People of retirement age are increasingly choosing private lending as their investment vehicle.
Those who are tired of speculating in the stock market, investing in sometimes artificially valuable products, are looking for a more secure investment.
Real estate secured assets are a great solution to their security dilemmas- since hard money loans to real estate investors are generally backed by a piece of actual property, they stand to profit even in the worst case scenario.
Usually, these lenders are interested in being passive investors.
They're people with a large cash reserve, and generally don't have the time or are not interested in going out and investing in real estate themselves, instead they'll invest in a real estate investor.
By lending to real estate investors who may have a hard time securing conventional financing, private lenders enjoy high rates of return- sometimes up to 15% depending on the "riskiness" of the borrower.
One of the most common and popular terms in hard money lending is LTV, or loan to value ratio.
The loan to value ratio in hard money financing determines what percentage of the potential value of the property they are willing to lend to the borrower.
For example, if the LTV is 60%, the lender will only lend out 60% of what the property will be worth when the investor chooses to sell it.
This is an ideal situation for real estate investors who plan on rehabbing a property.
If they buy their property at a discount and then spend a few thousand dollars rehabbing, and are able to build 40% of equity in the deal, they could potentially finance 100% of their expenses.
The LTV is how lenders protect themselves in a deal- the lower the LTV the more they stand to gain should the investor stop paying his/her bills.
For example if the investor gets foreclosed on, the lender acquires the property since their loan is backed by that piece of real estate.
The lower the LTV, the higher the equity the lender stands to acquire, and the lower the risk.
Although interest rates and LTV's vary among hard money lenders, mortgage brokers and hard money lending businesses can help private lenders get through the process for a fee.
There are many services online and available on recommendation through investment groups to connect borrowers and lenders, recommend interest rates and LTV's, and inform lenders of state and local regulations on hard money lending.
While hard money lenders aren't subject to as much regulation as traditional financial institutions in terms of income requirements and minimum credit scores, there are some systems in place to prevent sub prime lending.
Some hard money lenders have given the industry a bad reputation by "bailing out" people facing foreclosure, at unreasonably high interest rates.
There are some misconceptions about hard money lending, like ideas about minimum investment requirements, that prevent people from exploring this investment option.
While many programs and businesses do have high minimum requirements, and require their clients to have high cash reserves, there are places where you can go with less money and expect the same returns.
Some programs pool investors money together to extend the opportunity to people who have a little less to invest with.