How To Do Hard Money Lending From Scratch in 2026

So what hard money lending is, is you've got a person down here, a distressed, you know, maybe it's a house flipper, someone distressed for whatever reason. They need money. Okay? Actually, we don't even care what they need the money for most of the time. We have money up here, big money. This is us. And we say, great, we will give you this money and we will take a lot of times an asset, usually a house as collateral. And so, hey, yeah, I'll give you $100,000. Today. But if you don't pay me back, I get your house, which is $500,000. Pretty good bet. This is it. Okay, now we can get to the— let's get to the nuances here. I've ran a private credit fund. My dad, other mentors have ran huge hard money lending funds. I'm talking $70, $80, $100 million hard money lending funds. We're going to talk about the Fund Launch Formula in a minute, how I would actually go launch one of these. But really, in a simplified sense, it's just collateralized loans. You are buying The asset essentially for $100,000. Now a few nuances to make sure you're aware. Number one, make sure if they don't pay you back, you could actually get the house. People that are getting hard money loans are sometimes some shady people. Okay? So if this guy just disappears, literally flew to Cuba, you could never hear this person again. Could you collect on the house? A lot of times that means you want a first position lien. So let's talk this again in terms of capital stack. What is a capital stack? Capital stack, very important to a hard money lender. There's different positions on a— let's take a house, for example. So there's first position, second position, third, fourth, you can get all the way down. Typically speaking, a first position would be the mortgage, right? Now, something people don't know about sometimes about real estate, if someone had a mortgage and then you put a second position on this house, okay? So I gave this guy $100,000 at a second position loan. What happens in a capital stack is the first position gets fully paid out first. It's not shared equally. If there's like a third and a fourth, everyone doesn't take a little piece in foreclosure. The first position takes the entire amount until they're made whole. Then and only then it goes to second position, and then the entire second position gets made whole. And then and only then it goes to third position. So you can see why sitting in a fourth or third or even a second position can sometimes be risky. You're going to get people that like, just back to this example, okay, hey, I've got a $500,000 house. I'm looking for a $100,000 loan. Great. Oh, and by the way, I have a $300,000 mortgage on the house. Okay. So again, I'm going to go back to my capital stack. All right. So there is a $300,000 mortgage. I'm going to give him $100,000. Theoretically, if the house really is worth $500,000, there is $100,000 more of meat on the bone that we could collect on potentially. But if this person over here— I already erased them here— if this person disappears, okay, we've now got to go into foreclosure. And the first position person writes the rules. The mortgage company Writes the rules. They don't care about a second position. A mortgage company might grab this house. They believe it's worth $500,000. You know what? Let's just get it off our books. Let's just sell it for— let's just list it for $350,000. It makes us whole. We're going to fire sell it. It's distressed. And you go, wait, hold on. Wait, wait, wait. I got $100,000 second on this. I got to make my money. They go, ah, we're good. We don't care about you. They fire sell the house for $350,000. It sells, they get their $300,000, and then you would get the remaining $50,000. Again, we're just doing simple math here. Sometimes there's fees and other things there, but you'd get the remaining $50,000. So you would have lost $100,000 on that deal even though it was overcollateralized. You had enough meat on the bone. That being said, a lot— I know a few guys that run large second and third position funds. What they do in that scenario So there's a foreclosure. They actually already have preplanned. They're going to buy out the first position. They'll buy out the capital stack. So if this person went to Cuba, disappeared, they would already have capital available and say, hey, mortgage, we're going to pay off the mortgage. We'll pay you out. We're now— well, we're going to pay off $300,000. So now $300,000 plus $100,000, we're $400,000 into the deal. That's our risk. But we still believe the house is worth $500,000. We're going to list it for, you know, $500,000. We'll see if it sells. Maybe it sells at $490,000. Great. The house sells at $490,000. Well, okay, we made a $90,000 return on this property that went bad, that went south. Hard money lending is all about covering your bases. Is this kind of making sense? Now I share that story and you're like, well, that won't happen to me. It happens all the time. Okay, we could probably pass the mic around the room here. People in the chat, you guys can share. I'm sure there are crazy stories in hard money lending. I'll share one from one of my mentors. He goes to title company, gets it on title. It was lots. These lots were in a, you know, there was like 3 or 4 lots they had a first position on. Well, the guy leaves, takes their money, and they go to foreclose on the lots. Well, these were a brand new development, kind of off the side lots. The title company And them had messed up. The lots