Lending Money

Hard money will get you the best returns. You charge points (1 point = 1% of the amount loaned) up front and then a high interest rate 12-18% on top of that. These loans are secured against the property itself. From an investor point of view, I hate these.

You can loan money out of a Solo 401k. There are several instruments like this out there. These generally require a penalty to withdraw, which you pass on in the form of points and a reasonable interest rate (5-8%). You pass the interest rate forward to the borrower at a higher rate; your rate plus 3-6% or so. Again not a favorite of mine because the rate and points gobble up most of the profit.

You could loan money like bank, but you won't make much of a return. 5% per year, though it would be backed by a 1st position mortgage. This gives you the ability to foreclose if necessary to protect your loan.

The final version of borrowing is preferred return. You lend money at a lower rate (6-8%) and purchase part of the deal at the same time. You lend 100k at 8% and purchase 50% of the profit from the deal. If the deals profits 60k you get your 100k back PLUS your 8% PLUS 30k for your share of the profits.

How you lend depends on what you are lending against. Short term flips can command higher rates, but you have to sell your financial package several times per year. Longer commitments are lower rates, but your returns are more consistent. Having money is a huge advantage, but you still need to find people willing to borrow it at your desired rate.

There are legal and tax implications to everything lending related. Find yourself a good team (legal, financial and lender) before actually lending money. Bring everything you get to the BP forums and we'll let we know what we think of your perspective deals.