Hard Money Funds Provide The Perfect Investment Vehicle For Today’s Challenging Economy

I was driving to work this morning listening to NPR where Michael Krasney was interviewing a couple of economists about the government takeover this weekend of Fannie Mae and Freddie Mac. This has been a boom time for interviewing economists of course: government bailouts, housing crisis, unemployment, demise of the dollar, skyrocketing commodities prices, the last gasp of the American auto industry, inflation, etc. Among all the gloom and doom discussion Krasney asked these economists where is the silver lining in all this? There has to be some silver lining, right? Something good that will come of this? Someone that will benefit? Surely the housing and financial markets will come out of this stronger than before, we’ll learn some lessons and the sun will shine a little brighter for the American consumer, right?

Not for these guys. They couldn’t come up with any significant upsides in the whole mess. The best one of them could to was to say that maybe, just maybe, the American tax payer will make a little money on the billions of dollars being sunk into Fannie and Freddie. (Except we all know that will just go into the government coffers and be frittered away on some pork barrel project.)

Well I’ve got an upside for some at least. Not that I would expect economists on NPR to mention this, but private money lending is a big silver lining in the credit crunch today, and investors in these funds are reaping the benefits. Hard money lenders are filling the gap (the canyon really) left by the implosion of the mortgage backed securities market as well as the disappearance of credit at commercial banks.

Hard money lending has been around for a long, long time and has always been a good business. When our current financial and economic challenges subside, hard money will continue to fill an important role in our real estate markets. But today, in many cases, private investors in hard money funds are often the only source of credit for a lot of high quality real estate deals that are still abundant in this country.

Last week I attended a conference for commercial mortgage brokers. Obviously being a mortgage broker in this environment is tough, but there is still a lot of business for those that know how to stay focused. Probably the biggest question being asked among the mortgage broker community is: who has money to lend? To be sure there are still banks out there lending money, but their underwriting guidelines are so stringent you really have to present a flawless (aka riskless) deal or they can’t do it. But when that question is asked the private money lenders were there to say, “we do, and lots of it!”

Hard money is by no means stupid money, but it is flexible money. Every deal, and every borrower, is different. Private money lenders have the flexibility to structure a deal to address the unique needs of each borrower’s situation. They don’t suffer huge bureaucracies so they can underwrite and fund very quickly, and their primary focus is on the value of the property backing the loan and a very clear story on how the loan will be repaid. Other issues are secondary. After years of credit available for virtually nothing hard money can seem quite expensive to some borrowers, but it’s way cheaper than equity and provides the high-octane fuel to those really valuable deals.

Investors in private money funds get a diversified portfolio of assets, an extremely high risk-adjusted yield, and their money is working for them 24/7. Many funds provide the added benefit of compounding by allowing dividends to be reinvested. Finally, and this is big for all of us looking to retire in the next ten to twenty years, many hard money funds are ERISA compliant, meaning you can invest your IRA or 401k and earn great compounded yields tax free.

Our world is changing fast and the economic free-for-all we’ve had in the United States for the past decade has come to a screeching halt. But in any economy, good or bad, there are always great opportunities to provide an important service and make a good profit. Today, hard money fund investing is just one of those great opportunities.