rehabbers looking for money at good terms.

You might want to get some legal advice, and that isn't me.  But I'm sure that you will want to learn enough about rehabbing that you can evaluate a deal to make sure that it is a deal and that your money is protected.  And I'm sure that you will want to get a mortgage or deed of trust to secure your position.  Evaluate the rehabber too and his/her level of knowledge and experience.  I've rehabbed about 30 properties, and I know that I'm getting better quality deals now than I did when I was just starting out.

And rehabbers will want to check you out as well.  They will want to know what your rates and terms are.  And also, can and will you produce?  When that rehabber gets to the closing table to buy that sweet deal, he/she has to know for certain that your money is going to be there.  Otherwise, the rehabber stands to lose his/her earnest money.  I often put down up to $10,000 earnest money on an REO deal, and I want to know for certain that the HM lender is the real deal, that they will follow through.  Actually, I need to know that well ahead of the actual closing date.  I need to know that before I ever write that $10,000 e-m check.

Now, as far as typical terms and such:  From what I can tell, the going rates seem to be in the range of 12-16% with 3-5 points or so.  Personally, I would like to find some better terms.  Most of my deals are REOs that I find on the MLS, and my profit margins are tight.  Spending that much to borrow money doesn't leave enough for me on some deals.  But I would hope that maybe I can find better terms since I have many years of experience and I can put skin in the game.  That's another thing for you to consider.  Can your borrowers put skin in the game.

Being a hard money lender or investor?

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