Hard money lending is a profitable business. It is so profitable that you will find lenders in every major metropolitan area as well as most medium-sized cities. Even smaller towns are known to offer opportunities to hard money lenders.
Do you think you have what it takes to make it in the hard money business? Though it may sound easy, hard money lending is more difficult than it sounds. You need to be properly equipped and have the right mindset. Here is what it takes to be a hard money lender, according to Salt Lake City-based Actium Partners:
1. Money
At the risk of sounding like Capt. Obviously, you need money to be a hard money lender. And you need a lot of it. Even the smallest hard money deals can be upwards of several hundred thousand dollars. The largest could be worth millions. Do not expect to succeed as a hard money lender if you only have a few thousand dollars to your name.
The good news is that few hard money lenders operate on their own. Firms like Actium Partners are composed of multiple investors who pool their money. More investors mean more opportunities to lend.
2. Market Knowledge
Hard money lending is risky, so you need a solid knowledge of the market to protect yourself from loss. The exact type of knowledge you need depends on the markets in which you choose to invest. Most hard money goes into real estate. But that could mean commercial or residential properties. For some investors, both are fair game.
You need a working knowledge of markets in order to understand if a loan proposal is worth your while. You need to understand how much risk is involved. If you don’t know your market, how can you figure such things out? In a real estate market, it is crucial to have ample market knowledge as selecting the wrong market will affect your investments.
3. Low Risk Aversion
Financial advisors frequently speak of risk aversion when recommending investments to their clients. Risk aversion is simply the amount of risk you are comfortable taking on a given opportunity. If your risk aversion is high, you avoid the riskiest investments. It is just the opposite for someone with low risk aversion.
Because hard money lending almost always involves large sums of money, investors need to have a low risk aversion. They need to be willing to lose it all in order and gain a nice return. If you are someone with a high-risk aversion, hard money is probably not something you should get involved in.
4. A Business Mentality
Due to its nature, hard money lending is as much a business as it is an investment. Lenders enter into legally binding contracts with borrowers. Terms and conditions must be adhered to. Why is this important? Because every hard money lender needs to deal with default from time to time. Lenders cannot allow transactions to become personal or they risk a default scenario turning into a substantial financial loss.
To put it more plainly, a business mindset is what makes it possible to address default in a way that protects the lender. That often means seizing the borrower’s collateral and selling it to recover what was loaned. Seizing and selling property is never easy, but it is part of the hard money game.
Plenty of hard money firms do very well in the U.S. If you have what it takes, hard money lending could be a very profitable investment opportunity for you. Think it over. If you have the money and the proper mindset, lending your assets to others could be the best way for you to realize the return you want.
