Hard money lending might not get the press attention it used to get, but it is still out there. It is alive and well in both the commercial and property real estate markets. Hard money lenders offer borrowers access to quick cash borrowed against lien-free collateral.
How much do you know about hard money lending? If you are like most people, not much. Hard money lending has managed to maintain a bit of mystique over the years to the extent that your average consumer has no idea what it is. Many haven’t even heard of it.
Below are three interesting things you might not know about hard money lenders. If you have never heard of hard money lending, it is an alternative to traditional bank lending that gives borrowers access to fast cash for property acquisition, business expansion, and construction.
1. Hard Money Lenders Are Regulated
Unfortunately, there is a lot of misinformation out there about hard money lending. For example, lenders are often referred to as being unregulated. That is simply not true. Hard money lending is regulated at the state level. In some states, for example, at least one partner in a hard money firm must be a licensed real estate broker.
Hard money lenders are generally not held to the same federal standards that apply to retail and commercial banks for the simple reason that their loans are structured differently. Federal law grants exemptions to institutions that lend on terms of 12 months or less, for example. That is why your typical bridge loan doesn’t extend beyond one year.
2. Lenders Can Be Individuals or Funds
Salt Lake City’s Actium Partners specializes in hard money lending. They say that hard lending can be accomplished in one of two ways. The first model involves a wealthy individual or a group of individuals who directly lend their own money. Each of them has a working knowledge of both hard money and the real estate market. They are familiar enough that they know how to make loans while protecting their own interests.
The other model involves setting up a hard money enterprise as an investment fund. Rather than individuals or partners loaning money directly, investors pool their money into a fund that is then managed by someone else. The fund loans money to borrowers. Any profits derived from those loans are then redistributed to investors by putting money back into the fund.
3. Lenders Love the Good Returns
Regardless of how a hard money lender establishes its business model, there are inherent risks with this sort of thing. The biggest risk is foreclosure. Because hard money loans are short-term loans, borrowers do not have a lot of time to come up with the money to repay what they have borrowed. So there’s always the risk of default whenever a lender writes a new loan.
So why would hard money lenders take such a risk? Because hard money lending generates particularly good returns. The fact is that hard money is loaned on the basis of collateral. More often than not, collateral is offered as clear real estate.
Investors know that hard money lending can generate higher returns than stocks, bonds, and other securities. They know that hard money lending is a way to make good returns on property without having to flip houses or act as a landlord. By loaning hard money, they let someone else invest in property while they make money financing property purchases.
There is a lot more to know about hard money lending. At least now you have a bit more understanding than you did before you read this post.