12% Returns without Buying Real Estate
This episode provides an overview of hard money lending opportunities for real estate investors in 2024, discussing how it offers consistent double-digit returns, low barriers to entry, and high demand due to more competitive interest rates compared to traditional bank loans. Tips were also shared on minimizing risks, such as focusing on smaller residential deals and strictly vetting borrowers, as well as how to structure loan agreements and find qualified investors to lend to.
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Key Takeaways:
Hard money lending offers consistent returns of 10-12% due to steady demand from real estate investors needing quick financing.
Demand for hard money loans is expected to remain high in 2024 due to interest rates at banks being not too far below hard money rates now.
Hard money lending provides flexibility and speed that traditional bank loans lack, while still offering decent returns.
Investors are shifting capital from equity investing to hard money lending funds that guarantee returns like 10%.
Hard money lending can be started with as little as $50,000-$100,000 and successfully scaled up over time.
About Your Host:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors.
Episode Transcript:
0:00
with lenders pulling back across the market and offering terms that often just don't make sense, right now, buying real estate in 2024, could prove pretty difficult. But there is one way for you to still make pretty significant returns, often 12% or higher, without having to deal with banks, or even buy the property yourself that opportunity become the bank. And you might not need that much cash to get started, which we'll get to here in a minute. So Dan, a lot of people are looking into alternative investments in the real estate world moving into 2024 with where interest rates are with where deal values are, it's just really tough. Tell us about hard money in the opportunities that exist in that world. Yeah, so
0:40
basically hard monies for one to four unit properties. I mean, there's some other companies that lend you know, I'm big stuff, really we focus on the one to four units. So I'm primarily interested in the single family space and what that's doing at all times. So in 2024, I think I think business is going to be as per usual,
0:56
hard money and private lending are going to be in high demand in 2024. And beyond. Because of the flexibility they can offer real estate investors and the decent returns that they can bring you. So what is hard money lending hard money lending means providing short term high interest loans to real estate investors, often those flipping or rehabbing properties rather than earning returns from the actual real estate hard money lenders profit purely from the points and the interest paid on the loans hard money fills a crucial niche providing financing quickly when borrowers can't qualify for slower bank loans, or they simply just can't wait. Now, the speed and flexibility that hard money brings comes at a price hence interest rates from 10% up to 15% or more. But for borrowers needing funds fast, hard money allows them to snap up and renovate deals, and they often won't bind the higher interest rates. Because of that the appeal for you as the winter is earning those double digit returns on your capital in a short period. With the real estate there as collateral the loan is secured by the asset itself. Most hard money lenders primarily focus on one to four unit residential properties that are being renovated or flipped by experienced investors. But you could also finance larger commercial projects. It all depends on how much cash you have available, and how savvy you are to step in. If you have to foreclose on that property. Focusing on smaller residential properties, especially when you're just starting out allows you to minimize risks thanks to lower loan amounts that you could then spread across multiple borrowers. And we're all about diversification here on this channel. With rates spiking at banks, there isn't really a massive gap any longer between hard money and conventional loans. Banks now charge seven to 9% plus interest not that far below the 10% Plus from private lenders, and they take much longer to fund deals and tend to have all sorts of hoops for borrowers to jump through. That's why some real estate investors gravitate towards hard money for the speed, the flexibility and the simplicity that banks simply don't have after the initial review and some minor monthly check ins hard money lending can be a relatively passive opportunity for investors to deploy their capital and earn excellent risk adjusted returns much better than just leaving money in the bank. And some think that it's better than just buying real estate in general. Let's talk about why her money offers attractive returns in a time when the outlook on different assets is unclear. Hard money lending can provide consistent returns of 10% to 12% or more year after year. Here are a few of the key reasons why demand is steady. There are always real estate investors that need quick financing to secure or rehab properties. The loans are secured, the underlying asset backs the loan allowing you to seize it and sell it if the borrower's default, interest rates remain high. Hard Money rates tend to stick around 10% to 12%. Despite market fluctuations, they don't really fall as low as bank rates. Winning is also short term ones are typically for one year or less allowing swift reinvestment of capital after it's paid off. And oversight of strict diligent lenders only fund experienced investors on variable deals, which helps limit defaults with interest rates spiking so much at banks. hard money loans really aren't that much more expensive today, meaning there is a high demand from investors that are out there that are still buying deals that are gonna want to work with you. Hard Money fills a key niche which is why lending volumes stay relatively constant and those fat rates of around 12% keep flowing to lenders like clockwork. Now, it's not all rainbows and butterflies. So we need to talk about how to minimize your risk as a hard money lender when to conservative loan to value ratios. Lending only 50% to 70% of the purchase price instead of 80% plus gives you a nice equity cushion if values drop or if you have to take the property back work with experienced borrowers that have successfully completed similar projects, avoid first timers unless you really, really, really feel confident in their abilities require borrowers to put 10 to 20% skin in the game with their own cash in the deal. Don't just let them use investor equity for 100% of their downpayment. You want them to be bought in thoroughly vetted deals to confirm solid financials and valuations before funding loans. Pretend this is a deal that you're looking at by when you do this deal structure loans was shorter six to 12 month terms to force quick repayment, and limit market fluctuation risk. This also allows you to get your money back faster. So you can lend on the next deal. Spread the loans across multiple borrowers, instead of overly concentrating your own capital with just one or to hire an attorney to put together all of the necessary legal agreements that clearly outline the loan terms and protections for you as the winter. I cannot emphasize that enough. Make sure you have the right attorney, we
5:57
want to return 10%, typically year over year to our investors, right, so we run this fund. And so as long as we're making them 10%, we're happy in the conventional space rates have gone from 3% to 8%. Our rates have only gone up 1% In the last eight
6:14
years. So with interest rates where they are true, traditional banks and hard money really aren't that far apart. And the value isn't there on the return for investors in some traditional commercial real estate deals. And real estate deals in general. Are you seeing a lot of people that used to be equity investors now investing their capital with you on the hard money side?
