“The chappies you’d like to lend money to won’t let you, whereas the chappies you don’t want to lend it to will do everything except actually stand you on your head and lift the specie out of your pockets.”
– P.G. Wodehouse, My Man Jeeves
Are you considering commercial or investment property lending as an investment?
If so, this article/interview transcription is for you!
Hard money loans, when done right, can produce excellent and reliable returns for investors in the high single digits or low double-digits.
Done wrong, they’re an exercise in futility and frustration, a vehicle for losing a lot of cash in a short period of time, or tying up money you can’t get back when agreed.
Awhile back, we sat down with Marc Sherrin, one of our bridge loan providers, to discuss private lending through bridge loans, rehab loans, and hard money loans. (Incidentally, those terms aren’t necessarily synonymous, although there is much overlap and sometimes a loan can be all three.)
Marc helps some of our clients earn reliable cash flow in the low double-digit range. At the time we spoke, we have more investor demand for loans than we had available loans. (Marc only works in one state and he doesn’t have the inventory to serve all of our clients.) Therefore our aim in this conversation was to provide useful information for clients, readers and subscribers so they could learn about doing private mortgage lending themselves, if they were so inclined.
We were in for a surprise when we heard of all the big challenges facing private lenders! There are many pitfalls facing any investor who wants to turn accumulated cash into a steady stream of payments through hard money lending, bridge loan mortgages, and rehab loans. This article covers just some of the pitfalls an investor may encounter!
We’re grateful to Marc for sharing his expertise and hope this information is useful to you! We’ll also return with a follow-up or two. (Next up: Where to FIND the deals!) – so be sure to opt-in at the bottom of the page if you want updates on bridge loan lending and other updates on how to build wealth without Wall Street!
Kim Butler asked Marc, “What are the main mistakes to avoid when starting to look at bridge loans or hard money loans?”
And this (with a little editing for clarity) was his response:
The first mistake private lenders make is that they want to do whatever deal they see.
Just because you see a deal doesn’t mean that it is a good deal. In fact, I would almost say it’s the opposite way – because you’re seeing a deal, that means they can’t do it somewhere else – so you need to be extra careful with whatever you’re looking at.
You’ve got the money, they want your money, even though you would like a return, the problem here is that they need your money before you get your return. So, you need to go about it with the thinking that “Everybody is lying to me. How do I set this up? They’re all lying to me. None of the things they’re saying are going to happen. How do I guarantee that I can come out as a winner in this deal?”
So the first mistake is, you see a deal and think, “Awesome, let’s do it!” You need to be able to look at least two or three deals before you decide on the deal you want to do. You’ve got to learn how to go through several steps to evaluate if this is an adequate risk for you, or if this is an unacceptable risk for you, and it comes from the experience gained from viewing different deals compared to one another.
The second major mistake is that investors get away from numbers and they do a deal for emotional reasons.
Oftentimes, new investors may “fall in love” with a deal and develop an emotional attachment to it. Maybe it’s down the street from them, or in the neighborhood they grew up in, or it’s a style of home they love, or it’s their friend’s cousin and he seems likeable – you name it – they find a reason to do a deal. Maybe it’s the glamour of being an investor. Some hopeful investors have a longing in their heart, “I just want to do a deal!”
Whatever that reason is – they get away from the numbers of the deal and they choose to close a deal for something other than it being an acceptable risk.
Those are the two massive, major umbrellas of mistakes – A) seeing a deal and doing the deal because you just want to be in a deal (without accurately assessing the risks), or B) you fall in love with a deal – and even though there are warning signs telling you not to do it, you decide you’re doing to do it anyways. From that mindset it’s easy to make more minor mistakes, such as, you feel bad for somebody and you want to give them every chance in the world even though they’ve let you down twelve times. They’re only going to get worse and cost you more money.
Another sub-point to the above reasons: Do your Homework! Several lenders have made this mistake and then got stuck with a owning a property that’s nestled in between two crack houses. You got to go out and look and see what’s going on and what your money’s going to be doing, especially if the property is going to be rehabbed. Location ok? Does the subject fit in with its surroundings? Do the numbers work? Are they realistic? Are there any issues with the property itself that can’t be easily fixed? Can the person wanting to do the deal perform?
The third mistake is that the investor or lender doesn’t have realistic exits to get OUT of the deal when the time comes.
“We’ll sell easily.” (It’s kind of hard to sell when it’s similar with every other surrounding property and the inventory isn’t moving.)
“We’re going sell it at $150.00 a foot” (when everything else is getting $120.00 a foot.)
“We’ll refinance.” (Well, it’s kind of hard to refinance when you’ve got a 500 credit score.)
Getting into a deal is easy, getting out is the trick. You’ve got to be thinking, “How do I get out of this deal and get my principle back?” And this is where you’ve got to go back to my first rule: “Everybody’s lying to me. How do I make it this a successful deal?”
As Marc continued, he highlighted some additional keys to making a deal work:
- finding a good deal in which the numbers work
- finding a good borrower who is capable of communicating as well as performing on the contract
- having the right support team (including a good real estate lawyer, a savvy realtor, a reliable appraiser, and more),
- having the proper contracts and paperwork to put the proper protections and contingencies into place, and
- being able to manage the process of releasing funds and collecting interest properly.
lnvesting in hard money loans is not an easy process, but it can be very rewarding when done right.
STAY TUNED: We’ll be back in a week or two with a follow-up on how to FIND hard money loans in the first place!
Do You Want to Do Hard Money Private Mortgage Investing the EASY Way?
Do you love real estate, construction, making deals, managing deals, and having hands on involvement with your money at all times? Do you have the time and desire to learn the ins and outs of private money lending? Then being an active investor in bridge loans might be for you.
Or would you rather have a company with years of experience and a proven track record locate the deals, negotiate them, communicate with the borrower and manage the deal for you? Would you like them to handle all of the legal paperwork, title, escrow, and even make the regularly scheduled payments to you, according to a written contract? Would you like to work with a company whose investors have never suffered a loss? Then we need to talk!
Partners for Prosperity has some excellent options for investors who wish to invest in first position commercial mortgage bridge loans for cash flow – without all the hassles! Contact us directly to hear the details and see a FAQ sheet on this opportunity. We’ll help you determine if this investment is an appropriate fit for you, and we’ll also make sure you get all of your questions answered.
You can also read “Bridge Loans and Hard Money: An Investment Opportunity?” and opt-in below for further information. You’ll receive an email with further information and an invitation to speak directly with a Partners for Prosperity team member.
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.