WHAT DOES MAKING YOUR DOLLARS WORK FOR YOU MEAN?
Making your Dollars work for you simply means that your money is doing the heavy lifting and multiplying itself (aka PASSIVE INCOME.) This is why it’s so important for you to build passive income sources and leverage your dollars.
Today you will learn about one of the most lucrative ways to put your money to work for you!
PRIVATE MORTGAGE INVESTING: HOW TO BE A HARD MONEY LENDER
It’s not always easy to find a good investment. Mutual funds and the stock market are viable options, but the returns aren’t always all that great. Plus, if you do make money you need to take the profits or it’s just statement money. It’s a roller coaster. Most people don’t have the income or assets to qualify for investing in a hedge fund.
There is another option that can provide great returns and also has minimal risk. You could become a hard moneylender.
A hard money lender makes loans that are backed by real estate. So, if someone wants to purchase a property but can’t qualify for a conventional mortgage or doesn’t have the time to go through the process, they can use a hard moneylender.
WHO USES HARD MONEY LENDERS?
The primary borrowers are:
1. Real estate investors.
Essentially anyone that requires a short-term loan to secure a piece of real estate can use a hard moneylender. Usually the borrowers are real estate investors that need to purchase a property quickly and intend to sell it within 6-12 months.
Real estate investors are frequently limited by time and the ability to borrow money. It’s harder to qualify for loans to purchase properties that are non-owner occupied. It makes the banks nervous.
2. Those that need time to qualify for a conventional mortgage.
Some people don’t have the best of credit and need more time to qualify for a home loan. These people can use the services of a hard money lender to purchase a house and then work on improving their credit.
When their credit is improved, they would get a conventional loan and pay off the hard money loan.
WHY IS IT CALLED HARD MONEY?
It seems like an ironic name, because hard money is relatively easy money to get. Hard money loans are made at higher interest rates than secured bank loans and the loan amounts are smaller. Most hard money lenders will not loan more than 80% of the after-repair value (ARV) of the property.
Usually there are no credit checks. It’s all about the value of the house.
Interest rates are typically 10-18% and there is usually a flat fee or points, as well. The fee / points are usually a few thousand dollars. Imagine getting $3,000 + 12% to loan out your money! And your investment is backed by real estate.
WHAT IS THE RISK?
The risk is actually quite minimal, if you do things properly and follow the necessary due diligence on your part.
What if they don’t pay you back? Since you won’t loan more than 60-80% of the home’s value, it’s not difficult to recoup your losses. In fact, if you’re making good loans, the best thing that could happen to you is they don’t pay.
If you have to foreclose, you’ve already gotten your fee/points and whatever payments and interest that you’ve been paid. You also now have a house that you got for 70 cents on the dollar. Sell the house and go make another loan.
Use the services of a knowledgeable attorney. You need an attorney to draw up the contracts to ensure you can take possession of the house if they fail to make the payments. Some states are kinder to homeowners than others. Be sure you have an attorney that can protect you.
Know the true value of the house before making the loan.
You don’t want to find out that the house you thought was worth $200,000. is only worth $100,000. Get a good appraisal.
The only risks are under your control. You need to be sure of the value of the property and certain that you can get the property back in the event of non-payment. If you can manage those 2 things, there’s little to worry about.
HOW TO GET STARTED?
There is relatively little required to get out there and start making loans. You need to have the funds and advertise your services. You might have to register in some fashion with the state. Your attorney can provide guidance.
Decide on your terms. Decide on your fees, interest rate, the amount you will loan relative to the property value, and how you will handle repair funds.
Some hard money lenders will loan money for repairs, and some will not. Those that will typically don’t give the money directly to the borrower, but to the company that does the repairs.
It was previously mentioned that hard money lenders typically loan 60-80% of ARV, but that’s actually (60-80% ARV minus repairs.) Remember that after all the repairs are made, you don’t want to be into the house for more than 80% of the retail value.
So, a house that is worth $100,000 in great shape but needs $20,000 of repairs, would only receive a loan of ($100,000 x 70%) - $20,000 = $50,000. The lender could provide the $20k for repairs, but many will not. Just be sure that if you will loan it that the money is actually spent on repairs!
Let people know that you have money to lend.
Just like any other business, you need to advertise your services.
Title companies. Title companies know everyone. They know the attorneys, real estate agents, investors, bankers, and more. Let all of them know that you exist.
Real estate investment clubs. Since investors are your largest client group, contact all the real estate clubs you can find. Also consider if you only want to loan in your immediate area or across the US.
Attorneys. Attorneys are another good group to contact. They might know the borrowers, but they frequently know the homeowners that are in trouble and targeted by the investors.
Everywhere else you can think of. Business cards and a website help you get the word out about your business.
TRANSACTIONAL LENDING
Another option to consider as part of your services is doing transactional loans. In some cases, primarily when a bank is involved in some way, investors cannot simply assign their interest in a property to another investor. Instead, there must be two separate closings.
In the past, it was possible for an investor to get a property under contract and do a double closing without having any of his own funds involved. So, the end buyer would be the only one providing funds for both transactions. This really doesn’t happen anymore.
The solution is transactional funding. You would loan money to the middleman who would only use your money for a moment. The title company would retain control of your funds and return them to you after the transaction was complete. There is essentially zero risk and you would earn a couple of thousand dollars. It’s worth looking into.
Hard money lending can be very lucrative. The risks are minimal and totally under the control of the lender. If you’re cautious and do the necessary groundwork, there are few, if any, problems that can occur.
If you’re looking for better returns than you can get in the stock market, consider becoming a hard money lender. You might even decide to make a career out of it.
CQ Consulting can also help you find lending opportunities with great returns with minimal risk. Contact us to schedule a consultation.