Bridger Pennington explains how to start a hard-money lending fund. Loans typically run 3-6 months at 9-14% interest plus 1-3 points upfront, with 70% loan-to-value on real estate deals in first position. Quick returns and deal flow build your track record with investors.
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What is the easiest type of fund to start? Now, easiest is subjective because all funds are kind of hard to start. But if I was going to start a fund, what would I do? And for me, the answer is simple: private money loans or hard money. This allows you to get quick wins for your investors. You can make money fast and get deals done and build a track record for yourself. Now, essentially how these work— let's use real estate for example. So let's say there's a property that this person wants to buy and the property is worth $100,000. They only have $30,000 to put down and they can't, for whatever reason, a bank won't give them a line of credit. They can't get money other places. They come to you. Oftentimes you do 70% of the loan. Loan-to-value. So you'll lend 70% or $70,000 of the money, and you take first position on the property. What first position means is that you essentially own the property. If they don't pay you back your 70 grand, you actually assume the property. So essentially, you just bought a $100,000 property for only $70,000. Now, hopefully though, the person pays you back. So you do this, a lot of times they're buying this as a house flipper. They're hoping to flip this house and sell it for $150,000, but you don't really care. They can do whatever they want with the house as long as they pay you back your $70,000. Typically those are short-term, so maybe 3 to 6 months, and they're going to pay you anywhere from 9 to maybe 14% interest and 1 to 3 percentage points upfront on the loan. What this allows you to do is get paid back relatively quick, and you and your investors earn a nice return and allows you to get deal flow and track record.
