Hard money lending

[riverwed070707]

Background as a real estate investor, but I'm tired of buying and fixing even though I've made a nice portfolio for myself. Renovations always take longer than planned, I give up every night and weekend when I have a project going, borrowing has gotten more difficult due to my current work situation and contractors have gotten expensive while becoming increasingly unreliable. So I had been sitting on a pile of funds earning 4% in a HYSA and trying to figure out how to make it work harder and I had a thought that maybe I should lend instead of borrow. Spent several weeks researching rates, contract terms, vetting borrowers, etc when I happened upon a local hard money lenders cooperative. Essentially there is a broker who lines up the borrowers, does all the vetting and comes to the pool of lenders asking if anyone will finance them. They handle all the paperwork and closing. Unlike websites who let you opt into financing a portion of a project, there is 1 lender for each project and the lender is the 1st lien meaning if the borrower defaults (has only happened 2x in the history of the company), the lender gets the asset which they can then finish and rent or sell to recoup their investment. Most borrowers are short term - typically 2-6 months but up to 12. Lender gets monthly interest only payments with a balloon payment on or before the term end date. I wanted to give it a try and the broker brought me my first deal within a week of contacting them. Here are the numbers for my first one:

Purchase price: $58k
Borrower DP: $5,800
Origination fee to lender: $1,566
APR to lender: 11.5%
APR to broker: 2.5%

Loan has a 6 month term but no prepayment penalty. Total earned on $52,200 investment assuming 6 month payback=$4,567.50.

I've calculated if I keep rolling in the earnings, I'll be able to double my money in 5 years. It's also come to my attention that you can rollover a 401k into a self directed IRA and do this same type of lending as part of a retirement account. I have an old 401k I've been sitting on not knowing what to do with it since I left my fill time job almost 2 years ago and I'm tempted to do this but 1) I want to be patient and see how the first one goes and 2) I'm a bit hesitant on being too heavily weighted in real estate. Anyway, just thought I'd share since this isn't a type of investing I've seen discussed here!

[Fishindude77]

Good luck.
I'd be reluctant to do anything like this through a broker. If putting your money at risk, why not handle the whole deal yourself?

[riverwed070707]

Good luck.
I'd be reluctant to do anything like this through a broker. If putting your money at risk, why not handle the whole deal yourself?

Started out with that being the plan but I didn't feel confident I had the know how to vet the borrowers or the systems and processes to navigate the formal lending process required for an asset backed loan. Everything is done through a title company, they handle the buyer payments, late fee assessments, lender distributions and paperwork when the loan is settled - broker never touches the money. Worth the broker fee for a piece of mind I haven't messed something up IMO, plus since is a small group, I was able to choose a borrower with personal lending and repayment history with this investment group further reducing my risk than if I'd just advertised to people on the internet I had money to lend. Not saying I'd never go that direction, but at least for now until I feel more experienced on the lending side, this felt like the best decision for me.

[kork13]

I think that's a good opportunity for you. It sounds like the lending group & broker are fairly good & active. I gather that the group lends primarily to builder/refurbisher outfits?

I'll be interested to hear how this goes for you over time.

[riverwed070707]

I think that's a good opportunity for you. It sounds like the lending group & broker are fairly good & active. I gather that the group lends primarily to builder/refurbisher outfits?

I'll be interested to hear how this goes for you over time.

Correct, borrows are mostly flippers or BRRRR investors who need short term cash flow and refi to a bank loan when renovations are complete. Will update on how it goes!

[bjl584]

Hard money lending can be lucrative.
I'd just be sure to cover yourself in the event that a deal goes south.
I'm not sure what recourse you would have to recover funds.

[riverwed070707]

Hard money lending can be lucrative.
I'd just be sure to cover yourself in the event that a deal goes south.
I'm not sure what recourse you would have to recover funds.

I'd have a house I could sell so there's that Loan was $52k - house appraised at $80k pre-renovation and should be worth $140 post reno.

[LivingAlmostLarge]

I'd love to do a hard money loan i have stuff now just sitting. How do you find such a thing?

[riverwed070707]

I'd love to do a hard money loan i have stuff now just sitting. How do you find such a thing?

