Bridge Loans and Hard Money: An Investment Opportunity?

hard-money-investing“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”

– Robert G. Allen

Two weeks ago, we asked in a post about Alternative Investments:  “If not the stock market, then what?” Indeed, it is a question many investors are asking themselves. Specifically, where can you earn cash flow with reliable rates of return with manageable risk?

Private Lending Basics

We have recommended to some clients to discover 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 Rehab Loan is a short-term loan made to improve a property. Construction funds are held in escrow until needed, and paperwork must be completed to show progress. Borrowers typically sell or refinance the property after improvements are made.

“Hard Money” Loans are the opposite of “soft money,” which is easily obtained. Hard money loans are made when either the borrower (often a contractor or investor) or the property (perhaps a rehab project) does not fit the typical bank lending qualifications. Hard money loans are secured by the value and saleability of the property more so than the borrower’s qualifications (though that has changed somewhat), and loan-to-value ratios are kept low to protect the lender.

By definition, bridge loans are generally considered hard money loans (even when borrowers have good credit), but not all hard money loans are bridge loans. Hard money loans are often short-term loans, but can be long-term mortgages for people who don’t qualify for more typical Fannie Mae/Freddie Mac/FHA/VA loans. Rehab loans can be hard money loans, though not all rehab loans are considered hard money, with some homeowners qualifying for FHA 203k rehab loans.

How Private Lending Deals Work:

The lenders examine the deals, analyze the properties and qualify the buyers. They charge fees plus interest. Some lenders look to private investors who can provide the capital in exchange for the interest. Depending on the type of loan, investors can be paid interest in a lump sum 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. These loans have been offered by mortgage brokerages and even some banks for years, but now it is easier than ever for individuals to “be the bank” and enjoy the benefits of helping qualified borrowers. The key is finding a private lender who will carefully screen borrowers and properties.

The Pros and the Cons of Investing in Hard Money

While bridge loans are a non-traditional investment, the advantages of being an investor with a private lender are noteworthy:

  • Diversification: Private real estate lending offers true diversification for the investor. The rate of return is not affected by stock market whims, global politics, or even long-term real estate trends.
  • Collateralization: Investment funds are secured against freshly appraised real estate without requiring investor to purchase or manage rental properties. Typically 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. (Investors are typically offered a set rate between 6-14% annualized with no fee, though terms vary according to lender and individual deals.)
  • Control: Unlike the investments that caused the subprime meltdown, these are not loans that have been sold, re-sold, converted into stocks other investment instruments, and then packaged in bulk to hide deficiencies. These are simple, direct, secured loans that have been individually evaluated to protect both the investor and the company structuring the loan. Private lending borrowers are individually assessed and qualified, and investors are essential business partners that the private lender wishes to keep satisfied.

There are also potential disadvantages of becoming a bridge loan or hard money investor:

Research required. 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 important 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. To find one, get referrals and recommendations, check references, and ask questions, such as:

  • What position would your loan be in? (First position is preferred, because that means you’re the first to get paid in a sale.)
  • How much do they lend on the value of the home, or anticipated value, if improvements are being made? (Our preferred provider only lends a conservative 65% of value.)
  • What happens if borrower defaults?
  • Can you check references? (Don’t skip this step!)
  • Do they offer “too good to be true” results? (RUN, don’t walk, if they say you can earn 20% per month, 2% per day, or some such nonsense, even if your brother-in-law swears its real.)

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). And the devil surely is in the details. For instance, if you discover that there are unrecorded liens or notes and your loan is forth in line on an already over-mortgaged property, you’ll end up with nothing.

Time frame. We wish we could get this rate of return year-in and year out, but bridge loans and rehab loans are, by nature, a shorter-term strategy. (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. Ideally, you’ll be working with a company that you can do many transactions with over time.

Risk. As with almost any investment, there is an element of risk, especially if “Murphy” shows up. What happens if something drastic happens to the house, the market, or the owner/contractor making the improvements on the home? In that case, the private lender goes to plan B. They have a lien on the home and are in an excellent position to collect on it. If necessary, they foreclose on the property and sell it to recoup the investment.

Every effort is made to guard the investor’s original investment, and if possible, the interest owed as well. However, it may take longer than anticipated, and the only real guarantee you have is the value of the home. While that may sound like less-than-a-sure thing, consider these facts to put the risk in perspective:

First, there is no insurance policy for a stock market crash, and in any economy, a company like Enron can go from riding high to crawling on the ground before you can say, “Sell my stock!” However, in real estate, a “worst case scenario” might look like a house burning down – and you’re insured for that!

Secondly, your mutual fund or stock investments are speculative in value. They are not collateralized with real property, nor are they considered to be collateral of equal quality and value to real estate. Ask your bank manager how much they’re willing to lend on a piece of residential real estate, and the answer will be at least 80%, even up to 100%, in some situations. Now, ask the same bank manager how much they will loan you against your mutual funds. Hmm…

Is real estate investing through private lenders for you? We think that investing in hard money loans such as bridge loans can be a great way to diversify your portfolio and raise your returns, while keeping your investments collateralized. Many of our clients have used this strategy over the years, with favorable results.

