How I Became a Hard Money Lender
Unlike other investors, my venture into real estate was a natural extension of my secondary business as the IP Ware software developer. However, opportunity and perseverance beget wealth, or at least a decent side income.
Aside from my ventures into lease optioning residential property, I and my partner have managed to acquire a number of properties with our own credit. However, when looking at our finances and the return we were getting for the amount of effort involved, we both decided there must be a better way. That is when it occurred to me. Instead of trying to leverage our existing assets for a diminishing return, perhaps we could be the bank.
Here is the scenario as it has played out. First of all, we control a decent number of properties with our own credit. Most were purchased with 100% financing using multiple capital sources. However, each contains only a primary lean and is financed using standard mortgage terms. Subsequently, there is a 20% secondary credit position available on each of these properties.
Now normally, an investor would use this 20% equity stake in the existing properties to leverage the purchase of more properties. However, our approach has been a bit different. Because interest rates are so low, we can borrow against the 20% equity position in each of the properties and loan this money to investors who need short terms financing to control and rehabilitate properties. Essentially, we are using our existing properties as collateral to borrow money at the going finance rate and loan it out at substantially higher rates of return. We have become the bank.
For investors who need money fast, this system works out beautifully. They pledge their property as collateral, and we loan out up to 75% of the purchase price. All parties benefit, and investors with opportunities that do not need long term financing have a source of funds to do their deals. Everyone wins.
If you are thinking of setting up this type of program yourself, there are a significant number of legal caveats that you must be aware of. The first is the company funding the second lean holder position on your existing properties must be aware of and amicable to what you are doing. This is a legal requirement of which there is no way of avoiding without committing fraud. Next, the usury laws in your state determine the maximum interest rate you can charge your customers. There are a host of additional laws that are more specific to the lending process, but a good lawyer will help you work through them.
Regardless, there is a decent return to be made helping others do their deals. Use your existing properties to secure the funds to lend, and make sure you have an experienced lawyer to help you sort out the details.
Barrett,
Yes you have indeed assumed the trappings of a bank. A little nervous to ask, just what rate of interest you charge and what costs to process and are there points involved? I like that you stop at 75% of the prior sales price of the property. Now thats conservative. Just how you stay competitive in a Spike market I know not.
Barrett, your life is the smashing of numbers and you do it well. You have brought this thinking directly across to your lending patterns. As far as I can see you are a bit more expensive then just going into a bank and borrowing for my client an equity loan which is usualy made at a very reduced rate of interest and can be played with as to length and dispursement of funds to an infinite degree.
Way back around 1530 when Luther was looking at a document nailed on a church door and wondering what his next move would be. There was a Banker by the name of Fugger. His decendents changed it to Fokker and converted. But this cagy old man had a couple of really great sayings. "Show me an accumulation of riches and I will make that person richer. In the process I shall take his gelt and spread it among the shop keepers. They will spread and become great companies. I also shall spread and become the cloak to cover them. In that deed the House of Fugger will assend to the right hand of Emperors."
He's the guy that excused Charles Loan in exchange for the right to lend money throughout the Holy Roman Empire. Created the Merchant Society. He began as did you. His risk rate was a little higher about 85%.
Until you approach that mark I shall continue to take my clients into the banks for equity loans.
Lucius Tertius
Barrett,
If you are financing 100% financing each of your properties, where are you getting the 20% equity on your property on which to borrow money against?
If you could clariy, that would be greatly appreciated!
Martin
Your strategy indicates total debt to be 120% of acquisition cost after securing 2nd lien financing? Unless you truly have equity below the FMV, this would appear to be a reach. Such a strategy could place one between a rock and a hard money loan!
lien and not "lean"
In response to rajwarrior's comment on Lufo's comment post........
Under your view isn't this an ad??????
boyd4444,
Before you become a Channel Partner at TCI, you are required to submit your material to the Webb Group for review, if the material fits certain guide lines then the person who submitted the material becomes a Channel Partner and is allowed to sell their materials at TCI.
Barrett is a Channel Partner and in reviewing this article, he is telling members how he got started in his investing career. This way the members get a heads up on a Channel Partners qualifications.
I know for a fact that certain Channel Partners have had their material pulled from TCI for not adhering to the standards required by the Webb Group.
This should differentiate what is considered advertising by a member and a Channel Partner.
John $Cash$ Locke