Initial Investments as a Hard Money Lender

[Michael Blanton]

Investment Info:

Single-family residence hard money loan investment in Baltimore.

Purchase price: $50,000
Cash invested: $90,000
Sale price: $140,000

This was my first of three hard money loans. I lent a colleague $90,000 with a contract to repay $97,500 within 9 months. He executed a BRRR, renting the townhouse as section 8, and refinancing to repay $97,500 four months later.
Unfortunately the next two loans to the same colleague were flips and did not go as well for him. The rehabs took much longer than expected and he ended up paying 10% annual interest for an extended period in addition to the $7,500 origination fee.

What made you interested in investing in this type of deal?

I was actually interested in partnering, but my colleague did not want a partner, so I offered to act as his lender.

How did you find this deal and how did you negotiate it?

For my part it started as a conversation at work about my colleagues real estate activities (he had recently acted as the real estate sales agent for a friend/mutual colleague and flipped a property locally in Hampton, VA). He was interested in flipping and acquiring more rentals. I had money to invest.

How did you finance this deal?

It was mostly money that I had saved and I used part of a HELOC against my primary residence that was paid off.

How did you add value to the deal?

I was able to provide money very quickly, with better terms than his previous lender and honestly I did not conduct the usual/appropriate level of scrutiny that a lender without the personal connection would have.

What was the outcome?

On this first loan, he repaid it within four months and both parties were quite pleased. On two subsequent and overlapping loans, his flips did not go well. Delay after delay caused what he expected to be 4-6 month flips to become 2 year sagas. I earned interest once the loans went over 9 months and realized a good cash on cash return, but he barely broke even. He says that he learned quite a bit through the flips, but I know it was disappointing.

Lessons learned? Challenges?

I am very glad that I had a good feel for the character of the borrower and his wife. They both had decent careers, other assets, and were honest people. My wife was probably the most stressed during the two years, even though it worked out well and never adversely affected our budget.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Not in this instance.