I laugh every time I see some article written by an "investment advisor" spewing all the benefits of stock investing with his or her firm, "Year in and year out, our firm beats the Dow Jones by xx% blah, blah, blah..." Meanwhile, the rest of us watch our stock accounts jump wildly up and down with the daily whims of the market and struggle to precisely time when to get in and when to get out. We never really stop to realize how little control we over our portfolios and that most of us would probably be better off throwing darts or having our pet hamster make our stock picks.
Enter the predictable and proven world of hard money. As a real estate attorney, I was exposed to hard money lending back in the 90's. Since then, I have been intimately involved through my law firm and hard money company in writing and closing hard money (or private mortgage) loans, but I'll skip that story for now and just give you the moral: hard money lenders make a killing.
How? They charge double digit interest rates (anywhere from 12-18%), they lend very conservatively (usually no more than 65% of the value of the property), and compound their money more often than those in other types of investments. The combination of these factors leads to outrageous results. Consider this:
If you invested $250,000 in a 4% CD that compounded one time per year, after 15 years you would have a little over $450,000. If you invested that money in the correct type of private mortgages and averaged 12% returns on your money, and you compounded that money an average of three times per year, after 15 years you would have $1,460,293.92. That's an extra $1,010,058.04!
Besides the excellent financial returns, there are many other benefits of hard money loans compared to stocks. Here are a few:
(a) Money is secured against real estate which, despite what we read about in the paper, is still the most stable collateral in the country (I'll put my house value up against my stock picks any day).
(b) It is an investment that is easy to understand. We won't need a stock picking hamster for this. Hard money lending is very simple when reduced to it's most basic form - a conservative mortgage loan against real estate - not that tough.
(c) The return on investment (ROI) is known up front, when the deal is structured. The interest rate doesn't float around with the mood of the stock market.
Unfortunately, this form of investing is little known by the general public and I often wonder why. If this is an investment vehicle that is safer than stocks with better yields, why aren't more people involved? The only true reason I can come up with is that most of us are simply uneducated as to these types of investments because of the advertising power of giant investment houses. They make their commissions not on you writing private mortgages, but on you trading stocks and investing in managed mutual funds, so of course you'll never hear about private mortgages.
It could also be the, "it's too good to be true" syndrome. Most people are simply so brainwashed by Wall Street that they refuse to believe there could be such a good investment vehicle out there not tied to the stock market.
So the obvious question you may be asking, "How can I add an extra million bucks to my bank account and get into hard money lending?" I'll add a shameless plug at the end of this article, but here are some basics:
First, you need access to deals. How do you get access? You either join forces with a private mortgage lead company that gives you access to deals, or you market yourself on different portals such as Craig's List, Google, newspapers, local real estate investor clubs, or any place that borrowers may be looking for hard money. Once borrowers know you're out there, you'd be surprised at how many phone calls you'll get.
Second, and this is the most difficult part for new hard money lenders, you need to understand how to underwrite the deals. If you are a person that is just looking for the high-yielding return without the headaches of learning how to get deals and underwrite them, consider investing in a private mortgage pool. These pools often make excellent returns and accomplish the same thing as "lending direct" without all the headaches of sourcing and underwriting deals yourself. They also help you diversify your risk by spreading you and your other co-investors' money across a wide array of properties and borrowers.
Lastly, if you do choose to source hard money deals yourself, you will need a professional team to help you get from underwriting to closing and servicing of the loan. You will need a good real estate attorney, an appraiser you can trust, and a title or escrow company. You will have to become proficient at underwriting the four "C's" of every deal:
(1) Collateral - What's that house really worth? What if I had to foreclose and sell it in 30 days? How much would I get then?
(2) Credit - Does this borrower have the type of credit that makes him an unacceptable lending risk? With his credit scores, will he be able to refinance in 6 months like he claims?
(3) Capacity - He says he has enough income to make the high payments, but does he really? What do I need to look at to make sure he can pay?
(4) Character - What does my gut tell me about this person? Have they walked away from other bank loans before? Will this person finish rehabbing the house if things get tough or just hand me the keys and say, "good luck"?
A whole book could be written about this topic and all the issues related to hard money lending, but hopefully this article has given you some idea of how profitable acting as your own hard money mortgage bank can be. In future articles, I will address some more advanced hard money strategies such as:
(a) Tax Free Lending - Yes, it is possible to take control of your retirement funds and use what is called a "self directed real estate IRA" to lend money in the private mortgage world tax-free or tax-deferred.
(b)Money Leveraging - Most savvy investors are familiar with margin accounts, but few realize they can do this with private mortgages as well. With the right banker, you can lend out 4 times the money you have. Why not? That's what banks do.
The legal, mortgage and finance experts at Hard Money Bankers, LLC provide a full spectrum of services related to private/hard money real estate transactions including loan placement; underwriting, title and closing, and loan document production and servicing. Our mission is to make the hard money process as smooth and fast as possible for both our borrowers and private lenders; and maintain the highest level of integrity, accountability and professionalism.