are like this, you know, it was like in a cul-de-sac. There's like 3 lots. What they had positions on, this guy, he owned— there was like a cliff off this side or whatever. He owned this little strip of land right here on the backside of the cliff. They thought they had collateral on the whole thing. But in reality, they just had collateral on this little black area. And they couldn't. They went to court. They tried to sue. It was just a big mess. They were like, no, no, we were supposed to have all 3 of these lots in this cul-de-sac. And they said, no, no, no. If you look at the whatever here and the title, they went back to title, title. There was just this big mess. Okay. It took months. And that's time that your money is not working for you. You don't want to be drawn to this. So you want to make sure the actual collateral is there. It's real. It can't drive away. It's not an RV. It's not a boat that could be put on a trailer and taken away. Okay. Or if it is, it's parked in your garage. You've got to I think through what's every single way that someone could screw me in this deal. People do this all the time. I'll share one more quick story of a mentor of mine. There was a title company they were using. There was a large transaction. Their fund was wiring in $15 million. The title company was supposed to verify that the property, you know, was there. And they were going to do this transaction, right? Well, the money got wired in. Title was acting as the escrow. They show up. The title company had closed their doors. Gone. Couldn't be found. They knock on the door, they call, they're closed. They go try to find the people. All the owners' social media accounts, everything's deleted. The owners took the $15 million and took off to like South America. Like, this could be on American Greed. This happens a lot in the space of hard money lending. So again, use a good title company. These guys apparently said, well, $15 million is worth it for our retirement. Let's just take the money and take off. Now guess what happened? A year later, they were found. They were caught. They got prosecuted, went to jail. But like, it took a year. You can go to court and stuff, but you don't want to. Your money now is not working for you for a year. All right. You guys following along? Okay. Hard money lending here. Now, oftentimes on these deals, you come down, typical deal is going to have something like this. They're going to have what people call points and then some kind of, you know, percentage or yield or something. on the loan. So, for example, if I was going to give somebody a $100,000 hard money loan, I'm going to make sure the collateral is really solid, that if they left to Cuba, I could collect on the collateral. Great. We got that. Well, for that, I'm going to charge you 2 points to originate the loan. What that means is 2 percentage points or $2,000 will be charged. Great. And then I'm going to charge, you know, rates change. Right now, rates are relatively high. You know, 15% on the money for the time that it's gone. Now there's different— you got to be meticulous about your contracts here. Some people do this on an APY, annual percentage yield. Like, so if you had the money for 1 year, it would be 15%. Some people just do it as, you know, 15 points essentially when you pay it back. And maybe it's a 3-month loan. And you owe me 2 points upfront and 15 points at the end of the 3 months. You following along there? It's not over the year because that would be 15 divided by 4. That's what you pay there. Now this is 15% like back. So you'd pay essentially $15,000 plus the $2,000. So you owe me $117,000 in a 3-month time period. I would just be very just clear with what these are. You don't want to surprise anybody. You want them to be very, very clear on this. Okay. And at 3 months, And one day you are now in default. And what happens in default? And you have that very explained in your documents. Well, in default, you've now triggered a penalty and you can extend and— or there's a penalty or you can do a plus one extension. But if you want to extend one more month, you got to pay us another whatever, $5,000 or whatever it is. Okay. For a one-month extension. After a month extension, we then move to foreclosure and then, you know, we are going to take the asset that we were lending on. There's a reason people call it hard money lending. You know, people like to call it private capital, private money lending. People call it hard though, because sometimes it's hard money. Usually it's the most expensive money. So Bridger, why would someone do this loan? Like what? Like why would someone do this? Well, they need the money. Okay. And actually hard money lending serves a great purpose in real estate. A lot of house flippers can't get loans or other, they can't get money from anywhere else. So they have to go to a hard money lender that's going to give them, maybe these aren't favorable terms, but you know what? I'll take it because yeah, I'll pay back $117,000, but I can flip this house. I'm going to make $150,000. So yeah, I'll pay $117,000. I'll take the spread. This serves a very good purpose in the landscape of real estate. One other thing I want to touch on, why, Bridger, would someone do this loan? This seems expensive. No one's going to take that loan. Well, you know, Joe, Is going to call you on a Friday night and say, Bridger, I'm in a bind. I've got this big project we're working on. We got, you know, we're just short a little bit of cash. I'm looking for, you know, $1.7 