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How I Became a Hard Money Lender
Unlike other investors, my venture into real estate was a
natural extension of my secondary business as the IP Ware
software developer. However, opportunity and perseverance beget
wealth, or at least a decent side income.
Aside from my ventures into lease optioning residential
property, I and my partner have managed to acquire a number of
properties with our own credit. However, when looking at our
finances and the return we were getting for the amount of effort
involved, we both decided there must be a better way. That is
when it occurred to me. Instead of trying to leverage our
existing assets for a diminishing return, perhaps we could be the
bank.
Here is the scenario as it has played out. First of all, we
control a decent number of properties with our own credit. Most
were purchased with 100% financing using multiple capital
sources. However, each contains only a primary lean and is
financed using standard mortgage terms. Subsequently, there is a
20% secondary credit position available on each of these
properties.
Now normally, an investor would use this 20% equity stake in
the existing properties to leverage the purchase of more
properties. However, our approach has been a bit different.
Because interest rates are so low, we can borrow against the 20%
equity position in each of the properties and loan this money to
investors who need short terms financing to control and
rehabilitate properties. Essentially, we are using our existing
properties as collateral to borrow money at the going finance
rate and loan it out at substantially higher rates of return. We
have become the bank.
For investors who need money fast, this system works out
beautifully. They pledge their property as collateral, and we
loan out up to 75% of the purchase price. All parties benefit,
and investors with opportunities that do not need long term
financing have a source of funds to do their deals. Everyone
wins.
If you are thinking of setting up this type of program
yourself, there are a significant number of legal caveats that
you must be aware of. The first is the company funding the second
lean holder position on your existing properties must be aware of
and amicable to what you are doing. This is a legal requirement
of which there is no way of avoiding without committing fraud.
Next, the usury laws in your state determine the maximum interest
rate you can charge your customers. There are a host of
additional laws that are more specific to the lending process,
but a good lawyer will help you work through them.
Regardless, there is a decent return to be made helping others
do their deals. Use your existing properties to secure the funds
to lend, and make sure you have an experienced lawyer to help you
sort out the details.
About The Author
Barrett Niehus is a principal for IP Ware Commercial and
Residential Real Estate Investment Analysis Software http://www.freetrainer.com
 MORE RESOURCES updated Thu. February / 09 / 2012
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New HARP Could Help Up to 6.7 MillionNASDAQOther changes to the program were designed to make it easier for homeowners with private mortgage insurance (PMI) to refinance or to obtain a HARP mortgage refinance with a lender other than their current mortgage servicer. In addition, new limits were ...and more » |
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Boehner On Refi Plan: Bad Idea, Obama!Mortgageorbby MortgageOrb.com on Thursday 02 February 2012 Any hope for bipartisan support of President Obama's mortgage refinance proposal was squashed by House Speaker John Boehner, who dismissed the new initiative as a continuation of failed policies.and more » |
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