Charlie Munger popularized the idea of paying a fair price for a wonderful business, rather than a wonderful price for a fair business. Whatever you call it Hard Money, Private Money, or Private Credit– as I write these words, it offers the opportunity to pay a fair price for a wonderful asset class.
At 9-10% nominal yields, private money first position loans secured by single family houses deliver an expected return comparable to the stock market’s long term return, with far less volatility and far less duration. Conversely, High Yield Bond Indices trade at 8.5% nominal yields, but with uncertain recoveries for creditors in the event of defaults.
Why do properly underwritten private money loans have high recovery rates, even when there is a default?
Unlike the “covenant light” bonds that were floated in the public markets during the ZIRP error, Hard Money Loans are covenant and recourse heavy. The majority are at low LTVs and require the borrower to sign a personal guarantee.
Not that we want to foreclose, but the statutory framework for foreclosure is clear and well worn in the courts. Depending on the state where the loan is made (collateral is located), the foreclosure process itself is inexpensive and reasonably quick.
The majority of Hard Money Loans are made to non-owner occupant investors rather than consumers, avoiding RESPA and consumer related regulation.
The collateral itself is liquid. Good Hard Money Lenders track the inventory levels in their market. Tracking months of inventory helps us price the risk of holding an asset for longer, should we take it back. But Hard Money Loans secured by single family houses are in and of themselves relatively liquid vs commercial real estate.
Have you read our free eBook on Private Money Lending? If not check it out below: