A hard money lender is an individual who uses his own money to finance a real estate investment for another person. The person who is borrowing it from a private lender instead of borrowing it from a financial institution. Investors tend to find tradition lenders loan agreements inflexible with timeline. Private money loans have become a popular option in the real estate investment business. There are many advantages to becoming a hard money lender. If you make the right moves, you can keep your risk low and your potential gains high.
There are two main ways to become a hard money lender. First is to create an LLC or fund which brings on outside investors who receive a certain interest rate every year on their investment. In this way, you collect a percentage of the profits plus a yearly service fee. Second way, you can finance the business yourself through your savings, retirement accounts, or line or credit.
A private money loan is similar to a conventional loan, but there are some differences. A private money lender can charge a higher interest rate for the loan, but also finance a loan that conventional lender do now want to finance. They make faster decisions on whether or not they wish to fund the loan and how to make their decisions is very clear. Most investors will come on as a deal-by-deal basis rather than continuous. Often times investors have their own money, but do not want t commit all of their own funds into one venture so they obtain a private loan.
Here are a few reasons investors obtain private money loans: Rehabs to sell, Rehabs to rent, Developers & Builders, investors of commercial property.
Borrowers and private lenders life private loans because terms can be as flexible as they agree upon. Terms can be anything that they agree upon as well. They can agree on how and when to repay the loan. A few ways a private lender can make a profit on are: interest payments, points, exit fees, joint ventures.
A few steps can do in becoming a hard money lender include:
- Consult with an attorney on forming a company
- Determine the focus of your loans
- Form the company and get insurance that is required
- Join networking groups to find leads to potential investments
- Launch your hard money lending business
- Start with small loans
- Be the Real Deal
- Stay Informed
- Study hard money loans
Some disadvantages of being a hard money lender include having enough money to lend and fully understand the risks. Some advantages include controlling the loan terms and whom you lend to. You are also able to participate in the real estate market without purchasing any property.
Being a hard money lender can be simple or complex. Make sure you weigh all the advantages and disadvantages before you jump into being a hard money lender.