Hey, what's up guys. It's Clint Coons here.
And in this video, we're going to talk
about how to structure your hard money lending business.
Okay. Let's get started.
Okay.
So you thought about setting up a hard money lending business.
You're wondering what is the right format?
Do I want to set up a corporation?
Is it going to be a limited liability company?
How is it going to be taxed?
How do you structure the deals?
Well, I don't do for you is answer those questions
and put it down on the board here so you see exactly what you need to do
in order to go out there and start lending money.
Because, let's face it, in this environment right now, hard money
lending is where it's going to be at for you, real estate investors,
because, you know, a lot of people are going to be struggling,
trying to obtain traditional financing so you can step in
and help put some of those deals together and make a little money
in the in the process through these interest payments.
All right. So what are we talking about when it comes
to structuring a hard money lending business?
The way I like to look at it is you have two sides to your business.
You have your business side right here.
So this entity is the one that's going to be interacting
with your borrowers, people that are want you loan on their properties out there.
Now, for some individuals I've seen before, they'll create their
hard money lending business and they'll put the cash inside of there
and then they'll loan or loan out the money against these properties.
And of course, whenever you make a loan, you're going to take back, what's that,
a deed of trust or a mortgage on that property to secure your interest.
Now, in this type of context, what type of business do we have here?
Well,
this could be a limited liability company or could be a traditional corporation.
Now, my preference is going to want to set this up as an LLC.
Now you might be thinking, should I have anonymity with that type of structure?
Meaning should I set this up in Wyoming or Delaware or somewhere else?
So my name's not associated with it.
You know, if you're going to go out there, you're going to hold yourself out.
As someone who is loaning funds, I don't know if anonymity is where
I'd want to go with this if I was an individual
who was looking to borrow money out.
I want to know who are the principals of this company that are going to be Loan
me the money and I maybe want to do some background research on them.
So if you don't live in Wyoming or Delaware,
that's not where you're conducting your business.
It's probably going to be more beneficial to you to set up that entity
in the state where you're going to be lending and forego anonymity.
Now, I'm not saying you don't have to do this,
but it's just something
that you may want to consider in your overall business setup.
So this is going to be an LLC.
It could, as I say, it could be a go with an LLC.
Now think about a limited liability company.
It's a hybrid entity.
So you get to choose how you want it to be taxed.
Now, if you're engaging in hard money lending
and you're going to make a business out of it,
this is how you want to start generating your revenue.
Then I would suggest that you consider having this entity treated
is either an escort or a C Corp for federal tax purposes.
And the reason why you want to go down that road is that if I was to choose
partnership, let's say I had another individual, a spouse
that was working with me on this business or disregarded tax status,
well then everything I earn is going to be self-employment income.
And so if I want to have control over my taxes from my hard
money lending business, you know the point you're going to be making on your loans,
plus the interest payments that are coming in.
I would suggest that you treat it as either an S corp or a C Corp
for federal tax purposes.
Now, how do you determine which way to go?
I get that question a lot, and that's something that we would need to analyze.
And that's why I would suggest that you look in the show notes,
you can sign up for a strategy session with someone at my firm who can then
look at your individual
tax situation, help guide you through whether or not this should be an S
or a C corporation when it comes to structuring that business.
And because it's an active business, don't forget that with the income
you generate from this activity, you can even put off the side of here.
Maybe you're going to set up a solo 401k plan.
And this is something I tell people a lot of times when when they're lending,
don't forget about this option over here.
This is going to allow you then to move money out of a taxable environment
into a tax deferred.
Or if you go with the Roth, it's going to be a tax free environment.
So this is a strategy that you would look at implementing
when this entity is up off the ground, it's running and it's generating income.
So you got this company here that you've set up.
It's engaging in the hard money lending.
It's out there holding itself out that your loan on your first deeds
of trust against property, hopefully not second deeds of trust,
but the issue comes up.
Then how about the funds?
Do I have the funds in here?
In this business,
I would recommend you do not put your money inside of that corporation.
Now, you might be wondering, well then how do I finance my deals
if I don't have the money inside that corporation?
Well, this is where we're going to come back and look at Wyoming and Delaware.
I'm going to recommend you create a Wyoming LLC right down here in this one.
Could be a disregarded LLC or a partnership.
And here's where your cash is going to sit right down in this environment
right here.
This is where you going to put your money now in order to make this work?
How do we get cash from here to here to this individual here?
What I'm going to do is I'm going to take this entity,
this Wyoming LLC,
and I'm going to enter
into another loan agreement so that I'm going to actually loan myself
the money that I'm going to loan out to other individuals.
Now, if you sit back and you scratch your head,
you're thinking, Clint, why the heck would I want to go through those steps
when I could just put the money into the initial entity itself and loan from there?
Well, what is my channel about asset protection?
So if you want to protect your cash, then
I would suggest you loan the money to your company.
Because here's the thing.
And when you get involved in hard money lending, there is risk there.
You have to accept that you may make a loan
and not realize that it violates usury laws in your particular state.
Or maybe you had to get a license for the county, the city, the state
in order to engage in that level of activity
that you're engaged in with your hard money lending.
And then they come after you and they want a fine.
They want to go after your business or the individual
you loan money to is now suing you to get back all of the payments,
plus penalties and interest because it was a usury loan.
Well, in that case, who are they suing?
They're suing the lender.
And if this company here is the lender,
not to mention, you know, whether or not you're using a licensed mortgage
originator and things like that, you that brings a whole other context
of this deal.
So what does this mean, high liability right here for this company
as a strong likelihood at some point in time you could be sued.
So if they sued your company and all of its assets
are going to consist of cash, right, that you have the loan out.
Plus, first deeds of trust, promissory notes
that are held by that corporation, well, creditor could swoop in and take those.
So here's what I want to do.
I want to ensure that anything this corporation is lending out
is not coming from its own finances, that it's going out there, it's borrowing
from someone else who is going to encumber all of the assets,
just like your business would do if somebody came and said, Hey,
I want to borrow $80,000 to buy this property, you're going to tell them
I need collateral in order to loan you the money?
Well, hell,
I'm going to want collateral in order to loan the money to this corporation.
So this is what we do.
We loan the money to the corporation.
So here's a loan agreement right here.
Now, with that loan agreement, I need collateral.
What is the collateral?
This corporation is going to give me?
It's going to give me a C, c, one financing statement,
which basically allows me to file this against my own company,
which states that this company, all of its accounts, receivables, deeds
of trust, promissory notes, everything that it has, cash on hand.
All right.
Up to the amount of what I've loaned is secured by my limited liability company.
You sound great. This is now.
So you can go out there and loan money out of this hard money lending business.
But the capital that you are putting at risk isn't being put at risk
for external creditors who may come back against you,
because the first person who's always going to get paid is the lender.
That's why you're in this business.
Who is the lender here with your company?
That's your Wyoming LLC. That is you.
So I highly recommend, if you want to get involved in hard
money lending, maybe you're already any hard money
lending scenario and you're operating through one entity.
Rethink your strategy here.
Get your cash protected down here in Wyoming, limited liability company.
Loan it back to your hard money lending business entity.
File that U.S.C.
one and then give yourself a little extra comfort knowing you've done
pretty much everything you can to protect your business from external threats.
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All right, guys, take care.