There are many ways to successfully invest in real estate. One that is currently taking on a renewed life is private money lending. With the banks sitting on the sidelines, private lending creates an opportunity for investors to make a high return while having their money secured by real property. Private money lending can be done in two general ways. Either as short term loans, commonly known as hard loans or as longer term loans simply known as private loans. Here we look at hard loans.
Hard money lending is one of the more popular ways of making passive income from real estate investing. Of course, every private contract is written for the mutual benefit of both the borrower and the lender but there are general rules that drive the hard money market. One is that these are short term loans averaging between six months and two years. Because hard money loans earn more interest than longer term loans, these can be very profitable.
Short Term Hard Money Loans
Why short term loans appeal to lenders is because these loans generate the maximum interest (profit) and are repaid in full long before the principal is reduced to lower the amount of interest being generated. What appeals to borrowers is these loans are granted within a couple of days, making all cash offers for properties possible. All cash offers are critical to almost all distressed sellers, which becomes the benefit to the seller. Although sometimes appearing ugly on the surface, these are actually win-win-win scenarios to all involved (the seller, the buyer, and the lender).
Another common denominator is that hard money lenders mostly don’t care about the credit rating of the borrower. Lenders are only interested in the value of the property securing the loan. In today’s market, most hard moneylenders won’t lend more than 70 percent of the appraised value of the property. This creates a 30 percent buffer to secure the loan.
As a hard moneylender, you can expect to earn at least ten to twelve percent above the prime interest rate. That means twelve to fourteen percent interest on a short term loan. One thing that hard money borrowers expect is a fast closing. Because there is no credit check, closing typically occurs in three to seven business days after the appraisal is completed. With an established relationship with a hard moneylender, the borrower can even close in less than three days. This can be very appealing to a distressed seller that has less than a week before being foreclosed on or having another immediate need for fast cash.
Sellers Need Fast Cash
Foreclosures aren’t the only reason a seller needs fast cash. Another example is a father that has fallen tens of thousands of dollars behind in child support payments and is within days of being put in jail because of it. He might have recently inherited a house that he has no significant interest in owning. Selling to an all cash buyer that can close in a couple of days keeps him out of jail and obviously creates a very profitable investment for the investor that searches out this deal.
If you are interested in real estate investing as a hard moneylender, you might want to consider your retirement account as a source of funds to make loans. You can do this by setting up a self-direct 401K or self-directed IRA account. It can be funded from an existing retirement account. A self-directed IRA can make hard money loans with the earnings going back into your retirement account tax deferred until you begin making withdrawals.
Of course, retirement accounts aren’t the only source of funds for hard money loans. Any source of funds can be used for both hard money loans and long term loans that will generate passive income that is secured by real property rather than the meaningless promises of Wall Street executives.
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Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.