10:00 PM PDT on Tuesday, August 30, 2011
Three months after he retired from his Wisconsinpackaging business and moved to California, Don Passehl watched the bottom fall out of the stock market, seriously depleting his retirement savings. It was enough to prompt Passehl and his wife to look for a better, safer place to invest their money.
That was 2008. Passehl, now 61, of Laguna Niguel, is rebuilding his nest egg by lending to real estate investors so they can buy foreclosed homes in Inland Southern California. He is pleased to be getting a 9 percent annual return by lending on deals that banks would reject.
In Riversideand San Bernardinocounties, as across the nation, mortgage experts say they have seen a surge of interest in so-called “hard money” loans because they generate income that is far higher than what is available from the rock bottom interest rates of bank CDs and more dependable than a gyrating stock market.
Among the investors eager to do hard-money lending — charging interest rates of up to 12 percent — are retirees and pension funds.
NOT FOR EVERYBODY
“If (the lack of) that payment means they won’t be able to buy groceries, this kind of investing isn’t for them,” said Sosa. Although an investment gone bad often may be recouped through foreclosing, the process temporarily ties up an investor’s cash, she said.
Darren Rivera, an air conditioning contractor from Chino, said three years ago he started lending to a friend, Nick Manfredi, a Corona-based real estate investor who flips houses.
Rivera said so far he has been in four transactions with Manfredi. The largest loan he made was $280,000 that he raised from a home equity line on his house. Considering that he is paying only 3 percent interest on the bank loan, he said he still nets a 9 percent return on the hard-money loan for which he charges interest of 12 percent.
With the profits from lending, Rivera said he was able to take his family on a trip to New York and a Caribbean cruise.
Manfredi, 43, who heads a real estate investors club, said he is getting a lot of calls from prospective lenders.
“With Wall Street the way it is, there is more interest in being a hard-money lender than I have ever seen,” he said. “A lot of people are kicking tires. They want to know what it takes.”
Dos and don’ts
of hard-money lending
Don’t do it on your own; you need a broker in California. Without one you could be committing usury.
Don’t lend to owner occupants because of the high risk they will default and you will have to foreclose and evict them.
Don’t loan more than 65 percent of a property’s appraised value.
Do shop carefully for a broker.
Do loan only on first trust deeds, not seconds, to protect your financial interest in a default.
Do get an appraisal of the underlying property.