Hard Money Lending

“Don't be the landlord. Finance the landlord. Instead of buying the real estate, lend against it.” - Salvatore Buscemi, Making the Yield: Real Estate Hard Money Lending Uncovered

Ray Poteet was more than just an insurance guy. In fact, he wasn’t an insurance guy at all. He was a full-blooded entrepreneur who had learned many valuable lessons from making many costly mistakes. He told me once that over the course of his life he had lost about $500,000 from lending money the wrong way, without doing the underwriting properly. He said that he didn’t regret a single dollar of that lost money, because it taught him things that the world would never have taught him.

As I watched Ray “do his thing”, one of the most valuable lessons was when I would watch him lend money. These are the lessons I learned from him along the way, and how I have designed my strategies around lending as I become my own banker.

Character

This one is the most important loan underwriting qualification to me. What is the character of the person or business I am lending money to? It is not wise to lend money to someone who has proven to you that they cannot be trusted, through their actions.

There are some extremely important qualifiers to put on this one.

First, it is impossible for someone to prove to me that they are trustworthy. What they can prove is that they are untrustworthy. If you wait for someone to prove to you that you can trust them, you are going to be waiting a very long time.

Secondly, Ray would always say, “I do not base my opinion of someone on what I have heard about them, I base my opinion of them on how they treated me.” This is one of the most important life lessons I have ever learned. The reason is: manipulative people often use gossip, innuendo, false testimony, and character destruction as methods to try to guide events to their own personal, predetermined outcome. If I base my opinion of Bob on what George said about Bob, and only his word, then maybe Bob did such-and-such, and maybe he didn’t. What I have learned is that if I withhold judgement and go experience Bob for myself, Bob is always a very different person than the Bob that George said he was.

This principle goes both ways: do not pass judgement on someone that has never given you a direct reason not to trust them, nor have they been found guilty of an offense via due process. At the same time, do not overlook it when you know that evidence of untrustworthiness is there. This you will do at your peril.

Collateral

This was the most important one to Ray. Ray would never lend money without proper collateral. He would always say, “If you walk into a bank and ask for a loan, the first thing out of their mouth is going to be, ‘What do you have for collateral?’” This is crucial for us to grasp: banks don’t lend money, they collateralize money.

Whenever you pursue collateral, research what exact documentation a bank would ask for in order to lend money on such-and-such an asset, and mirror their strategy. It is perfectly legal for you to require all the same liens as a bank does. Most of the time this involves getting notarized loan documents: promissory notes, amortization schedules, deeds of trust, etc. Remember to be state and asset-specific. Each state has unique requirements and laws for private loans, and they are not the same for real estate as they would be for heavy equipment, etc. Any mistake you make here is potentially an opportunity for a borrower to default on the debt and retain ownership of the asset in question. Many people think that being thorough on the “character” trait erases this danger, but it does not. The person you lent the money to may be as pure of heart as the driven snow, but if that person dies, you may soon find yourself talking to your ex-borrower’s wife’s new husband’s lawyer. This is not a description of a joyful experience.

Next, make sure that the borrower is required to carry adequate property and casualty insurance on the asset in question, and always make sure that you are listed as the first loss-payee on that insurance policy. That way, the insurance company is aware that there is a lien on the asset and they have a financial obligation to someone other than the asset-owner in the event of physical damage, theft, or loss.

In essence, even though you have already done a thorough overview of the individual’s character, structure the collateral as though the borrower has the moral fiber of a serpent. Be thorough. This is not a commentary on their character, it is a commentary on the nature of real life as time passes. A borrower’s reluctance to agree to proper collateral may be an indication that this is someone you do not want to have as a customer of your finance company.

Capacity

This one is more simple: does this person have the available monthly cash flow to make the payments? Or is all their cash flow already earmarked for other obligations?

Capital

This one is simpler still: does this person have any capital or assets on hand, in addition to the asset they are putting up as collateral? The more cash and asset-poor they are, the less qualified a customer they are for your finance company.

Conditions

This one is very challenging and requires laser scrutiny. Once character is established, collateral has been presented, and capacity and capital have been shown to be a non-issue, now you move into the stage of structuring the loan itself.

• How much down-payment?

• How long is the amortization period?

• What is the interest rate?

• How often will I require that payments be made? Monthly? Annually?

• What will the late fees and penalties be for late/missed payments?

• What forms of payment do I accept?

• What is the process of collateral repossession in the event of loan default?

The most efficient way to do this is to look again at what high-quality commercial lenders are doing for the same collateral, and mirror their strategy. Hard money loans are always a premium product, so charge an interest rate that is substantially higher than what a commercial lender would charge. Make sure that you are not breaking any usury laws in your state.

Two final points:

First, all of this makes me think yet again of the primary benefit of infinite banking. The primary benefit of infinite banking is that it forces things that we normally keep in the dark, into the light. As you read through these stipulations, I bet you recoiled at some of the things I said about what a lender should require, because lending money touches on the most base and fundamental human flaws that we have all been tempted to, and which we have experienced in others. One of the reasons people do not pursue becoming their own banker is because it is very humanely uncomfortable. It is so much more comfortable to just throw money at Wall Street and blame them when the results are poor. The arena of becoming your own banker is the opposite of this. 99% (and by that I mean 100%) of poor results in IBC are the direct result of you as the banker making errors in the underwriting process when you make loans.

Secondly, a thought on structuring deals. By the time Ray was in his heyday, going strong on all cylinders, he had a favorite way of structuring deals as a banker. He would find an entrepreneur who had a business idea, and he would lend them the seed money to get their idea off the ground, at a lower rate than one could normally ever get from a private lender, and sometimes even lower than what they could get on an SBA loan. But in exchange, he asked for ownership in the new enterprise they were creating. This would increase the risk profile for Ray, and required him to calculate that risk on the business side. But it also dramatically increased the potential rate (over time) at which he could lend money (because this type of structure is much more attractive to an entrepreneur), and therefore it increased the profitability of his finance company.

———

9/9/2026 - Addendum: When I first wrote this article, I left out one very important piece of the puzzle, and I cannot believe I left it out! Do not lend money without getting a life insurance policy on the borrower! You may require them to purchase the policy as a stipulation of the loan, or you may require them to allow you to buy the policy on them, depending on the structure of the deal. Either way, be sure to put life insurance in place as a requirement of the loan (with the borrower as the “insured” on the policy), require a collateral assignment on that life insurance policy, and make sure that the structure of the deal indicates that the lender (you) continues to be paid in the event of the borrower’s death. This can be done by continuing payments, or in a windfall. You may add a paragraph to the loan documentation itself that stipulates this, or you may even list yourself (or your finance company, whoever lent the money) as the sole (or partial) beneficiary of the life insurance policy. When deciding who the owner and beneficiary of the policy should be, examine what the tax consequences would be in each scenario. In any case, the principle is simple: if someone is dead, they cannot pay you anymore!