I’ve always had a 1-4 hard money loans out to other RE investors for the past 5 years, whom I knew very very well and what they were doing with their properties.
It’s been the easiest 12% return possible, but scaling it to other people or even brokers is a much different story and requires an extreme amount of due diligence.
The downside risk of HMLs is pretty big imo. First is the potential for fraud is the biggest downside that can cause a 100% loss, and routinely happens.
Second is having to foreclose, which I have yet to do. There is a chance of making money on a foreclosure if your LTVs are <70% but the timelines, headaches and legal aspects are certainly not what I want to do with for a passive investment.
It either goes perfectly without any issues in any shape or form, or its a disaster.
Several years ago I would have assumed I was going to sell all my annoying properties once they appreciated enough and just lend money instead. However, nowadays I see the financial risk is real and would only do <10% of my portfolio in HMLs
Other tidbits that I live by:
-Lending to proven investors who can refi out of the HML. If they’re kick ass at what they do, the loan risk goes way down.
-Understanding the exact metrics of how the investor is going to make money is crucial. If they can’t make money off your loan eventually, you’re screwed. If your familiar with flipping houses and the costs associating to actually making money, then lending to flippers makes you able to vet the deal. If you can’t vet the deal from their perspective, stay out entirely.
-Lending on properties that I would gladly buy myself (for the price of my 1st position), or love to foreclose and keep. This makes vetting the deals very easy.
-Lending at a low LTV, obvious but this is your safety margin.