Have you been thinking about other ways to invest your time and money into something that will help you grow your financial wealth?
Making sound financial investments certainly helps you build wealth for the future and reach your life goals, and one of the most tried and true wealth-building tools is real estate investing. There are plenty of ways to invest in real estate to build wealth for the future. Many savvy investors achieve their real estate investing goals by leveraging the advantages of hard money loans.
If you’ve never considered what a hard money loan could do for you, let’s take a look at what they are, how they work, and whether they could be a good option for your next investment opportunity.
What Are Hard Money Loans?
In short, a hard money loan is a type of loan that is funded based primarily on the collateral, rather than the borrower, qualifications.
These types of loans are commonly known for their short duration, usually between six and eighteen months, although they can be as long as three to five years. The most common use of hard money loans today involves real estate investments such as residential fix and flip projects.
Hard money lenders are generally individuals or private companies, as opposed to traditional banks.
Unlike a traditional thirty-year mortgage financing a home that the borrower plans to live in, a hard money loan provides financing when speed and a quick turnaround are essential. This is often the case on real estate investment opportunities when a borrower has a plan to quickly improve the property to either build equity or turn a profit.
Hard money loans work great for investors looking to flip houses or invest in rental properties.
How Do Hard Money Loans Work?
Hard money loans are easy to apply for and approval is much faster than a traditional loan. Since hard money loans are primarily based on the real estate collateral instead of the applicant’s financial position, there are less hoops to jump through to prove your worthiness as a borrower.
A hard money loan can often be completed in days or a couple of weeks, rather than a long process that could last a month or more with a more conventional loan.
Additionally, a hard money loan has looser criteria for things like credit scores, since the lender is mostly focused on the collateral and has more assurance that the loan can be repaid with the value in the property.
A fix and flip loan offers a great example of a typical hard money loan. When a borrower needs the cash to purchase and fix an undervalued or distressed property, they can get a hard money loan to fund the project. After using the loan to purchase the property, they quickly fix it up and sell it for a profit.
Some hard money lenders offer lending solutions for both the funds needed to purchase and to rehab the property. Other hard money lenders focus their lending just on the purchase of the property.
In any case, by finishing the job in a timely fashion and selling the property to pay off the loan before the end of the loan term, the borrower can profit on the sale after paying back the loan. Banks and other traditional lenders typically do not offer this type of short-term financing used purely for business or investment purposes.
During a fix and flip project, while the borrower is fixing up or in the process of selling the house, the lender usually collects interest only payments. Then when the property sells, the full amount of what was borrowed is repaid to the lender. At this point, the borrower could try doing the same thing over again for another profit.
Another option that many borrowers prefer is to keep the home as a rental for long-term cash flow. In this scenario, the borrower would rehab and rent the property, then pay off the hard money loan with a refinance into a more traditional long-term mortgage. This is commonly known as the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat).
Hard money loans give investors a chance to acquire discounted or distressed properties that do not qualify for traditional financing, then either profit on the short-term investment or add a great piece of cash flowing real estate to their long-term portfolio.
Hard money loans can also be a great fit for investors who already own investment real estate and want to leverage their existing portfolio for other investments, such as flipping houses or acquiring additional rentals. Plus, once you’ve dealt with a lender for one project, it gets even easier to do it again.
You build trust and a reliable reputation that increases your chances of approval and often improves loan terms.
Advantages & Disadvantages
As with any business or financial endeavor, there isn’t a one-size-fits-all solution. There are both advantages and disadvantages to any type of loan.
In the case of hard money loans, they tend to have higher interest rates due to the short duration and higher risk of the loan.
If you don’t think you can finish your project and sell the property in time, you may end up paying more in interest and extension fees.
If you fail to pay back the loan before the loan comes due, then you will need to find a way to sell or refinance the property to avoid the lender foreclosing on the property.
When deciding to borrow this type of loan, it’s important that you have a solid plan that factors in unforeseen obstacles and contingency plans so you can ensure a high likelihood of success in a short timeframe.
On the other hand, hard money loans can be very fast with less red tape while allowing you to capitalize on great investment opportunities.
You may have some flexibility in the repayment schedule, depending on the lender, and lenders can often do their own underwriting to offer flexible terms.
For a short-term loan with a quick turnaround, a hard money loan may be just what you need for your next real estate project.
Whether you’re a first-time house flipper looking for a financial partner to help fund your real estate endeavors, or a seasoned investor or developer looking for an efficient source of capital for your business, a hard money loan can be helpful to get your next project off the ground.
Check out our recently funded projects page to see how other people have done this very same thing and reaped the rewards.
If you’re ready to roll on your fast-moving project and need some fast-moving cash to fund it, come see us! We love to help people build wealth through real estate.
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General Investor FAQs
What is Cetan Income Fund’s Investment Objective?
Cetan Income Fund and Cetan Opportunity Fund (the “Funds”) are real estate debt funds that deliver consistent and attractive risk-adjusted returns to investors who seek preservation of capital and income.
Who Manages The Fund?
Our CEO, Mary Merriman, manages the Fund and lending operation. She has over 40 years of lending experience, holding a variety of executive-level positions at banks and an economic development lending organization. Steven Yett is actively involved in daily operations, fund management, and business development. Zach Smith is also an integral part of the team, leading loan originations and other business development activities. To learn more, please visit our Meet the Team Page or contact us.
Can Anyone Invest?
Cetan Income Fund: This Fund is only open to accredited investors with a net worth of $1,000,000 excluding their primary residence, or annual income of $200,000 for single filing status or $300,000 for joint filing status. This Fund is open to investors from anywhere in the United States.
