It’s easier than you might think to make $250,000 per year as a hard or private money lender. Today, we’re breaking down how you can do this as a new (or experienced) hard money lender.
A lot of you might be thinking, “Yikes! That seems impossible.” It’s easier to obtain than you would think. I cringe a little bit because the internet makes people think that making six figures a year is so basic, and that everyone is earning six figures a year. That is just not the case.
Last I checked, the median individual income in the US is around $64,000. The median household income is around $76,000. That being said, if you make six figures a year, you’re definitely above average and not as mediocre as all the Lambo-driving 18-year olds on Instagram would have you believe.
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Let’s take a step back and see how YOU can earn six figures a year. I really don’t care who you are – if you’re making $250,000 a year, you can live well almost anywhere (though I realize it doesn’t go quite as far if you’re in a HCOL area, such as New York or California).
For me, it all comes down to the math. Plain and simple, most people won’t do the math, and the math is what’s going to get you there. The math is what’s going to set you free.
“The math is what’s going to set you free.”
Let’s say we have a target of $250,000 a year. What’s the monthly loan volume it’s going to take to get there? I’ll break it down. Your business might be a little different than mine, but for the most part, the numbers are going to be similar.
Interest Breakdown
First, my company charges three points (3%) and 14% interest on every loan. As a lender, we’re compensated for all our due diligence, underwriting, allocating investors to a project, and the associated risk we take on. I’ve found that our rates are slightly higher than industry average, but I’ve been very upfront with our borrowers that we’re far from the cheapest option around.
We offer a 6-month loan term. If a borrower chooses to do so, they can add an additional point or two if they decide they want to extend their loan up to a year (this is rare as most of our loans are paid off within six months).
At 14% interest on a six month loan, we first take that 14% and divide it in half, which is 7% annualized. Then, if you take that 7% and add it to the 3% origination fee on the front, you get roughly 10%. This is what makes it really easy to do the math.
This 10% number changes slightly whether you’re solely lending your own funds, or if you’re incorporating somebody else’s. For an easier explanation, I’m going to assume that all the funds are your own.
The Simple Calculation
If you want to make $250,000 a year, simply take the $250,000 and divide it by the 10% annualized return we’re expecting, which comes out to $2.5 million. Now, to be clear, the $2.5 million is not the amount of cash that you have to have on-hand. That’s the total annual loan volume that you’re going to have to originate in order to make the $250,000.
If we break that down a little further, you can take that $2.5 million and divide it by 12 months. This comes out to roughly $200,000 in monthly loan origination volume. Because the average home price in America is currently ~$450k, $200k per month is quite easy to achieve. Again, this is assuming that you have all of your own capital. Most people starting out don’t have a $10 million or $50 million fund. Most start with $1-2 Million (or less).
Let’s say you want to make $500,000, or even $1 million net income in a year. You can easily calculate how to do that.
I’m sure there’s someone out there thinking, “Well, jeez. I wish I had this $1M or $2M that you’re talking about, but I just don’t have that.”
That’s okay. Most people don’t.
That’s what’s so great about private lending. Most people starting out don’t have the money available to them. That’s why we bring in outside investors. Yes, you have to pay your investors a good portion of that interest, but most people will take the spread on that interest from the investors. The great thing is that you can scale other people’s capital faster than you can scale your own. It’s a lot easier to get investors than it is to save 20, 30, or 40 thousand dollars to be able to lend these funds out.
For example, my company takes a 2% spread on investor’s funds. We pay them 12%, we keep 2%. Then, we also keep the origination point. If you take the 3% for the origination, the 2% from the spread, that’s 5%. If you work backwards and do that math, it would take twice as much loan volume using other people’s money to be able to hit that $250,000 goal.
It’s probably a little bit daunting if you’re new to the lending space and you’re not making a ton of money, but it is very achievable. This a great way to earn a six figure income without:
A lot of capital
A lot of overhead
Other employees or managerial wages.
All in all, it’s a great business model to reach lending success in while making a pretty good amount of money.
Let me know if you have any questions or if you have different perspective on the topic. If you are curious about this business model and interested in lending with the help of my team, contact us! I love hearing all the various input, questions, and opinions!