million. I got to fund payroll by Tuesday. And it's a Friday night. I got to fund by Tuesday. Bridger, can you, can you do a deal for me? And I say, well, yeah, we can do a deal, but it's, you know, We want 2 points and 15%. And, you know, you're going to pay us back, you know, at the end, $2.3 million. Oh, that's so expensive. That's so much. Well, okay. You don't have to do the deal. It's up to you. I'm not the one calling me on a late Friday night asking for $1.7 million because you did whatever it was in your life that put you into a bind where you need $1.7 million by Tuesday to move capital that fast. I've been waiting. I've had to wait for 2 months with capital in my bank account doing nothing, just sitting there waiting for someone like you to ring my phone and call me. And because I've had to wait for 2 or 3 months, that's why I'm charging 2 points and 15%, because I've had to wait for that, for you to be in a bind and for me to scramble all weekend. I work. I got to call lawyers. I got to pay them extra. I got to pay people overtime. I got to work all weekend. I got to not spend time with my family. To get you $1.7 million by Tuesday afternoon so you can make your whatever project work. So yeah, I'm going to charge you, you know, this amount. I'm just throwing numbers up. I don't know if those numbers match up, but that's what I'm going to do. Take it or leave it. That's kind of the game. A lot of times that's where— that's one way you could get alpha and/or in the game because you get a good return if you do scramble, if you can move quickly. That's why people call hard money lenders or private money lenders because they can move fast. They are paying for speed. If they had, yeah, if they had 90 days, yeah, go to a bank, go to a credit union, go to somebody else. But you don't have 90 days. You've got, you know, over a weekend, you know, 3 days. So what do you want to do? And this is why hard money lending funds can do extremely well. Furthermore, this is a great fund to launch on your first or second fund because it gives you so much experience looking at deals. When you tell people you have money, everybody sends you deals. Number 2, it helps you get quick track record. These deals, a lot of times it's 3 months, it's 6 months, it's 10 months. And so you can build a track record. You can pay back investors. My first one I did out of college, I was, I was doing not quite hard money lending. I was doing private credit and we were doing small short-term loans. We were paying back our investors all these monthly or quarterly dividends and they loved it because the turnaround was so quickly. It built Bridger a great track record as a fund manager. Now, if I was going to start this from scratch today, I would follow the Fund Launch Formula. I'll run you through this very quickly. I would start right over here with the deal strategy section. Okay, so you start with obviously we just talked through the deal and strategy, how a hard money fund would look. Then I would run through the frame and structure, meaning, you know, I'm going to raise money from investors. I'm going to raise $5 or $7 million. I'm going to pull that money together. How is that going to be structured? How am I going to pay my investors? I'd run through that. We have other videos on our channel about this. And then I would go see if, you know, I'm going to go try to get verbal commitments. Do people actually want loans like this? What's market rate? I'd start and you do this in a circle to try to line up some deals and capital. Hey, we've got a few deals over here. A lot of times hard money loan deals are quick. And so you're probably going to miss a few because you're not quite ready, but you're going to line up some deals. You're going to make sure you're going to vet them, underwrite them, practice this process. You're going to frame, hey, investor, if you give me money, we're going to split the returns 60/40 or 50/50 or 80/20. We're going to walk through that split. And I'm going to start queuing up investors. Hey, if you know, if you get a phone call from me, answer because I might have a deal ready to go in 48 hours. So I'm going to start lining up deals, whether this is for a single asset fund or a full-out fund. This will help me validate that my idea is good. There also, there might be a chance where maybe there's a ton of hard money lenders in your area, right? Or they're so saturated that this isn't a good idea. Or maybe you say, hey, we're only going to do second position loans. We're only going to do mobile home parks. We're only going to do a certain asset class. And that might give you Validation here. After I've reached validation, then and only then you go hire the lawyer, form the docs and stuff. Because if you don't reach validation, there's no point in wasting your money on legal docs, right? The contracts between you and the borrower are going to be very important. The contracts between you and the investors in your LP and PPM agreement. We teach all that in this channel and in this show as well. And then you're going to launch and you're going to raise money together. You're going to be doing asset management and firm management as you go forward in the future. Okay. You're going to keep building this. I would follow this formula to a T on going through this because this helps you figure out, is this a good idea or not? Should I go out and launch a hard money lending fund? Hopefully that was helpful on hard money lending and we'll see you in the next one. Bye-bye.