Today one hears frequently about hard money loans.  This category of loan is sometimes also called bridge loans, asset based loans, private money loans or private capital loans.  By reputation these loans are expensive, but can be useful in situations where banks or institutional lenders will not provide the required commercial real estate loan. A question not often asked is:  where does the money to fund hard money loans come from?

There are a great variety of sources of the capital used to fund hard money loans. The list below describes the most common:

Private Individuals

Private investors seeking alternative investments often use their own personal funds (sometimes including their IRA money) to fund loans in their own area.  These lenders typically fund loans from $50,000 to $500,000 – sometimes larger.  They have to do all the work required to find and evaluate loans. Then, the private investor closes and services the real estate loan.  The yield can be good but the risk of making mistakes can be costly to individuals who are doing this on the sideline. 

Local and Regional Mortgage Investment Funds

These companies lend as their primary business and are able to fund larger loans – frequently up to $5,000,000 or more. There are several types of companies that do this lending – each using a different model.

The Leveraged Lending Company

This type of company has financially sound principals who are able to set up lines of credit with other lenders to leverage their lending capital.  Typically these lenders will fund up to 50% of the amount of the loan using their own capital while the bank puts up the other 50%.  These companies in the recent past were the most common source of funding for hard money loans.  At present however, banks have become more wary of these leveraged types of hard money lending companies and lines of credit are in short supply.  Many of these companies ran into trouble when real estate values dropped radically during the recession of 2008-2010.

[google_authorship], because of his more than 40 years of experience in funding hard money loans, is considered an authority on hard money or bridge financing.  He frequently speaks at meetings and conferences and writes articles on these subjects.