Do you want to be a bank and make the big bank bucks? Who doesn’t, right? The question is, how do you do that? Well, one of the most lucrative ways to accomplish this is through one of the industry’s popular alternative investments, called hard money lending.
Although the practice of lending money has been around for decades, it has grown since the recession. Given that traditional banks have limited the type of investments they will commit to, as well as the borrowers they will finance, investors have taken matters into their own hands.
Albeit it sounds like a very appealing investment opportunity, before becoming a hard money lender, you must:
1. Understand the laws in your country and state. For example, in the United States the Securities and Exchange Commission (SEC) has strict lending laws that any hard moneylender needs to follow.
Moreover, each state has so-called Blue Sky Laws that complement and add in some cases to the SEC regulations. Chances are you will need an attorney to make sure that you keep on the right side of the law.
2. Understand the risk of hard money lending. Keep in mind that when you lend money to individuals looking for hard money loans, that they cannot receive traditional financing. This means you need to have your own set of rules to ensure that you do not lose your investment. Lending is a risky business, so establish your own lending criteria before starting.
Whether it is a large down payment, or an extremely low Debt to Income ratio, think about some requirements to protect your investments.
3. Do your research. Once you have a prospective borrower that fits your criteria, make sure that you research the borrower and their intended purchase.
If it is investing in real estate, have an appraisal of the property done and request a credit report of the borrower. This should include income and savings documents for (at least) the last two years.
Hard money lending is one of many high risk, high reward investment alternatives. Perhaps the most important thing to remember about lending money is to make sure you have the funds to cover the investment, as well as a reserve fund to cover defaults and losses. Being a hard moneylender requires time, patience, and research to get the right returns.