Be Liquid, Be looking, Be Open

How we pivoted to Hard Money Lending.

When we become comfortable with having substantial liquidity on hand throughout life we can live with more certainty on a day to day basis. Also, for those looking to capitalize on bigger endeavors, I know first hand that being liquid can be as big as life changing. At the end of the day, money allows us to make decisions quickly-you can swap out a broken air conditioning unit in our home keeping your family comfortable, start a new business, and everything in between.

Below I am going to share how having liquidity allowed us to create a new business that was profitable in the first month while being mostly passive. The returns this business generates are what I once would have thought to be out of this world.   

At the end of 2022 a real estate flipper I follow on Facebook had made a post that he was looking for some capital for a flip he was wanting to do. He was experienced in flipping with over 20 years of experience. Having successfully flipped over a dozen single family homes myself I know first hand that having ample access to OPM-other people’s money-is constantly on one’s mind. It’s not difficult as a flipper to have all your money deployed (but no, we never deployed all our capital into our flips!) in your deals with other deals in need of capital. At the time of seeing this post our reserves were ample, more so than usual. We had just sold off a few of our rental properties and hadn’t redeployed into more rentals. 

I reached out to this individual and, long story short, I felt good about the deal itself and I 100% trusted him (the operator). Within a couple of weeks I was wiring money to a law office in South Carolina. What came after was very interesting and in those first couple of months I had a “light bulb” moment. It turns out that Hard Money Lending (HML) can be very lucrative. I will go as far to say that HML can be more lucrative than investing in real estate itself. I still hold the opinion that long term, real estate might be the most powerful asset class for building wealth but I also have experienced that the old adage “tenants, termites, and toilets” holds true. Real estate can be a pain for a long time before it’s not. More on this perhaps in another article.

“Hard Money” What is it?

Real estate flippers don’t work with banks, at least not in the traditional sense. When a house is flipped it’s generally a short term project. Where you and I might go to a bank for 30-year loans for our primary residences, this loan product doesn’t work for flipping a house. Commercial lenders can come into play here but certainly this is where normal everyday people like you and me have a huge advantage. We’re smaller than big commercial banks and can be more nimble. Hard money lenders lend out their capital for a short periods of time, say, 6-12 month periods. The returns are great. Where a 30-year loan at the time of writing is 6-8%, hard money loans are 12-15% annually. Most lenders also charge points which we do, further increasing your overall rate of return.    

Within 5 months my capital was returned to me. I made just $16k on that first deal and contrary to flipping a piece of real estate I had sent less than 20 emails with just a few phone calls while my capital was out “on the street”. Up until that moment I always had to work much harder to earn anything close to what I earned here. I knew I had to lean in on this business model to see what was possible. 

I can share more of the “how to’s” on building a lending business at another time but today our hard money lending business is flourishing and it came down to just a couple of components that I will share below. 

1.Cash on hand

Katie and I thrive when we have cash on hand. We’re better spouses, parents and business owners when we have dry powder. We learned along the way that investing every dollar on hand is guaranteed to create stress. I recommend finding what amount of money kept on hand is right for you and then don’t go below that (save for, say, an emergency which is the very purpose of this amount of capital). I dive into this more in a video around a concept that I refer to as The Stack. Anything above Level 1 and 2 (referenced in video) is your Opportunity Fund. We were able to capitalize on that first deal back in 2022 and create our first loan quickly only because we were liquid.

2. Network

Know people. You’ve heard the saying “your net worth is your network” and it’s true. I had never met this person in person who was looking for capital on that first deal. We know some of the same people and we had a few conversations on the phone about real estate over an 8-year period before we finally worked together. It’s not hard to have a rolodex of good people. Building a network comes down to two things: Meet interesting people who do what you do. Then, stay in touch with them. It’s that simple. Checking in on people and building relationships is not rocket science and it doesn’t deserve it’s own blog article. Just do it.   

3. Action

Learn how to analyze risk with whatever you’re looking to do and then take ample amounts of action. If you’re interested in lending your own capital and if you’re already in the real estate investing space it shouldn’t be all too difficult to find someone you know, like, and trust who is looking for capital for an upcoming project. 

4. Get Specific 

Get specific on your business model. It’s important to go a mile deep and an inch wide if you want to be a huge success. Once successful then and only then should you consider branching out. Case in point: After lending for 18+ months my business model is still simple: I lend on residential real estate with loans less than $250k, not exceeding 70% of ARV-after repair value. I don’t deviate. A mile deep. 

You never know what kind of opportunity will cross your desk in the future. I have had a few solid instances in life where if we didn’t take very swift action on opportunities we wouldn’t be where we are today. Be Liquid, Be Looking, Be Open. Who knows, you might just find something that creates a return that is literally out of this world.

-Mike

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