Accredited investors and family offices face unique challenges when it comes to investing their wealth. They require investment options that provide high returns without the high fees typically associated with traditional investments. In recent years, alternative investments such as hard money lending have gained popularity among these investors due to their potential for high returns and low fees. In this blog post, we will provide a detailed overview of the features and benefits of hard money lending, tailored to the specific needs and pain points of accredited investors and family offices.
What is Hard Money Lending?
Hard money lending is a type of alternative investment strategy that involves lending money to borrowers who are looking for alternative financing solutions to avoid lengthy application processes, in-depth credit analysis, or who simply cannot secure funding from traditional lenders such as banks. These borrowers typically have distressed assets with lower property valuations, making them unattractive to traditional lenders who don’t consider after repair value when determining property value. Hard money lending involves providing short-term loans with higher interest rates, typically secured by collateral such as real estate.
Features and Benefits of Hard Money Lending for Accredited Investors and Family Offices
One of the main benefits of hard money lending for accredited investors and family offices is the potential for high returns. According to F Street, an alternative investment firm, their hard money lending fund has historically paid out 10% returns on investments. In addition, hard money lending can provide a steady stream of passive income through monthly interest payments.
Another feature of hard money lending that may appeal to these investors is the ability to invest in private credit and private equity markets. Private credit refers to loans made to private companies or individuals, while private equity refers to ownership stakes in private companies. Both of these markets can provide higher returns than traditional public markets such as stocks and bonds, and they offer the potential for diversification in an investor’s portfolio.
Case Studies of Successful Hard Money Lending Investments
With nearly 85% of funded projects for real estate investors including some form of rehab or repair escrow, the majority of the assets that F Street lends on are distressed or in need of some value-add additions. One recent example was for a property in Wauwatosa, Wisconsin, a suburb just outside of Milwaukee.
The property was a ranch-style home, built-in 1954, with an attached garage, 3 bedrooms, 1 bath, and approx. 1,100 sq ft. of space. The borrower found this investment opportunity listed on MLS as a foreclosure. With a purchase price of $135,000 and repairs estimated at $40,000, the borrower was able to secure funding for $161,500 on an estimated ARV of $300,000. The length of the loan was briefly extended beyond the initial 6 month expiration due to some construction delays, but in the end the home sold for $334,000.
F Street’s fund facilitates hundreds of loans like this at any given time, providing investors with an opportunity to benefit from the entire value of the lending services vs. just one individual loan or project, which helps to reduce risk and ensure a more general exposure to the overall success of the fund.
Tokenization and Hard Money Lending
Tokenization refers to the process of converting assets such as real estate or art into digital tokens on a blockchain network. This process can help to increase liquidity and make alternative investments such as hard money lending more accessible to a wider range of investors, including accredited investors and family offices. Platforms such as Securitize are working on creating blockchain-based infrastructure that can support tokenization of various asset classes, including hard money lending investments.
The Future of Hard Money Lending for Accredited Investors and Family Offices
As the demand for alternative asset investments increases and as the utilization of blockchain technologies further enhance the ownership and liquidity of private funds, accredited investors and family offices will have opportunities to find more attractive returns that can outpace more traditional investments.