In real estate, hard money lenders offer short-term loans that are backed by the title to a property. What makes the money “hard” is the fact that it is tied to a hard asset that guarantees its value. For making money available as bridge loans to complete a real estate project, a hard money lender gets both protection against the possibility of failure and also a favorable interest rate. Today hard money lenders are working online. One of the ways they now use the digital world is to grow their hedge funds. A hard money lender will open a 506 Regulation D fund specifically to raise capital for his or her real estate lending deals. (I’ll show you one of these funds in the last section) Then to facilitate fund raising use webinars, regular blog postings and a continual back-and-forth communication with an email list generated from those webinars.
The significance of these hard money funds is they bring together technology and finance to answer market-driven financial problems. In the United States and Canada where the term “hard money” is used – as it is not used most other places – took its new look in the late 1950s, when the financial industry’s approach to credit was substantially reworked. Banking became less available for these types of short-term loans.
But hard money in real estate is only one of many new ways that credit is being structured. The internet and computers are now allowing credit arrangements to be far more easily transacted and consumer debt is at the center of the new credit markets simply because consumer debt offers such huge financial opportunities. As banks focus on consumer debt they run through up and down cycles of tight money and easy money. Other markets aren’t served well during the tight money phase of the consumer debt banking cycle and devise their own lending methods. Thus, we get the most recent expansion of hard money and hedge funds after 2008. The funds provide a great new alternative investment opportunity for investors seeking asset backed investments that offer a higher return than most traditional investments.
A Hard Money History
In the 1800s, America searched for a currency and banking system that would retain value in the money and offer opportunity to the masses. After 1820, the money and banking system produced a long political struggle. Hard money emerged as part of that struggle. At that time the term “hard money” meant specie or metallic money. Banks could issue paper money, which lost value when too many bills were printed. For the first half of the 1800s there was no treasury, so there was no way for the government to control the amount of paper money that banks printed. At times, paper money was almost worthless, and as a result some people demanded coins be used for all transactions of twenty dollars or less. That was the beginning of hard money.
All through the nineteenth century the struggle between those who supported banking and those who supported hard money continued. Banks were needed to offer credit in a country that was expanding rapidly and hard money was a political alternative option that became most viable when credit got out of hand. Today’s hard money offers a similar alternative. Even today, banks continue to offer credit and sometimes it gets out of control and crashes the economy. When this happens, as it did in 2008, hard money becomes a viable alternative way of financing real estate projects. Today most of the political baggage is no longer attached to hard money; it just grinds along in real estate markets all over the United States and Canada.
One hard money lender on the west coast has developed a series of funds that specialize in real estate investment. Matt Burk, the CEO of Fairway America, is soon launching his seventh hedge fund. Matt comes from a finance background and has launched and wound down five hard money funds over the last seventeen years, but is now launching a fund of funds. For accredited investors, this fund offers a unique opportunity to pursue high returns while distributing the investment’s risk over a selection of different real estate funds each with its own unique market niche. Some are hard money funds, some are distressed mortgage note funds and some are rehab funds. As it is currently difficult to find profits in real estate markets due to a lack of inventory, this fund offers an alternative real estate strategy. The fund is managed to find the hot spots in real estate and real estate finance. You can learn more about Matt’s company and fund at the Fairway America website. Sign up for his blog or one of his webinars; you’ll learn a lot.