Since many of you are sitting on assets that you want to turn into cash flow, I'm curious if anyone has considered hard money lending?
I've been exploring the REI ecosystem (fascinating to me!) and as I've been learning more about it and all the parts you can play, I'm wondering if hard money lending is a good way to go. It seems like 12-18% returns are normal, and if you can find some RE investors you trust it could be very profitable.
Thoughts? Experiences?
You said the word "trust". Red flag!!!
I prefer mortgage REITs for my 12-18% returns.
I've considered REIT's too. My concern there is that the risk is tough to control (interest rates). Where as with short-term hard money lending, you can tame the risk through deep analysis of the investment and conservative after-repair LTV's.
With REIT's, aren't you basically speculating that interest rates won't rise?
The people using hard money lenders are real estate investors who buy distressed properties, fix them up, and sell for enough profit for themselves and the lender (often the sale is to a "buy and hold" investor). I'd rather just use my money to buy distressed properties, fix them, and rent them. It leaves out two middle-men.
Currently I have two active loans, small amounts at 10%/year. I have a website that grabs loan request leads. ATM I have 400 requests so there is a lot of gems in there but I don't have the capital base to expand and cover the risk yet.
Personally, I don't feel entirely comfortable with becoming a moneylender. Riba (usury) is forbidden in many places for good reason.
ER is as much an ethical stance as a financial one to me; I'm not consuming too much.
One way to start might be with peer-to-peer lending such as through Lending Club (Prosper is another one although from my research they seem to produce a higher default rate...but that may have to do with the fact that they've been around longer). Yes, these investments can be risky, but you can start with a very small amount of $$. LC usually provides a fair bit of info about borrowers, what they want the loan for, etc., so you can figure out which ones seem most solid to you. They do also claim to screen borrowers pretty stringently, although I have definitely seen articles suggesting that fraudulent borrowing does periodically occur. I think it's also a good way to find out what your tolerance for risk is--if you stick in $500 and find you can't sleep for worrying after one $25 default, that's a pretty cheap way of learning that high risk is not for you!
@tac - thanks for the advice on Lending Club. I've spent the past few hours researching it and decided to open an account. I put in $5K, which is a pretty small percentage of my invested assets, and I already know I'm risk-tolerant so I'm excited to try it out.
I bought a distribution of Notes ranging from A to G, and I'm going to track them to see which ones perform better over time (and after defaults).
Anyone else out there using LendingClub.com or Prosper.com?
I'm on lending club. Not a good experience for me. Been on there for 3 years, getting about 2% yoy after defaults. Started with $2,000... so I wasn't able to spread out the loans that great though. I would recommend just buying a high yield corp. bond fund instead.
I think Lending Club and Prosper are excellent ideas, and I look forward to the day, I invest them, but I won't do so until the business model is sustainable/profitable. I encourage you to read Lending Club's SEC filings before you put too much money there. There is no free lunch.
I'm invested heavily in Prosper.com for about 2 years now with a regular account and my Roth IRA have been getting great returns (currently 25-28% or so depending on how you look at the grace period, but I'm sure a few people will default soon). I agree that Prosper and Lending Club's business models don't generate enough revenue for the companies (a financial company with fees too low! imagine that!) because they require a much larger total base of loans. As a result, they've been on a pretty constant IV of venture capital infusions for the past few years. Thing is, if these companies do go belly up, it shouldn't be too bad. You won't be able to get any more new loans from the site, but all the existing loans will be turned over to a collection agency to continue processing borrower's payments at current rates. Actually being able to maintain a 20%+ rate of return really does funny things to ERE's formulas, but given the data set for my types of loans, I'd expect to at least have a 10% return.
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