Want to know more? Contact us if you are interested in working with us to find bridge loans or appropriate alternative investments for your portfolio. Our preferred provider has limited bridge loans available to investors, so clients are given priority.

AND SEE COMMENTS BELOW – We are putting together additional information for people who are interested in finding or evaluating their own hard money loans!

1-22-2015 Hard Money Lending UPDATE: We have been searching for more hard money lending opportunities with a new lender we can recommend. (Our tried-and-true private lender has limited opportunities that our current clients tend to “snap up”!)

We are now able to connect readers and subscribers with a new lender who can source qualified borrowers and properties for bridge loans and hard money investments.

Just enter your name and email below and you will receive additional information on investing privately in bridge loans and mortgage contracts. You’ll also receive our Prosperity on Purpose ezine to stay in the loop and receive updates. These are first position COMMERCIAL loans, not residential, with returns in the high single digits and low double digits, depending on the project and the amount.

Thank-you for your interest! You are also welcome to add your questions or comments below. Partners for Prosperity, Inc. is a Registered Investment Advisor working with clients in all 50 states. Our specialties are alternative investments and high cash value whole life insurance. We believe in “building wealth without Wall Street!”


53 Responses to Bridge Loans and Hard Money: An Investment Opportunity?

  1. Heidi says:

    This is a very informative article I’ve read so far regarding hard money loans. I keep searching for more information regarding it and I am glad to have found your site. Awesome explanations in every aspect. Hard money is very profitable business but just be sure with your choice on who you want to grant that loan money.

  2. KimButlerkp says:

    Thanks for commenting, Heidi, glad you enjoyed the article!

  3. Preeti says:

    Thank you for posting.Hard money is nothing but financial backing from private investors in the form of a loan.

  4. Anne Boss says:

    Bridging Loan is short term loans. Bridging Loan is beneficial because short term loan made to improve a property. Bridging Loans can be considered as hard money loan.

  5. Julie says:

    interested in more information.

  6. Jennie says:

    There is certainly a great deal to find out about this subject.
    I love all the points you’ve made.

  7. JollyRoger says:

    Couple questions: First, how can you research the people who put these packages together and how do you evaluate the manager of the fund?
    Second …. What kind of assurances can you get that the deals are being well vetted, that the loan is in first position, etc.?

  8. Kate4Kim@P4P says:

    GREAT questions, Roger! We have a source for these loans who we work with and refer our clients to who has been excellent at evaluating deals and protecting the private lender’s investment. Title searches, properly designed contracts, notes, etc. are important in the process, and it takes some know-how for sure. Typically these aren’t funds with managers, but they are private deals, and the source we work with finds and brokers these loans. (I’m not sure “broker” is the exact word, but he match-makes private lenders with developers or people who wish to borrow.)

    But… they only have limited loans available.

    So… we asked our bridge loan guy (just a few days ago, it’s like you read our mind) if he would let us pick his brain and put together an ebook or training not only for our clients who may wish to go “DIY” with hard money lending, but also our readers and anyone else who wants to know the pitfalls to avoid and the key to success with private money lending. (We couldn’t find a good source for this information and decided to create it ourselves!)

    He said “Yes!” So in a little while (a month or two), we’ll have something that is more comprehensive than this article. I’ve got your email via your comment Roger, so I’ll make sure you’re notified.

    If anyone else wants to be notified of this as well, just leave a comment below and we’ll put you on the list. And if you’re already a Prosperity on Purpose subscriber, you’ll receive notice automatically.

    And more questions are welcome! We may not be able to answer them here, but we will make sure the training addresses all the questions.

  9. Pingback: Not-So-Smart-Planning: Is “Conventional Wisdom” Threatening Your Financial Future? | Partners for ProsperityPartners for Prosperity

  10. Chris says:

    Im interested in the e book or whatever info you can provide

  11. Kate4Kim@P4P says:

    Thanks Chris, you’ll be on the list!

  12. Kenneth says:

    Would like to know more about this what min. amounts of $$$ is required, ect.?

  13. Kate4Kim@P4P says:

    Hi Kenneth, thanks for your question. We’ll have more detailed information about bridge loans and hard money lending soon, and I’ll make sure your question gets answered.

  14. Steve says:

    Please add me to the list.

  15. Kate4Kim@P4P says:

    You’re on the list!

  16. Alfreda says:

    I am interested in more information regarding the hard money loans. My parter and I are looking for an investor who we can get a hard money loan from to flip houses. Please let me know when more information is available. Thank you

  17. David says:

    Please forward more information.
    Thank you.

  18. Allan says:

    Please include me on the list for your e-book.

  19. Michael Welch says:

    I’m also interested in the ebook.

  20. Larry says:

    Please put me on your list if it’s not to late. Would also like to know more about Partners for Prosperity.

  21. Kate4Kim@P4P says:

    Hi Larry, (sorry, missed your comment at first) We haven’t made a lot of progress on this project yet (a little!) but you’re “on the list” when we do have something.

