This guide highlights key factors and criteria for investing in high-quality hard money loans to help borrowers select the right lenders.
Hard money loans are short-term financing provided by private lenders to borrowers — typically real estate investors — who want to purchase an investment property.
Investing in hard money loans has become increasingly popular because (1) they offer annual returns between 10% to 14%, (2) they are backed by physical real estate, making them safer than other investments, and (3) the loan term is only 6 to 18 months, reducing interest rate risk.
While there are various ways to invest in hard money loans, fractional investing with a lender is often the best choice. Unlike buying entire loans, fractional investing requires less capital (you can start with $1,000), and you don't have to underwrite and service the loan yourself.
That said, not all lenders are the same. Based on our experience originating and investing in hard money loans, we've identified three key factors to consider when choosing a lender:
This guide helps borrowers choose the right hard money lenders by reviewing three key factors. Along the way, we’ll show how Constitution Lending meets each of these criteria. At the end, we explain how you can invest in our hard money loans with as little as $1,000, capitalizing on higher interest rates between 10% and 14%.
Since 2018, Constitution Lending has originated over $200 million in hard money loans. By focusing exclusively on originating high-quality loans (i.e., high credit score, low LTV loans), our investors have never experienced a principal loss. Get started by creating an investor account.
Here are the 3 key factors to consider before investing in hard money loans:
The Loan-to-Value (LTV) ratio, calculated by dividing the loan amount by the property's value, is a key indicator of loan safety. For example, if a property is worth $1 million and the loan is $700K, the LTV is 70%.
We recommend investing in loans with an LTV of 70% or lower, meaning the borrower has made at least a 30% down payment.
A low LTV protects investors from market downturns and property value losses. With a 70% LTV, the property can lose up to 30% of its value during the 6 to 18-month loan period, and investors will still avoid principal loss, as they can sell the property for 70% of its original price (the loan amount).
A 30% drop in real estate prices is rare, especially in the short term of a hard money loan. Such drops are considered worst-case scenarios, with most fluctuations being less extreme.
At Constitution Lending, all our hard money loans have an LTV below 70%.
Many investors worry about what happens if the borrower defaults. Will payments stop until the borrower resumes, or does the lender cover the payments?
The best private money lenders offer a payment guarantee, ensuring investors continue receiving monthly interest payments (covered by the lender) until the property is foreclosed and sold.
At Constitution Lending, we provide this payment guarantee. If a borrower defaults, we’ll pay up to six months of payments while foreclosing, selling the property, and returning your original investment, plus 10% to 14% return. This guarantees predictable cashflow throughout the loan term.
Read more: How to Buy Mortgage Notes with as Little as $1,000
The third factor to consider is whether the lender owns most of the private money loan or is merely a broker connecting investors with loan sellers.
This distinction is crucial as it reflects the loan’s quality. Many hard money platforms act as brokers, listing loans they haven’t invested in themselves. With no incentive to ensure quality, these platforms often feature low-quality loans, allowing anyone to list them.
At Constitution Lending, we originate all loans on our platform using our own capital and always hold a majority stake. This aligns our financial success with yours, as we are invested in the same loans.
A lien position determines the order in which investors are paid during a property foreclosure. First lien note holders are paid first. Only after all first lien note holders have recovered their real estate investment do investors in the second loan (refinancing, home equity line of credit, etc.) receive payment.
We recommend investing only in hard money loans where you hold the first lien position. This ensures you’re always paid first. At Constitution Lending, all our investors are first lien note holders, guaranteeing priority payment in the event of a borrower default.
Finally, consider the interest rate on the hard money loan, as it determines your return. Hard money loans typically offer high interest rates, providing investors with yields of 10% to 14%.
You can invest in hard money loans with Constitution Lending in under five minutes.
Here’s how it works:
While we believe investing fractionally with a hard money lender is the best and most practical option for most investors due to the benefits discussed above, there are alternative ways of investing in hard money loans:
If an investor has hundreds of thousands of dollars to invest and the expertise in origination, underwriting, and servicing loans, buying entire loans is an option.
Banks, traditional lenders, hedge funds, and other financial institutions often sell loans they originate or acquire to accredited investors. This could include bridge loans, fix and flip loans, DSCR loans, or even traditional mortgage loans.
Alternatively, investors without connections at these financial institutions can use online exchanges to buy short-term loans directly from sellers.
That said, investors face three challenges with this approach:
Fractional investing overcomes these challenges by allowing you to start with as little as $1,000, offering protection against missed payments, and enabling you to diversify your portfolio by investing smaller amounts in multiple loans.
Another option is to participate in portfolio sales, where financial institutions bundle several hard money loans into a single pool and sell it to private investors. This allows for diversification across multiple loans.
However, the problem with portfolio purchases is that they are very capital intensive, even more than purchasing entire loans. Portfolio sales usually start at $2 million, requiring private investors to have significant capital to employ this strategy.
Fractional investing offers the same benefits of portfolio purchases — diversification — without the need for $2 million.
Real estate crowdsourcing platforms can be an option for investors who may not have a lot of capital and want to invest in hard money loans.
These crowdsourcing platforms collect smaller amounts of money from multiple investors until a project is fully funded and work can begin on the investment property. They then update investors on the project’s progress, pay them every month, and return them with their principal and returns at the end of the loan term.
However, keep in mind these crowdfunding platforms don’t have a payment guarantee feature. If borrowers miss their monthly payment, you won’t receive cash flow. You must wait until the borrower starts paying or the lender forecloses on the property.
With Constitution Lending, you don’t have to worry about missed payments because our payment guarantee feature means we pay you out of pocket regardless.
Accredited investors can use online peer-to-peer lending platforms to find borrowers needing funding for fix and flip or even traditional loans.
These platforms act as intermediaries, connecting borrowers and lenders. As a lender, you’ll receive details like the purpose of the loan, the LTV, and the borrower’s creditworthiness, allowing you to choose the project to invest in.
However, there are two drawbacks with peer-to-peer lending platforms:
At Constitution Lending, we have a majority stake in all loans on our platform (we don’t just connect borrowers and lenders), meaning we are invested alongside you.
To get started investing in hard money loans, create an investor account. Expected returns range from 10% to 14%, and you can get started with as little as $1,000.
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| Qualification | Requirement |
|---|---|
| Minimum and maximum loan amount | $150,000 to $3,000,000 |
| Type of property | Non-owner occupied single-family, multi-family, and 5-8 unit properties |