Most great investors have a well balanced and diversified portfolio of investments.
These investments can range from stocks to bonds to real estate to an assortment of alternative investment vehicles.
While stocks and bonds require little to no upkeep, some types of real estate investment can require lots of hands on maintenance.
A great way to diversify away from stocks and bonds, while also not having to apply much effort is to invest in hard money loans.
Hard Money Loans
Hard money loans, otherwise known as private money loans or bridge loans are short-term loans funded by individuals or private lending companies.
These loans are backed by a hard asset, more often than not the asset used as collateral is a piece of property.
HMLs are a great financing option for real estate investors who do not qualify for traditional bank loans due to poor credit, inability to show income for three years or one of the other myriad of factors banks look at when evaluating a borrower.
Usually hard money lenders are willing to loan between 70% to 80% of a property's value depending on where the property is located, the experience of the borrower. and a few other metrics.
For investors looking to fund hard money loans, there are a few interesting options available to them.
Hard Money Lender
Consider reaching out to hard money lenders found on Google.
Tell these lenders you are interested in funding hard money loans.
Generally depending on state, type of property and the experience of the borrower, the investor could be looking at an annual return on investment of 8% to 15%.
Usually the higher the interest rate, the higher level of risk involved associated with the deal.
These lenders often will put you on an email list and when they source a good deal, they will email blast investors to see who might be interested in funding the deal.
Typically, HML term lengths range from 6 to 60 months and are often associated with prepayment penalties for the first 6 months.
Therefore, investors know they will have their cash deployed and working for at least 6 months if not longer.
Peer to Peer Lending
For investors with only a small amount of money, investing in hard money loans is still possible.
Using peer to peer lending sites such as Lending Club, Prosper or Upstart can allow an investor to diversify even a few thousand dollars into a few different HML projects.
Lending Club has funded over $20 billion in projects and loans for $1,000 to $300,000 are possible. The minimum investment option is for $1,000.
Proper only offers unsecured consumer loans and to date has funded over $6 billion in loans.
Loans are graded on an A, B, C, D, E scale to help investors more easily understand the likelihood of defaulting from the borrower. and what the ROI will be.
Upstart was founded by a few ex-Google employees.
They use a unique system to evaluate borrowers using not only the borrower's credit score but all their educational background.
With over 94% of loans being repaid, they have the highest success rate amongst the peer to peer lending company options.
The Bottom Line
Hard money loans allow individuals to passively invest in real estate with low risk while receiving a high ROI.
For those with more money to invest, going directly to a hard money lender to cherry pick your deal is a great option, but for those of you with less capital to work with, peer to peer lending companies offer a fantastic way for investors to diversify out of stocks and bonds.