I have been writing about hard money for many years now. I have learned a lot through extensive research and consultations with industry experts. For example, did you know that hard money lending can be considered a form of investing? Indeed, it can.
I bring this up because, as Salt Lake City’s Actium Partners explains, the vast majority of hard money loans are dedicated to real estate investments. Lenders like Actium write loans so that real estate investors can acquire new properties. They are essentially funding investments being made by others.
But what about the people who provide the money lenders lend out? It turns out that they are investors, too. The only difference is that they are investing at an earlier stage of the process.
How Hard Money Works
Hard money lending is a form of private lending based on asset value. A real estate investor approaches a lender with a proposal to obtain a new piece of property. The lender values the property to make sure it is worth enough to cover the amount being requested. Assuming the value is high enough, the lender will approve the loan. Documents are drawn up, funds are transferred, and the borrower closes the deal.
It’s a pretty straightforward process for both lender and borrower. But for the lender, it is also an investment. How so? Lenders charge interest and assess a variety of fees. Their ultimate goal is to end up with more than they started with. Every hard money loan should return a profit.
Where the Money Comes From
Actium Partners say that hard money loans can be as small as a few hundred thousand dollars or as large as tens of millions. It really depends on a lender’s resources. The question is this: where do lenders get their money from?
Bank money comes from individual depositors. Ditto for credit unions. As for hard money lenders, their funds can be sourced in any number of ways:
- Directly – A hard money lender could be an individual with his own financial resources. He is independently wealthy and able to loan out significant amounts of money as he sees fit.
- Investors – Most hard money firms source their funding from groups of investors who all contribute some of the funding. They do so with the expectation of a decent return. In such cases, the hard money firm acts as a management arm that lends out on behalf of the investors.
- Mortgage Pools – Although rare, some hard money firms source their funds from mortgage pools. A mortgage pool is essentially a real estate fund that pools the financial resources of smaller investors looking to get into real estate without taking excessive risks.
Regardless of where the money comes from, all who contribute expect to turn a profit. They lend their money with the expectation that it will generate a suitable return. So in that sense, contributors are also investors. They are investing in the investors who take out hard money loans to buy property.
It Can Be Risky
Contributing to a hard money fund can be risky. Hard money lending itself is risky due to the nature of real estate investing. Firms like Actium Partners employ every possible measure to protect themselves against loss. But there is always some measure of risk.
While hard money lending is a form of private lending, it is also a form of investing for those individuals and mortgage pools that supply the financial resources. And everyone along the investment chain expects to see a good return. Returns are what keep the whole thing going.