What does hard money lender mean? At its most basic definition, a hard money lender is an investor who uses private capital to underwrite loans that are secured by real estate rather than credit. These loans have higher interest rates and origination fees than bank loans, but these are countered by the speed and flexibility of the lenders as they will often loan on properties that banks turn down.

How are hard money loans funded? Typically, these loans are funded either by individuals or by funds with multiple investors pooling their money together. Individuals are referred to as trust deed investors, while the funds are usually referred to as private mortgage funds. Both types of investors generally choose this form of investment because it allows them to invest in commercial real estate and generate a higher return than savings without having to manage or rehabilitate the properties themselves. While a fund will have a manager to oversee its portfolio of loans, trust deed investors are much more hands-on than investors who choose private mortgage funds as they must oversee the sourcing, selecting, and originating of their loans directly. Montegra administers a private mortgage fund. For more information on our fund and private mortgage funds in general, check out our recent blog series.

Do companies fund hard money loans? In addition to individual trust deed investors and private mortgage funds, there are also companies that provide hard money loans. Some of these companies specialize in either commercial or residential properties, but others will lend on either. Major commercial banks will often have a bridge loan program (bridge loans are a type of hard money loan) that is targeted at a particular range of loan amounts, depending on the size of the bank. While larger banks will focus on loans of $20 million or more, many smaller banks and privately operated funds will only lend on projects in the $10 million to $20 million range. There are also often regional lenders and developers who are only willing to loan on smaller amounts, typically $5 million or less.

How do hard money lenders make money? Hard money lenders make money based on the interest that is paid by the borrower. Thus, they must charge enough in interest and origination fees in order to give investors the return on investment (ROI) they are seeking while retaining enough to cover their overhead costs and earn the desired profit margin. It is important to distinguish between hard money lenders and brokers at this point. While lenders take on a risk because their ROI will suffer if a default occurs, brokers do not have this risk as they are paid upfront and are not direct participants in the loans that they broker. While brokers can help you find a reputable hard money lender, it is not necessary to go through a broker in order to secure a hard money loan.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.