6:33
Yeah, 100% I mean, people used to, you know, lend private money at nine 10% People are getting that from banks. Now, typically. So there isn't this huge rush for private money lenders to, you know, go out and lend their capital and put it at risk. A lot of them are investing in syndications. They're also investing in our fund, where they're pretty much guaranteed an easy 10% return, they can put as much or as little in as they want at any time. And they can pull that capital out. So there's no minimum no maximum. No, you know, one year hold two year hold. So it's a very flexible fund for us.
7:06
Okay, so now that you know that who should you actually lend to, and what loan specifics make the most sense, ideally, you'll find experienced investors with a solid track record of fixing and flipping or rehabbing properties in your area work with those you know, like and trust target loans on one to four unit residential properties, bread and butter type deals that are in decent condition that only require minor to moderate renovations that will help force appreciation on the property. Again, if you're comfortable, and you have the capital, you could start with smaller commercial properties to I would avoid major construction projects, whether it's residential or commercial, because that could get messy, especially with how long those projects are taking today, you could structure interest only payments. If you wanted to help keep your borrowers monthly payments lower, that's completely up to you most hard money lenders will charge what are called points on the front end, generally around two to three points. That's a fee for putting the loan together. So for example, if you were lending $100,000 and charging three points, the borrower would pay you $3,000 for putting the loan together, then you'd collect 10 to 15% interest. Depending on the interest rate that you want to charge, you'll definitely want to include penalties for late payments. And if there's a construction piece to the deal, you'll want to schedule that as a drawdown, meaning they submit the completed construction costs to you each month and you send them the money instead of giving them 100% of the loan upfront. You'll want to get title insurance to protect your lien position on the property and mandate property and hazard insurance to cover any damage risks that could occur. Just always think through how you could possibly limit your downside when you're lending on real estate. Now, I'm not an attorney, I'm not your attorney. So hire an attorney to construct your loan documents and your agreements and is a non negotiable if you're going to take this path get all terms in writing before releasing any funds. I don't care if it's your brother, your mom, your grandma get a contract in place. So now for the biggest question, how much cash do you need to start lending on deals, the barrier to entry is actually lower than you may think. Hard money lending can work with as little as 50,000 to $100,000. To start, you can always add more capital later as your confidence and your experience grow. Many successful hard money lenders use IRA funds from a self directed IRA. This keeps your returns growing tax deferred. You can also raise investor capital to do these deals or talk to a hard money winning group like Dan's about placing your capital with them. You don't need millions stashed away you can start small and limit your risk through diversification grow slowly and reinvest those profits to scale up your winning capital over time. It's also important to generate the core documents governing each loan transaction like the loan agreement, which outlines terms like the entry strait the length of the loan payment schedule, Cetera the promissory note which details the loan amount and the required payments, the deed of trust, which secures your ability to take the property if the borrower defaults, might just be the most important one, but they're all important, and the personal guarantee, which holds the borrower personally responsible. Even if their borrowing entity goes south files for bankruptcy, they are still personally responsible for repaying that loan. An experienced real estate attorney can provide templated versions of documents tailored to hard money lending in your specific state, because it does vary on a state by state basis. Now once you've got all of this setup, how do you find real estate investors that are seeking capital for flips and rehabs? Here are some of the best ways that I've found. Let me know in the comments below what your favorite methods are. Attend local real estate networking events and let people know that you provide financing, check online listing sites for distressed properties or fixer uppers that are coming soon. Or maybe they're already on the market. Dig into the LLC ownership and reach out to them directly search the county records for recently sold distressed homes purchased by investors, reach out to rehab contractors that work with these investors and just partner with them or visit foreclosure auctions, there will be a decent amount of investors bidding there. You can also advertise on Craigslist, Facebook or LinkedIn. But I don't really know how well that would work today is hard money gonna be in high demand in 2024?
11:26
I think so. And it's mostly because the rates are not that far off now from the conventional lending world. So if you can get a hard money loan in four days from Long Horn investments, and it takes 40 days to get a conventional loan, and it's only a few more percent, like you're gonna do that deal with hard money right to get the deal potentially zero down with us. I mean, it's sort of a no brainer, there's not that massive gap anymore that there used to be, you don't
11:49
want to do the work yourself connect with an established hard money group like dance that has a proven track record, they can explain options that fit your risk tolerance and your required returns. So now you know how to win money and make some solid cash on cash returns in 2024. But you need to know which markets will be the best for real estate this year so you can make the right decisions. And be sure to check out this video here.
This episode of Office Hours covers strategies for commercial real estate investing, brokerage, and career growth as Tyler Cauble takes live questions. He also discusses upcoming projects like a brokerage mastermind and hiring an investor relations lead.