How to Become a Hard Money Lender

Hard money lending can be the root of your real estate investment plan

Being a hard money lender involves a certain amount of risk but opens up a whole new way to invest in real estate. Real estate investors like being a hard money lender because of the control and flexibility it offers as well as the potential to earn higher than average rates of return.

Things You'll Need

• Cash reserves
• Basic knowledge of the mortgage process

Instructions

1. Determine the source of your investment. Will you use money you have in savings to make your investment or invest through a retirement vehicle such as a self-directed IRA? If you're interested in learning more about the ability to be a hard money lender or trust deed investor using IRA assets, see the Resource section below for additional information.

2. If you are investing with a trust deed or hard money firm, you have minimum investment amounts you must meet. Some are as low as $5,000, others as high as $100,000. Determine your risk level and how much you're comfortable placing in your first investment. Remember: you can always invest more in another deal later.

3. If you are considering becoming your own hard money lender, you will likely need more cash available than you would if you were investing with a hard money or trust deed firm. You will also need a cache of real estate and legal professionals to assist you with things such as drafting loan documents, underwriting, appraisals, title services and loan servicing.

4. Once you determine source of funds and if you're going to be a hard money lender though a trust deed investment firm or become a direct lender, you can move on to researching the firm or looking for lending opportunities.

1. By performing an online search, you can find many hard money lending firms and trust deed investment companies with investment opportunities. If you locate firms in your home state, you can visit their offices and begin your due diligence process. Don't ignore the interview process: would you place thousands of dollars with a company or person you've never spoken with?

2. Ask the hard money lending or trust deed firm about their underwriting process, loan-to-value (LTV) guidelines, investment minimums, years in business, default process and what entities regulate their business practices in their state.

3. Contact the hard money lending firm's regulating entity in their state and inquire about any past or outstanding complaints. This information is public record.

4. Ask for references from current investors with the hard money lending firms you are interviewing. If they cannot provide references, move on to another firm.

5. Request a copy of their generic loan documents and loan servicing agreements to review. These will differ greatly among firms and it helps to know what to expect from each firm you are considering.
   These documents will outline the term of the hard money loan in which you are participating, whether it's a fractionalized deal (one where you're pooled with other investors to comprise the total loan amount), the interest rate you'll receive, frequency of interest payments and method of payment, provisions for default, and return of capital. If anything is unclear to you, don't hesitate to ask the firm for clarification.
   If you're planning on being a solo hard money lender, review all of the loan documents that your attorney drafts and ask for clarification on any items you do not understand.

1. If you've decided to become a hard money lender yourself without working through a firm, you will be responsible for assembling your own team of professionals to help get the deals done. These professionals might include a real estate attorney, CPA, appraiser, title company, loan servicing company (if you do not want to service the loan yourself) and real estate agent.

2. You might find it useful to connect with other real estate investors in your area for support, locating those in need of hard money loans and referrals to qualified professionals mentioned above. The Resources section below has a link to the National Real Estate Investors Association, which has chapters nationwide.

3. If you decide to be a solo hard money lender, understand that the risk is generally perceived as greater than becoming a fractionalized investor. A fractionalized hard money loan or fractionalized trust deed is one where multiple investors pool their money to make up the loan amount. If a loan defaults and you're the only lender, you're going to be responsible for handling the entire default and collections process.

1. Whether you're becoming a hard money lender through a firm or on your own, the research and due diligence process for deals is much the same. You'll want to review the criteria for each loan separately.

2. Yields on hard money loans vary greatly. Normal ranges for first deeds of trust (first mortgages) are generally between 8 percent and 12 percent annually. If the loan you're considering participating in or granting is a second deed of trust or mortgage, interest rates on those can run anywhere from 10 percent to 18 percent. The higher the interest rate, the higher the risk. You are rewarded as an investor for taking greater risk with a proportionately higher interest rate.

3. Request any available supporting documentation for the loan/property. Documents that are commonly available for your review are a property appraisal, financial documents from the borrower (financial statements, tax returns, etc.), and property photos. If there is no documentation available or the hard money firm/borrower is unwilling to share any of these document with you, it might be a sign that you should consider another firm or move on to another lending opportunity.

4. Once you've reviewed the documents and performed your own due diligence on the loan package, you can make a decision whether to invest in the opportunity or wait for another to come along. If you want to participate, you'll need to let the borrower or hard money lending/trust deed investment firm know of your interest.

1. Once you've indicated interest to the hard money lending firm or borrower (if lending solo), you'll need to have your chosen investment amount placed in escrow. This will generally entail sending a check or wire to the hard money lending firm or directly to a title company.

2. Once the title company has closed escrow and funded the loan, your interest will begin to accumulate. You should also receive a copy of the recorded deed of trust from the title company, naming you as a lender. Have patience, as recorded deeds can take up to six weeks to process in some larger counties. If you have not received a recorded deed of trust within six weeks, it's appropriate to call your hard money lending firm or title company representative and inquire.

3. You've just become a hard money lender. Deciding on sources of funds, whether to invest with a hard money lending firm or solo, researching a firm, performing due diligence on investment opportunities, and closing a hard money loan--these aren't tasks to be taken lightly. Remember that there is no substitute for thorough research and you should never feel bad about asking questions. It's your money and hard money lending has many benefits, but don't forget the associated risks.

Tips & Warnings

• Do thorough research of all hard money lending companies to see whether they have outstanding complaints with the securities or lending divisions in their state of incorporation. Ask for references from any hard money lending firm you're considering investing with. Start small. Hard money lending means you are the bank. Banks assume risk with any loan they issue. It's always best to have a trusted financial professional, attorney or CPA with whom you can discuss potential investments. Don't be afraid to have a second set of eyes on a deal.

• Never invest with a hard money lending company or trust deed company that is hesitant to answer your questions Make sure you understand the process by which a trust deed/hard money firm you're investing with will handle defaults. Some handle the process for you, others expect you to handle the foreclosure process.

References

• Investopedia's definition of a Trust Deed
• California Department of Real Estate - Trust Deed Investing: What You Should Know

Resources

• Equity Trust Company - Allowable Self-Directed IRA Investments
• NREIA - National Real Estate Investors Association