Kind of by accident in my case. I joined a real estate investors group for a metro area a few hours away. Saw a bunch of posts asking for recommendations for hard money loans and one name came up over and over. I decided to reach out to him with some questions I had about lending myself and he shared how his investment group works. I wanted some hand holding while I learned this side of real estate investing so I jumped on it. If you're on FB, you might look for some local (or not local??) real estate investor groups

[riverwed070707]

Been a little over a year since I started lending and I thought it was time for an update. My first loan was repaid in full in Oct 2023 and I opted to reinvest. Second loan was a little more ($65k I think?) and they repaid within 4 months. I was ready to make bigger loans. Since getting a full time W2 position last fall, I was ready to roll over my old 401k. I moved 40% into my current employers 401(k) and 60% (approx $200k) into a self directed IRA with Rocket Dollar. It was a pricey account setup fee ($600) and comes with a $30/mo account fee (something I avidly try to avoid when it comes to my financial accounts) but it was the best option I could find that would give me checkbook control of my IRA dollars so I could easily transfer funds for lending, plus it has some perks that helped offset the cost like waived wire transfer fees, the creation of a trust to hold my funds and audit protection in case I'm questioned on the validity of my lending.

Since I set that up, I took on a $110k loan and an $80k loan in May and June of this year. Together they have earned $6,482 in interest over the past 4-5 months with 11 and 12% interest rates plus $2500 in origination fees. I also had another $50-60k I was waiting to deploy from my personal account but had a lull in lending opportunities so I had moved it to a HYSA earning 5%. I finally got an offer for that pool of money last week and the loan closed on Monday with a 14% rate.

Overall - super rough numbers because I was being lazy with my calculations - my HMLs have earned me approximately $11k YTD with no missed payments, hassles or complications. I have no doubt at some point there will be some bumps but so far super pleased with the experience. Kind of want to sell my entire rental portfolio and move entirely into lending but I'm concerned about 1) the tax burden if I sell while I still have decent W2 income - it would be advantageous to wait until I leave my corporate job in 3 years and 2) if/how my lending portfolio would be viewed as reliable passive income to foreign governments when I want to apply for residency outside the US - I know rental income counts but I'm unsure if hard money lending would be as easy to justify since its considered non-traditional and potentially inconsistent.

With this newest loan, my HML payments should come in near $2,800/month nearly matching what my net income from my 10 year old rental portfolio with a lot less work involved. My wheels are turning on how I can transition my real estate to being fully passive.

[disneysteve]

a self directed IRA with Rocket Dollar. It was a pricey account setup fee ($600) and comes with a $30/mo account fee (something I avidly try to avoid when it comes to my financial accounts) but it was the best option I could find that would give me checkbook control of my IRA dollars so I could easily transfer funds for lending

Are you saying you're using IRA funds for lending? Is that a Roth or a traditional IRA? I guess with a Roth you can withdraw contributions at any time but there would be tax consequences for taking traditional IRA distributions.

[ua_guy]

The Rocket Dollar account sounds expensive. Is having a checkbook to write from your IRA not an option with your employer's administrator (like a Fidelity, Schwab, etc).

$11k YTD made off HML seems like it would pale in comparison to rental, but I've never owned rentals. Sounds like either high maintenance expense or high borrowing/payment expense might be dimming the shine on those?

[riverwed070707]

Are you saying you're using IRA funds for lending? Is that a Roth or a traditional IRA? I guess with a Roth you can withdraw contributions at any time but there would be tax consequences for taking traditional IRA distributions.

Yes! It's a self directed IRA and I can lend for real estate as long as I personally don't own or have involvement with the investment (hence why I needed a trust because if one of the borrowers were to default, the trust can foreclose but I personally cannot). Investopedia info on it

[riverwed070707]

The Rocket Dollar account sounds expensive. Is having a checkbook to write from your IRA not an option with your employer's administrator (like a Fidelity, Schwab, etc).

$11k YTD made off HML seems like it would pale in comparison to rental, but I've never owned rentals. Sounds like either high maintenance expense or high borrowing/payment expense might be dimming the shine on those?

A traditional IRA isn't allowed to be used for lending - it has to be a SDIRA so no an employer account wouldn't work since those are typically restricted to Traditional/Roth IRAs and 401ks.

A good rule of thumb in rentals we use is the 1% rule which roughly states that if the rental cost $250k, it should gross $2500/mo to be profitable. If there is a loan on the property, you can reasonably expect that half of your gross will go to mortgage/utilities/maintenance/vacancy if you self manage so in theory the same amount invested would net $1,250/mo and is much less passive while I'm currently earning approx $2,800 entirely passive. Of course my loans can't always be lent 100% of the time so I lose some "vacancy" from times I'm holding the funds waiting for the next deal, I believe it still comes out ahead.