Hard money lending as a retail investor?

Is there potential for 7%+ annual returns doing hard money loans as a retail investor? If so, what does the risk profile look like for this kind of investment? How high is risk of default and what's the recourse action? Can you claim first lien position? Can you repossess the property in case of default, or do only banks have the leverage to negotiate that ability?

Sort of looking for a tutorial on hard money loans, either in resi or commercial RE.

 

Diving into the world of hard money lending as a retail investor can indeed offer the potential for 7%+ annual returns. However, it's crucial to understand the risk profile associated with this type of investment. Based on the insights from the Wall Street Oasis discussions, here's a breakdown of what you need to know:

  1. Risk Profile: Hard money loans are typically secured by the property itself, which means that in the event of a default, you as the lender have the right to take possession of the property. This security does mitigate some risk, but it's important to remember that the risk of default can be higher than traditional loans. This is because hard money loans often serve borrowers who might not qualify for traditional financing due to credit issues or the need for rapid funding.

  2. Default Risk: The risk of default in hard money lending can be significant. Borrowers seeking hard money loans may do so because they cannot secure financing through traditional means, which inherently carries a higher risk. The recourse in the event of default is typically to foreclose on the property, but this process can be lengthy and costly.

  3. Recourse Action and First Lien Position: As a hard money lender, you can indeed claim a first lien position on the property, which puts you at the front of the line for repayment in the event of a default. This is a critical factor in mitigating risk. If the borrower defaults, you have the right to initiate foreclosure proceedings to recoup your investment. However, the process and ease of doing so can vary significantly by jurisdiction.

  4. Repossession and Negotiation Leverage: In the case of default, hard money lenders do have the ability to repossess the property. This is a key advantage of hard money lending over other types of investment. The ability to negotiate these terms upfront and secure your investment with the property itself provides a level of protection. However, it's essential to have a clear legal framework in place, often requiring the assistance of a lawyer experienced in real estate transactions.

  5. Considerations for Retail Investors: As a retail investor, it's crucial to conduct thorough due diligence on the borrower and the property. This includes assessing the borrower's financial stability, the property's value, and the potential for resale or rental. Additionally, understanding the legal implications and having a solid contract in place is paramount.

  6. Educational Resources: For those looking to deepen their understanding of hard money lending, exploring educational resources such as the WSO Courses or Academy can provide valuable insights into the intricacies of real estate financing and investment strategies.

In summary, while hard money lending can offer attractive returns for retail investors, it comes with a higher risk profile, particularly regarding default risk. Ensuring you have a first lien position and understanding the recourse actions available to you are critical components of mitigating these risks. As with any investment, education, due diligence, and proper legal advice are key to navigating the complexities of hard money lending successfully.

Sources: Alternative Lenders & the End of Risk Taking for Banks - Opportunity or Risk?, Overview of Leveraged Finance, https://www.wallstreetoasis.com/forum/real-estate/commercial-hard-moneyprivate-lenders?customgpt=1

I'm an AI bot trained on the most helpful WSO content across 17+ years.
 

Is 7% supposed to be good? That seems like an abysmally low yield. We’re routinely making 12-14% at 65-75% LTV (although our positions are back levered with a senior lender and yours wouldn’t be (too small)). If I were you, I would make sure your debt was priced in the double digits to make it worth your while (15-20%+). Otherwise, why bother? You’re more likely than not taking equity risk (very high LTV is customary) and the duration will be short (typically low multiple). You’re also opening yourself up to a lot of headaches by dealing with subprime borrowers. I don’t know how you plan to find your deals, but this is not an area of finance that I would venture into without a lot of experience structuring credit (debt and pref). I don’t have any specific resources for hard money lending unfortunately, but I’d be interested if others do. Clearly it’s not rocket science though; there are plenty of unsophisticated scummy people out there who do it well, so I’m sure you could figure it out.

 

Not necessarily. It requires a good manager. Most investors suck whether they’re debt or equity. The problem with debt is there’s no upside so one or two bad loans can blow up an entire fund since there’s no upside, so if you’re investing with average managers you’re basically investing at the whim of the cycle and might as well be throwing darts. I don’t know what to tell you. If I had bigger balls, I’d quit and go do it myself because this industry is full of clowns.

 

Do you both have substantial capital? Seems like you're doing this personally and only looking at the potential 15-20% returns without realizing the risk. If you have millions and are lending $50-100k at these terms go for it, but from what I'm reading and your titles seems that may not be the case.

If it doesn't work out you have to get lawyers involved and may need to go find these people to even have a chance at getting your money back. Like another comment alluded too, seems to be more scummy in my opinion and what kind of borrowers are coming to those type of people... I'm sure some likely have no problem telling you what you want to hear then screwing you over/not paying you back so hopefully it's a small % of your net worth. The tools (first lien priority, foreclosure) you are mentioning can take many months+ to get finalized. You need to ask yourself do you need this money at all and can you wait the loan term + 1-2 years if they don't pay you back and you have to litigate. 

 

Crypto lending is probably better then what your doing, looking at 10 to 20 percent gains on reliable coins like USDT or USDc. If you US based use a VPN, also might not have to pay as much tax based on state law. 

Kucoin is best for this format of lending. 

amit b.
 

This sounds like an awful idea.  First off, it requires a high degree of sophistication and a huge appetite for both risk and confrontation.  Most "retail" hard money lenders are the ones that break your thumbs when when you don't pay up.  Obviously that isn't going to be you, but if you're lending to real estate projects, you are almost by definition lending to relatively savvy investors.  Which means you're going to have to litigate to get your collateral.  For years, likely.

So if you lend $100,000, are you prepared to spend another $50,000 just to collect?  Can you accept that it'll be years before you get any of that security?  What's the real risk/reward calc there look like, knowing that?  Probably not great.

As for all the other questions, lets just say that if you don't know the answers to those, you are a long way away from being in a position to execute on this strategy.

 

A loan like this is not highly liquid. You're putting up money into a risky project that other established lenders wouldn't touch for various reasons, it's why someone is coming to you. Getting your money back from someone who is doing small deals like that, with questionable track record, history, and likely no money means if you need to collect they can't pay you unless their investment does well and they find other financing to take you out. Just wait or invest in the stock market, this is not a good idea as others have said.

 
MonopolyMoney

Lol - I keep seeing the "real estate gurus" talk about getting into hard money.

The same way that they got into "value add" in Sun Belt markets.

Any time you start seeing people pump these "strategies" on LinkedIn or TikTok or Instagram, you know it's a bubble and to run the other way.  If Grant Cardone is investing in it, you shouldn't be

 
Most Helpful

Done quite a few hard money deals as a partner. First thing, is you want to be lending in a non-judicial state as they are more favorable to lenders. Stay away from super small balances as someone else above said. A $500K loan will require a fair amount of closing costs, legal, DD, etc and if that deal breaks, its going to get extremely expensive hiring attorneys for such a small deal. Is the hard money for a development or existing value-add? If the earlier, theres quite a bit more risk.

LTVs tend to hover around 65%. In the HML space, lending to good sponsors is the real key. Your goal is to find the guy thats experienced and just needs short term capital because they need to close quickly. However, some HMLs end up risking it on the guy that needs short term capital because frankly he's not qualified to get any capital from anywhere else. These are the people you avoid.

7% is super low IMO. Before rate hikes, HMLs were charging around 12-13% at 65% LTV. I can only imagined this has gone up now.

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