Hard money lending depends on individuals who invest in trust deeds.
In simple terms, investing in trust deeds means lending money using real estate as the collateral. As a trust deed investor, you become the bank.
If you have money in a standard savings account or CD’s, you are likely realizing less than 5% return on your money. In addition, the bank you have that money with pools your money with other people’s money and lends it for a higher rate of return. The difference between what they are paying you and what they are collecting on that money is how the bank makes a profit.
By investing in trust deeds directly, you effectively cut out the middle-man, allowing you to realize a greater rate of return on your money.
When done properly, trust deed investing can be a very save investment. Each deed of trust should be insured by a reputable title company. This insures that your deed of trust is recorded properly, insures against title defects and insures that the owner/borrower actually has valid title to the subject property. In addition, each property secured by a deed of trust should be covered by fire insurance, paid for by the borrower, and in a sufficient amount to cover the loan made.
Since the property is the collateral for a trust deed investment, proper valuation of the property is important. Obtaining a professional, independent appraisal of the property helps to ensure a proper valuation.
In addition, by keeping the loan to value at a conservative number, you are able to be comfortable that your investment is, in fact, secure.
The servicing of trust deeds can be done by the individual investors, or can be done by a third party. Typically the cost for a third party to service a loan is 1% or less.
In addition, there are more aggressive investor programs out there, such as gap financing. Gap financing is typically lending a borrower money short term to bridge the gap between what a hard money lender will lend and what the borrower needs to close a deal.
These days a lot of gap financing is used for rehab or fix and flip transactions. The security is still the property and project, but the risk is greater due to not being in a first position with a deed of trust. In exchange for this more aggressive position, gap funding can offer much larger returns than traditional trust deed investing.