A rental can have a place in every property investor's portfolio, but it's only one way to generate cash flow from real estate overseas. Another less-common strategy that you may never have heard of is referred to as a hard money loan. We're not talking about becoming a loan shark, but you can earn double-digit returns lending money to a property developer or even a fellow investor overseas. These hard money loan opportunities come in various forms. The typical borrower is a developer looking to fast-track a project, an individual looking for financing for a property purchase in a market where it isn't available otherwise, or a company funding individual renovation projects.

This kind of one-to-one lending takes place in the United States, too, where people borrow to buy a run-down property, fix it up, and flip it. Maybe they have the capital or bank financing available for the property purchase but need cash to cover the renovation costs. An individual or an organized private group lends to the renovator at an interest rate much higher than the going rate for a bank mortgage. The borrower accepts the terms because he doesn't intend on accruing interest long. The plan is to flip the property and pay off all debt as soon as possible after the renovation has been completed.

The borrower is able to fund his or her project quicker and more easily than if they had to battle bank bureaucracy, and the property serves as collateral for the lender, either a first or a second mortgage. Developers overseas find it easier to skip bank bureaucracy, as well.

One personal experience with a hard money loan was with a developer in Australia. The interest rate was 12%, the term 18 months. The collateral was the land for development.

The developer was the sort we like—what we refer to as a serial developer. He had years of experience with relatively small and quick projects, meaning he could show a track record of getting in and out, from land purchase to sale of the completed units, in less than three years, again and again. He could have borrowed for his next project from a bank, but bank approval, even if you qualify easily for the loan, can take months. Instead, he opted to approach a broker and was able to raise the money he needed in a matter of weeks. We were fortunate enough to be communicating with the broker at the time the developer made contact.

A larger developer needing money for construction might seek a hard money loan to avoid being at the mercy of a bank's schedule for release of funds. Local housing developers in Latin America are increasingly choosing to take this route. They seek individual investors to fund the construction costs of a specific house. Eliminating bank loan paperwork and bank construction draw schedules allows the developer to move more quickly. The investor gets the lot and the house under construction as collateral.

You could also lend directly to a property buyer. This is a less turn-key approach. You'll need to engage an attorney to make sure that a mortgage is properly filed in your favor. However, in this case, when lending to an individual directly, you can set the terms. You just need to find a borrower who'll agree to them. A three- to seven-year loan is typical. Payments can be interest only, based on a 30-year amortization with a balloon payment, or anything else you'd like to propose. You can also set the currency for the loan—either dollars or the local currency.

To find borrowers, speak with real estate agents in the market where you're interested in investing. Investors typically ask agents if they have properties on their books from sellers willing to carry a mortgage. Those buyers could be potential borrowers for you.

You can also ask the real estate attorney you're working with if he has any clients looking for financing for the purchase of property. In many markets where financing is not available to foreigners, you'll find property buyers open to a private loan even at higher than typical interest rates. They understand that leverage enhances returns.

In Colombia, one attorney we work with received so many inquiries about property financing that his firm put together a program to match buyers with people looking to lend. The program started small, with foreign investors funding foreign property investors. Over time it grew to include foreigners wanting to buy personal residences and eventually local buyers who didn't want to deal with local bank financing.

The cash flow to the investors lending money was impressive. The program made it possible to earn double-digit returns backed by real estate in Medellín and to do it in a turnkey way, without any of the hassle of being a landlord.