The current situation with inflation, economic uncertainty, and elevated interest rates has proven one thing: It’s essential to have a diverse portfolio that goes beyond the typical stocks and bonds. Conventional wisdom that the performance of stocks and bonds balances out is no longer valid. For serious investors, this means exploring other investment alternatives, such as investing with a hard money lender.
Hard Money Lenders and How to Invest
Hard money lenders are regulated entities that provide equity-backed loans to borrowers. Although they are subject to some regulation—which is a good thing for both borrowers and investors—they have much more freedom than conventional banks. This means they can lend to real estate investors, business owners, and other individuals and companies that might not be able to secure a bank loan. The capital comes from investors who get returns from the interest when the loans are paid back.
Hard Money Investments Compared to Other Alternatives
There are plenty of other ways to diversify your portfolio—and you should be considering all of them—but hard money loans have unique benefits.
Rates of Return
Hard money loans might not produce as high a return as cryptocurrency or venture capital, but you do get the benefit of having security for your investment (the property) plus the benefit of passive income. Hard money loans can vary in risk/reward benefits. The key is finding a lender whose risk/reward profile mirrors your own.
Compared to many other types of investments that might fluctuate wildly with the economy, hard money loans can be fairly stable when underwritten conservatively. Of course, the economy does have an influence, but sometimes it’s favorable. For example, when banks tighten lending practices due to bank failures or higher interest rates, hard money lenders get an influx of borrowers who need cash. As demand for loans increases, hard money lenders can, in turn, raise interest rates and pass that on to you, the investor.
Some investments, such as flipping real estate or collecting artwork, require material participation. You have to know what has value and when it’s the right time to buy and sell—not to mention doing the actual buying and selling. When you invest with a hard money lender, the broker typically handles all the underwriting and determines the proper loan amount and rates to charge.
Some investments are more liquid than others. It’s important to compare all of your assets when building a balanced and resilient portfolio. If you are going to invest in individual hard money loans, be aware of the loan term you are committing to. If you invest in a mortgage pool, make sure you’re aware of the lock-up and redemption rules.
Benefits of Investing in Hard Money
When comparing a hard money investment to other options for balancing your portfolio, consider the benefits:
Hard money investing provides reliable passive income with monthly or quarterly payments based on the interest collected from borrowers.
The broker or fund manager does most of the work of attracting borrowers, underwriting, and collecting payments, so you can generate passive income with minimal effort.
Relatively Low Risk (When Underwritten Conservatively)
No investment is entirely risk-free, but because the loans are backed by equity, investors have recourse to collect if the borrower defaults, which helps protect your investment. If you invest in mortgage pools, ask how much leverage the fund has. The greater the leverage, the greater the risk. Always do your homework and ask questions.
Access to Your Own Cash
When investing through a mortgage pool, you can still access your capital in intermittent time periods and with proper notice. Understand the loan terms of the individual loans you are financing or the liquidity rules if investing through a mortgage pool. In some cases, your capital can be more liquid than other alternative investments!
Invest with Socotra Capital
Socotra Capital has a strong track record of successful hard money lending to generate reliable returns for investors. Our deep experience and expert underwriting have given investors confidence since 2007, enabling us to service more than 1,500 loans. Once you become a verified accredited investor, you get access to our investment guide with all the details.
To learn more about your investing options, including hard money lender investing, download our Guide to Building a Resilient Portfolio.