Hard money is a form of lending considered an alternative to traditional bank financing. And because hard money lenders are not banks, they are subject to an entirely different set of regulations. That begs the following question: what does it take to actually become a hard money lender?
The answer lies in state law. Banking and finances are regulated at the state level. So consider Actium Partners based in Salt Lake City, Utah. As a licensed Utah hard money lender, they had to meet Utah requirements to start operating. The firm eventually expanded into Idaho and Colorado as well. To do so, they had to meet the requirements of both states.
Actium explains that most hard money firms are structured as licensed companies. The company manages a fund consisting of financial resources from multiple investors. The fund is used principally to make hard money in bridge loans. Actium says that the majority of those loans fund real estate acquisitions.
1. You Need Money
Before an individual or company can be licensed as a hard money lender, proof of financial resources is required. States vary in this regard, but a typical requirement is a minimum of $250k in total assets with $100k in cash equity.
Given that hard money loans themselves can be valued in the hundreds of thousands of dollars, coming in with just $250k wouldn’t get a hard money lender very far. But a new lender could always start with smaller loan amounts until assets and cash reserves grow.
The money requirement makes clear why so many hard money lenders are organized as companies managing funds consisting of resources from multiple investors. Get a dozen investors to contribute that minimum $250k and you suddenly have millions of dollars to work with.
2. You Need Experience
Most hard money loans are utilized for real estate transactions. Therefore, it’s not unusual for state requirements to include a minimal amount of experience in the real estate market. Lenders are expected to know what they are getting into. They are also expected to understand how real estate transactions work.
For me, I would want a lender with plenty of real estate experience even if state law did not require it. Experience goes a long way toward protecting both lender and borrower. Why would I not want to avail myself of it by way of my lender?
3. You Need a Willingness to Take Risks
Finally, though not required by law, hard money lenders must be willing to take risks. The very reason so many real estate investors look to hard money lenders is the fact that their transactions are risky from a financial services standpoint. They are risky enough that traditional lenders will not touch them.
Fortunately, state regulations are such that hard money lenders can manage their risks through their lending practices. They do so by charging higher interest rates and insisting on shorter terms. They also base approval decisions on real estate assets.
A Word to Borrowers
A word to borrowers is in order before closing this post: hard money lenders need to be vetted just like traditional lenders. Most hard money lenders are reputable firms that follow the rules and do right by their customers. But there are bad actors in every industry. If you are planning to borrow via hard money, do your homework.
A licensed firm has sufficient assets and capital. Fund managers have experience in real estate. And because licensed firms have demonstrated a willingness to take risks, they could make the perfect partners for pursuing your financial goals in the real estate market.
