Setting Up a Hard Money Lending Business

A hard money lending business is based on real estates. Setting up a hard money lending business and becoming a hard money lender involves several amounts of risks but unlocks up a whole new way of investing in the real estate industry.

last updated Friday, April 18, 2025
#Hard money loan for real estate #Hard Money Legal structure

by John Burson

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Real estate investors like being hard money lenders because of their advantages.

While starting your company, there are several factors that you should consider, including:

Will you use your money or seek investors?
Will you make commercial hard money loans locally, nationally, or internationally?
Will you invest in real estate, startups, or early-stage businesses?
What type of firms will you be lending money to? Real estate development, technology, construction, residential or commercial.

Begin by naming your business and acquiring a corporate address and phone number.

These are essential, regardless of how you structure your business with a permit; the documents require a corporate address. To reserve your company's name, contact the Secretary of State's office on your state's website.

Meet with an attorney to determine the legal structure of your hard money lending business.

A limited liability company will be the most likely structure. You need to choose an attorney who is a business and real estate professional. Discuss with your lawyer the appropriate state of integration, tax matters, certification, and other legal issues related to residential and commercial hard money lending. Ensure that your lawyer sets up your Employer Identification Number (EIN) with the IRS.

Analyze your particular investment emphasis.

You will always want to focus on your knowledge and learn what the markets are doing in your space. Let's say you're investing in an apartment building. You need to know the rents in the area, the business environment, property values, similar properties nearby, and other factors that affect the asset's value and the borrowers' ability to repay.

They are buying business planning software and drafting your business plans.

Also, underwrite the criteria based on the types of commercial hard money loans you will be making. To value measures, minimum and maximum investment amounts, interest rates charged, and the kind of property, you must develop such items as your loans. The business plan acts as your roadmap to keep you on track.

Assemble your financial projections.

It would be best to break even at points, consider monthly expenses, and project monthly. Annual income is based on several factors, including interest charges, legal costs, and other parameters, regardless of whether you are investing your money.

Secure your field name, set up your website, and launch your business.

Ensure your website is done skillfully and add an intake form to the site to pre-qualify projects online.

Complete all the above steps and determine in what states you will seek investors. Your lawyer should be experienced in blue sky law.
You must hire an experienced management team that knows the real estate market and banking sector to increase credibility and raise investment capital more efficiently.
Draft a two-page executive summary and a 20-page investor-attentive PowerPoint.
Improve your risk management and underwriting program.
Begin raising money and search for projects to fund. You will have a great business deal if you have a group of real estate brokers. Projects going through the due diligence pre-funding process while seeking capital give you a portfolio of projects that will attract investors.

You must follow the Security Act of 1992 and other regulations, like Red D, when raising money from investors.

Frequently Asked Questions:

1. What Is a Hard Money Lending Business?

A hard money lending business provides short-term, asset-based loans secured by real estate. Unlike traditional banks, hard money lenders focus on the property's value rather than the borrower’s credit score. These loans are popular among real estate investors for fix-and-flips, renovations, and bridge financing.

2. How Do I Start a Hard Money Lending Business?

Starting a hard money lending business involves:

Securing Capital: Use personal funds, private investors, or crowdfunding.
Legal Setup: Form an LLC or corporation and comply with state lending laws.
Underwriting Criteria: Define loan terms, LTV (Loan-to-Value) ratios, and interest rates.
Marketing: Network with real estate investors, brokers, and contractors.

3. What Are the Risks of Hard Money Lending?

While profitable, hard money lending carries risks:

Default Risk: Borrowers may fail to repay, leading to foreclosure.
Market Volatility: Declining property values can reduce collateral security.
Legal Risks: Non-compliance with lending laws can result in penalties.

Conduct thorough due diligence, require strong collateral, and set conservative LTV ratios (typically 65-75%).

4. How Much Money Can I Make as a Hard Money Lender?

Earnings depend on:

Loan Volume: More loans = higher profits.
Interest Rates: Typically 8-15% annually.
Points Charged: 2-5% origination fees per loan.

Example: A $100,000 loan at 1.15% annually (interest) + $3,000 (fees).

5. Do I Need a License to Be a Hard Money Lender?

Licensing varies by state:

Some States Require a mortgage lender or broker license.
Others: Allow private lending without a license if the funds are personal.

Final Thoughts

A hard money lending business can be lucrative, but it requires careful planning, risk management, and strict legal compliance. By understanding the market and structuring loans wisely, you can build a profitable lending operation.