“If not the stock market, then what?”
It’s the question a handful of investors ask themselves daily. More then anything, where can you earn cash flow with reliable rates of return with manageable risk?
Understanding Private Lending Basics
Our Los Angeles Hard Money Lenders have suggested to a few clients to figure out how to work with private lenders to invest in “hard money” loans such as bridge loans and rehab projects, which are secured with real estate. What are hard money loans, exactly? Here’s a brief summary:
A Bridge Loan is a short-term loan to “bridge” the interval between buying one property and selling another. A typical bridge loan is for a short-term loan of 6 months or less, though time frames vary.
A Commercial Bridge Loan is just a bridge loan on a commercial property, not a residential property.
Mezzanine Financing is also a term used to describe Commercial Bridge Loans, even though it can apply to other types of businesses as well.
A Rehab Loan is a short-term loan made to improve a property. Construction funds are held in escrow until needed, and paperwork typically must be completed to display progress.
Borrowers usually sell or refinance the property after improvements are made. An assortment of rehab loans are also bridge loans and commercial loans.
“Hard Money” Loans are in a different spectrum from “soft money,” which is seamlessly gathered. Most Los Angeles Hard Money Lender will tell you that hard money loans are made when either the borrower (often a contractor or investor) or the property (perhaps a rehab project) doesn’t fit the conventional bank lending qualifications.
Most Hard Money Lending Companies in Los Angeles will tell you that hard money loans are secured by the value and sale ability of the property more so than the borrower’s qualifications and loan-to-value ratios are kept low to protect the lender.
By definition, bridge loans are generally thought of as hard money loans (even when borrowers have decent credit), but not all hard money loans are bridge loans.
Our Los Angeles Hard Money Lenders say that hard money loans are often short-term loans, but can be long-term mortgages for individuals who don’t qualify for more traditional Fannie Mae/Freddie Mac/FHA/VA loans.
Rehab loans can be hard money loans, though not all rehab loans are thought of as hard money, with some homeowners qualifying for FHA 203k rehab loans.
How Private Lending Deals Work:
Usually, a Los Angeles Hard Money Lender will examine the deals, analyze the properties and qualify the buyers. There can be charge of fees plus interest at times. Some Los Angeles Hard Money Lenders seek out to private investors who can provide the capital in exchange for the interest.
Now depending on the type of loan, investors can be paid interest in a big amount up front and when their principal is returned at the end of the loan term, or they can receive regular monthly payments.
Bridge Loans and other hard money loans can be safe, reliable investments when properly vetted and executed.
Our Los Angeles Hard Money Lending Company says the crucial key is to get an exceptional private lender who will carefully screen borrowers and properties.
Bridge Loan Investment Rates of Return
Now depending on how much you have to invest, for how long, and whether or not you are an accredited investor, the first/senior position notes and bridge loan funds a lender will have access to are paying mid-to-high single digits, at minimum.
Of course, the return on any bridge loan or hard money loan is whatever is agreed to between the lender and the borrower, and rates of return can vary vastly based on a variety of factors, such as the experience and credit of the borrower, and even the anticipated profitability of the project.
The Pros and the Cons of Investing in Hard Money Loans
While bridge loans are a non-conventional investment, the advantages of being an investor with a private lender are noting:
- Diversification: Private real estate lending offers true diversification for the investor. Best part about it is that the rate of return is not affected by stock market whims, global politics, or even long-term real estate trends.
- Collateral-ization: Investment funds are secured against newly appraised real estate without requiring investor to purchase or manage rental properties. Usually a maximum of about 65% is loaned on the current or improved value of the property.
- Profitability: Investors can earn proven, predictable rates without tying up their money for years (or decades) at a time.
- Control: Bridge loans have not been sold, re-sold, converted into stocks other types of investment instruments, and then packaged in bulk to hide deficiencies. These are seamless, direct, secured loans that have been individually evaluated to help protect both the investor and the company structuring the loan.
- Bridge loans have not been sold, re-sold, converted into stocks other investment instruments, and then packaged in bulk to hide deficiencies, as were the financial instruments that caused the subprime meltdown. Private lending borrowers are individually assessed and qualified, and investors are essential business partners that the private lender wishes to keep happy.
Los Angeles Hard Money Lenders say there are also potential disadvantages of becoming a bridge loan or hard money investor:
While putting money in a certificate of deposit or even an index fund mirroring a certain index may be somewhat simple, doing your due diligence is especially critical with bridge loans.
While some investors put deals together and lend the money directly, we only recommend using the services of a proven, reputable company who finds, analyses, and puts together the deals.
If you are not already a professional real estate investor, we don’t suggest attempting making private loans yourself.
To loan directly to a homeowner or contractor, you need to have an excellent understanding of real estate law (or a good lawyer) and property values (or a good appraiser).
Understanding The Time Frame
Bridge loans and rehab loans are, by nature, a shorter-term strategy, often in the 6-12 month range. (Of course, that may work perfectly for some investors!)
Then you’ve got to wait for another bridge loan or find someplace else to put your money. In a perfect world, you’ll be working with a company that you can do many transactions with over time.
Ultimately, our Los Angeles Hard Money Lenders often say that every effort is made to guard the investor’s original investment, and if possible, the interest owed as well. Nonetheless, it may take longer than anticipated, and the only real guarantee you have is the value of the home or property.