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 Niehus is a principal for IP Ware Commercial and Residential Real Estate Investment Analysis Software http://www.freetrainer.com