    And what would you like to know about Partners for Prosperity? We are definitely an “out of box” advisory… our founder Kim Butler is an expert in alternative investments as well as creative life insurance strategies. Please see our About page for more. Also our founder Kim Butler’s Amazon page. You can use our contact page for specific questions about us or to schedule an appointment with Kim.

  22. Philip Cardaci says:

    Please put me on the list for more info

  23. Jay says:

    Very interested in more info. How long has Partners for Prosperity been in business?

  24. Kate4Kim@P4P says:

    Hi Jay, thanks for your comment. We’ve been in business since 1999, you can find out more about us here.

  25. Rick Pascucci says:

    Please put me on the list for more info. Any update on a timeline for the information to be ready to be sent out? Thanks.

  26. Kate4Kim@P4P says:

    Hi Rick, will do. And timing wise, we hope to have something out early 2015.

  27. Donna L. Newman says:

    please put me on the list for more info.

  28. rox says:

    please put me on the list for more information on bridge loan investing. thanks

  29. Rob Ralston says:

    Do you publish a list of possible investment properties?

  30. Kate4Kim@P4P says:

    No, we do not, sorry Rob. Way out of our area of expertise, but do find yourself a trusty experienced realtor, preferably one who specializes in working with investment property. There are also “wholesalers” who specialize in finding pre-foreclosure or other distressed homes (though just because something is cheap doesn’t mean it’s a “deal.”) The real estate software package at helps us analyze investment properties for our clients, and again, a savvy realtor can be well-worth a commission or consulting fee.

  31. Joe says:

    please include me on the list for more information on bridge loan investing. thanks

  32. Jose Martin-Gallardo says:

    Great article. I would love to learn more about Bridge Loans.Thanks.

  33. Lyle K Gillett says:

    I would like to receive your book when you have it compiled. Thanks

  34. Daniel says:

    Please add me to the list. Thank you in advance.

  35. Doug Nebel says:

    Hi Kate:

    Would like to know more about hard money loan investments, partners4prosperity, and any training/informational material regarding hard money loan investments.

    Also, What do you know about the company “Equity Build Inc” where Jerry Cohen is president? I’ve read both pro and con on the company on the Internet. This company does exactly what you’re discussing here: provides opportunities for investing in rehabs with high returns of 10-13%.

  36. GARY says:

    would appreciate more info

  37. Kate4Kim@P4P says:

    I believe Kim contacted you directly Doug…

  38. Michael Nuyts says:

    I am interested in being contacted when your bridge loan guy puts together a training manual for the pros and cons of bridge loans or a ebook.

  39. would like to receive ebook on bridge loans

  40. Kate4Kim@P4P says:

    Hi Joe and Char, we will have some information on bridge loans VERY soon, though at this point we have decided not to do an “ebook.” You’ll be on a list for additional info. Thanks!

  41. Kate4Kim@P4P says:

    Thanks Michael, it won’t be a training manual per say, but you will receive more information very soon, including a new source we have discovered for investing in bridge loans on commercial properties.

  42. Pingback: Private Mortgage Investing: How to Find Hard Money Deals - Partners for Prosperity LLC.Partners for Prosperity LLC.

  43. Brian Borchert says:

    What sort of agreement/contract do you enter into with your investors? What are the terms?

  44. Kate4Kim@P4P says:

    Thanks Brian, We have a variety of options. Kim or one of the P4P team will be in touch with you.

  45. George Freeborn says:

    I have already had interesting phone talks with Jill and Kim re High Cash Value Whole Life Insurance .
    Please put me on list for the Bridge Loan e-book

  46. Kate4Kim@P4P says:

    Hi George! We are no longer putting together an ebook just on bridge loans, but we did publish a couple newer articles with great information from Marc, one of our bridge loan providers, and (at least) one podcast on the topic. See ALL the articles and podcasts on bridge loans here.

    And we DID publish an ebook you can get for free – Financial Planning Has FAILED – as part of our Prosperity Accelerator Pack. (Just click on that link and opt in.) It includes information on Bridge Loans and more as well as our investment philosophy, Prosperity Economics.

    I hope that helps!

  47. Omar Aviles says:

    I’m interested in your e-book regarding bridge loans for cash flow!

    Thank you!

  48. Kate4Kim@P4P says:

    Hi Omar, thanks for your interest!

    We don’t have an ebook just about bridge loans, but we DO offer a free ebook that includes information about bridge loans. You can sign up to get instant access to Financial Planning Has FAILED here. You’ll also receive our entire Prosperity Accelerator Pack and a “crash course” in Prosperity Economics!

    You can also find all of our blog posts about bridge loans here, and you’ll be notified about any further relevant information by opting in above.

  49. Omar says:

    Thank you Kate!!!

  50. Kate4Kim@P4P says:

    You’re welcome!

  51. Michelle Kinkead says:

    Looking for investors in smaller hard money loans. Any advice on what to look for in taking a loan? Will be our first time trying to invest. We want to buy, fix and hold for rental property

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