Cetan Opportunity Fund: This Fund is only open to Oregon residents with either 1) a minimum annual gross income of $70,000 and a minimum net worth of $70,000 excluding their home, home furnishings, and automobiles; or 2) a minimum net worth of $250,000 excluding their home, home furnishings, and automobiles.
Can I Invest with IRA Funds?
Yes. Investors with a Self-Directed IRA account can invest in the Fund. Currently, we are well below our 25% threshold.
If you do not have a Self-Directed IRA account, we can help you create a self-directed IRA (SD-IRA) account and use those funds to invest in the Fund. Please contact us with questions and a list of IRA custodians we have worked with in the past.
Cetan Income Fund also includes a promissory note offering for accredited investors, which many of our IRA investors benefit from.
How Do I Track My Account Balance?
We provide investors a secure online investor portal to access subscription documents, quarterly statements, fund financial information, investor updates, and tax documents.
How Do I Withdraw My Investment?
Every equity investment has a 12-month “lock-up” period where withdrawals are only allowed for hardships and early withdrawal fees may apply. After this “lock-up” period, investors may withdraw at any time with at least 60-day notice.
How is Risk Mitigated?
Management actively monitors our real estate debt fund and mitigates risk by deploying several strategies:
1. We maintain a diversified portfolio of loan types, loan purposes, and geographic locations in Oregon and SW Washington. Our loan types consist of residential and commercial loans with subtypes of new construction, rehab, acquisition and development, and bridge/term. We only finance business-purpose loans that provide funding for purchases, refinances, rehabs, new construction, and development.
2. The portfolio’s weighted average loan size is typically below $500,000, so our transactions are small. Therefore, the projects tend to be more resilient given the high demand for affordable housing and when faced with conditions that negatively affect the real estate market.
3. Generally, our loan-to-value (LTV) ranges are from 60-75% in Cetan Income Fund and 65-80% in Cetan Opportunity Fund, with a portfolio target of a weighted average LTV at 65% or less for Cetan Income Fund and 70% or less for Cetan Opportunity Fund. To determine value we complete an internal evaluation that uses a variety of sources, including an Automated Valuation Model, Broker Price Opinions, as well as our direct sourced market and comparable data. On properties with a unique purpose or for larger loans, we typically order appraisals.
4. Loans are typically secured with first position liens. Cetan Opportunity Fund may also selectively fund loans secured with second position liens.
5. In Cetan Income Fund, loan terms range from 6-36 months with the weighted average asset life in the loan portfolio target of 12-15 months. In Cetan Opportunity Fund, loan terms range from 6-60 months with the weighted average asset life in the loan portfolio target of 15 – 21 months.
6. We use leverage minimally as it is not a permanent funding strategy. Cetan Income Fund has a bank line of credit that is used to meet temporary liquidity needs but rests it at $0 frequently during the year. Cetan Income Fund also offers 6 to 36-month Promissory Notes to investors who prefer to loan their money to the Fund rather than invest in equity or wish to have a mix of both. Cetan Opportunity Fund, on the other hand, was recently launched in 2023 and does not currently use leverage or offer promissory notes to investors. Once the Cetan Opportunity Fund reaches $5 million in assets under management, we may establish a bank line of credit to use to meet temporary liquidity needs. Management will always limit leverage in both Funds to a maximum of 20 – 25% of assets under management.
Why Do Banks Not Make These Loans?
This is because of several factors, including regulatory constraints, banks’ large overhead expense making smaller loans unprofitable transactions, and obtaining a bank loan often takes too long, or the process of obtaining it is complicated and expensive.
Though the typical borrower is creditworthy, they are seeking a loan that is not readily available from traditional banks and credit unions. Cetan Funds addresses this credit and service void in the marketplace by taking reasonable risk while processing applications with speed, transparency, and accuracy.
What Distinguishes Cetan Funds From Other Non-traditional Lenders?
The Cetan Advantage is what sets us apart from other lenders. It provides borrowers superior lending experiences. As a result, our investors are well positioned to realize a positive investing experience as well. The Cetan Advantage embodies the following values:
- Expertise
- Partnership
- Efficiency
- Flexibility
- Integrity
How Are Returns Calculated and Earnings Distributed to Investors?
Both Funds fully distribute net income to all investors on a pro-rata basis quarterly. All investors are treated equally as we do not have a preferred return, classes of shares, or any other preferential treatment.
We close the accounting quarterly, derive the net income, and then our fund management software calculates the distributions to generate investor statements. Dividends may be withdrawn or reinvested in additional shares. Generally, it takes two to three weeks to close a quarter and distribute the earnings to investors.
Are Your Financial Statements Audited?
Yes, our financial statements are audited annually by a qualified CPA firm that specializes in private equity funds that include real estate debt funds and are posted for existing investors as well as available for interested investors.
What Type of Income Will My Earnings Be Considered?
Equity investors earn ordinary income and will receive a K-1 schedule for their tax returns. For IRA investors, Unrelated Business Taxable Income is generated but is limited to the amount of income that is generated from leverage; hence, it is a very small percent. Promissory Note investments in Cetan Income Fund generate interest income, so this income is reported on a 1099 INT statement.
None of the information herein is to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product, or instrument. Any projections or targets are aspirational only, are not guaranteed, and do not reflect past or current performance. Any report of past performance is no guarantee of any future performance. As with any investment, an investment in the Company is subject to risks, some of which could be substantial. No investment should be made in the Company by any investor who cannot afford to lose their entire investment. There are also restrictions on re-sale of Company securities and no investment should be made by any investor who cannot afford to hold the investment in the Company for a long period of time. This investment is only allowed and suitable for certain kinds of investors, who must have their investment status verified and confirmed in writing. No investment may be made, and no investment will be accepted unless the Company has received and approved the required written verification of each investor’s status.