Entrepreneurship, in general, is an extremely tough and time-consuming profession. Sure, you will always find people that are running businesses, but at what cost? Most of them would live much happier lives if they would delegate a lot of the work they deal with. So, what does this have to do with someone who is a residential hard money lender?
As far as entrepreneurship goes, the real estate market is one of the toughest to grow a successful business. For hard money lenders, there is a very large amount of financial risk that is associated with real estate. Most of the time, yes, you will get your money back. Could there potentially be pushback? Yes, but most of the time you will receive your investment back.
For those bigger deals, however, you may want to take a look into pursuing a fractional investment. Basically, fractional investment is the inclusion of multiple parties that are willing to invest with you. Usually, each party receives an equal amount of ownership in the deed of trust when lending to potential borrowers. If you are just starting your lending career this may be one of the best options that you should consider when you are starting your lending career.
So, what are some of the advantages of fractional investments?
One of the biggest advantages that you immediately get from having fractional partners is the number of people you have on the team. Suppose you have started a firm and thankfully you have taken on a new client, but you have little knowledge on residential hard money lending. In this case, having two or three people that have knowledge in the industry could greatly benefit your business.
With more people that are investing in the same property, it could potentially cut out a lot of competition. When you are starting out you want as many friends as possible and as little enemies as possible. In the real estate business, you are going to encounter tons of people that will try to scalp those great finds. By adding more people to your company’s roster this could give you more money, experience and lower risk.
Those are the advantages, but what are the pitfalls of fractional investment?
With everything good, there is something bad lurking in the background. For the right people, this type of investing is great, but you are liable to run into a few issues if you and your partners are not on the same page. Fractional investing allows lenders to partner on investments; this means each person has an equal amount of stake in the property.
Without the proper amount of communication with your fellow residential hard money lenders, things could go terribly wrong. One of your investors could possibly get cold feet on about a residential property that you had agreed on. If you do not have enough money to fund the changes the property needed you could miss out on a lot of profit.
So as a residential hard money lender do you need fractional investors?
Depending on the market you should consider fractional investing. Will you always get your way? Most likely no, but if you are an inexperienced lender it would help greatly if you had someone that could mentor you for your future clients that you take on. Having more investors does mean having more money that you could put into your project, as well. You should definitely weigh all the options before you commit to fractional investing.
Dennis Dahlberg Broker/RI/CEO/MLO
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.