Fitting Hard Money Lending Into Your Passive Investing Portfolio
Hard money lending is an investment in a debt position as opposed to an equity position. The returns are projected to be lower than an equity investment, but are generally accepted to be safer and more predictable.
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Some of the benefits of hard money lending are:
Typically short turnaround times: Most hard money loans are short term loans, between 6 - 24 months, meaning you get your investment back quickly and can redeploy your cash into other investments.
More predictability in returns: Investments as a debt position give you a fixed return as an annual % return per year as opposed to equity investments which can range in projected returns.
Safer position than equity investments: Returns of hard money loans are secured by the asset and possibly even personally guaranteed. Meaning the returns of a hard money loan will be paid regardless of the performance of the property.
Generally high cash flow: Depending on the position of the rest of your portfolio, hard money loans or funds can be a higher cash flow investment than other REI options.
Funds make the investments more available: Investors no longer need to commit larger sums of cash to fund entire projects, funds make it possible to invest with significantly lower entry amounts.
Considerations when investing in hard money loans or funds:
Tax considerations: Since the investment is in a debt position and not an equity position, you lose some of the tax benefits of investing in real property.
Lower projected returns than equity positions: Because there is less risk in a debt position, returns are projected to be lower if a property performs as expected or overperforms.
Private money lending and funds are a great way to diversify your real estate portfolio. With proper due diligence and strong operating partners, taking priority positions in debt can give strong and consistent cash flow returns with fast turnaround times to return initial investments.