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Mindy:
Welcome to the BiggerPockets Money Podcast, show number 328. Very special Finance Friday edition where we interview Alex Breshears and Beth Johnson and talk about private money lending as an alternative investment vehicle.

Alex:
Because when most people talk about they want that financial independence, they want that financial freedom, what they’re usually truly wanting is time freedom or geographical freedom. And I kind of got stuck in this because I got geographical freedom kind of forced upon me by Uncle Sam, and that’s why I would rather do lending, and I don’t have to babysit tenants or contractors. I have the ability, my spouse currently lives in Europe, I can go to Europe and still fund alone and still keep my business going. And Beth has a similar story to that too because she splits time between two places as well.

Mindy:
Hello. Hello. Hello. My name is Mindy Jensen and with me as always is my critical thinking cohost Scott Trench.

Scott:
Mindy, your intros are always a true credit to discussions around lending and finance and that kind of stuff. They generate a lot of interest. You make some great points. Okay, let’s continue.

Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you are starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big-time investments in assets like real estate, start your own business, or become a lending mogul, a bank, we’ll help you reach your financial goals and get money out of the way, so you can launch yourself towards those dreams.

Mindy:
Scott, this is an epic episode. We talk to Alex and Beth. This episode is probably going to run really close to two hours. And you know what? You are going to want to listen to every single second of this episode if you have any interest in making money. Do you think people listening to this episode, listening to this podcast, want to make money? Yes, they do. And if you want to make money, this is the episode that you want to listen to. It is an absolutely legitimate way to make money and make big money. I am so excited for this book that BiggerPockets Publishing is releasing. It’s called Lend to Live: Earn Hassle-Free, hassle-free, Passive Income in Real Estate with Private Money Lending. And it is fantastic.

Scott:
Yeah. I think that when you hear the word private lending, you tend to poo poo it or [inaudible 00:02:27], “I’m a real estate,” and all that, “Private lending sounds like a hassle. There’s a lot of paperwork.” All that kind of stuff. Sure. There’s some paperwork. There’s some work to get into this, just like there is in real estate investing, but this is a serious moment for this asset class. This is one of those episodes that, for me, is a game changing or perspective widening show. I liken it a lot to the episode we did with Jay Scott a few months back around syndication investing, which also went two hours because the topic needs two hours to really fully digest and really get a full intro into. This is an asset class where interest rates have been rising dramatically over the course of this year. Being a private money lender, tough gig.
When the capital markets are flooding with capital, tons of competition. That’s all dried up. There’s a big opportunity right now to be a lender. And I think after you listen to this episode, you’re going to have a hard decision in your mind about whether you want to buy rental properties or whether you want to lend to people buying rental properties. Because I think that the balance is really healthy right now in a way that it hasn’t been in 10 years. And I think it’s a really interesting time to do that, and you should seriously consider this for yourself. This is an option available to you if you have 20K, 50K a 100K, or 500K. This is not something you need millions to do. So I’m really interested in this and I’m going to take a serious look at this for my own portfolio, just like I took a serious look at syndications after the episode with Jay Scott.

Mindy:
I am only going to disagree with one thing, Scott. I think that there might be people who are listening, who are like, “I don’t want to get involved in real estate at all.” This is a great way to make money in real estate without owning real estate.

Scott:
Love it. Let’s bring them in.

Mindy:
You know what, before we do, Scott, even though this is a different type of Finance Friday, I feel that the subject matter of this show makes the disclaimer and advice even more relevant for this episode, so I’m going to say the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott, nor I, nor Beth, nor Alex, nor BiggerPockets, nor, nor, nor, is engaged in the provision of legal, tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal tax and financial implications of any financial decision you contemplate. And as we say in just a few minutes, if you want to get into private lending, there are people that you are going to need to hire to do some work for you, some of these professionals that I just listed.
But later on in the show, we will discover that your borrowers are paying the whole thing. They’re footing the entire bill. So it’s even more important to get somebody that you trust to have your back because you’re not even paying for it. Alex Beshears and Beth Johnson are the authors of the latest BiggerPockets Publishing title, Lend to Live: Earn Hassle-Free Passive Income in Real Estate with Private Money Lending, which is a textbook about private lending, how to become a lender, how to find a lender if you need one. It is a fantastic book. And today we are going to cover how to use this method as an alternative investment. Beth and Alex, welcome to the BiggerPockets Money Podcast.

Alex:
Thank you for having us.

Mindy:
I’m so excited to talk to you ladies today. I have done some private lending. I think it’s really important to acknowledge before we jump into this, that this is going to sound a little bit scammy, but it is an actually legit way to invest your funds. The reason it sounds scammy is because you can make a lot of money as a real estate private money lender. However, if you don’t do it right, you can lose every single penny that you have ever put in there. So that’s where it starts to feel a little scammy.
You have to do the homework. You have to do the research. This is not a, “Oh, I’ve got a lot of money. I’m just going to lend it to somebody who wants it,” and everything’s going to come up roses. I mean, that would be really nice, but that’s not how reality works. So I have personally done private lending. I know this works, but I also know that you have to do some homework. I just wanted to get that out of the way before anybody’s like, “Nah, that sounds like a scam. I’m not going to listen.” It’s a totally legit… What kind of returns are we talking about?

Alex:
I would say on an annualized basis, depending on whether you’re in first lien or second lien, anywhere between 8% annualized, and maybe realistically up to 14 or 16% annualized.

Mindy:
That kind of return sounds almost fake. But it’s real. I have fattened my wallet with those kinds of returns by doing private lending. So I want to talk about how we can make all this amazing money. Let’s jump right into this. How do you get started? I have a pile of… Well, okay, let’s actually… Who’s qualified to be a private lender. Beth.

Beth:
Anybody can be a private money lender, as long as you have an amount of capital that you want to lend out, safely, securely, that can still leave you with a little bit of a nest egg so that you aren’t lending out every penny you have. Anybody can become a private money lender. And that’s what Alex and I are trying to communicate to the broader masses.

Scott:
What do you say to somebody who thinks that this is an activity that, really, you need to have a couple hundred thousand dollars in liquid cash, at minimum, in order to be an effective lender? Because that’s how much a property costs at my local area. How do you get over that for… I think a lot of people have that preconceived notion that this is for wealthier individuals who are looking to transition to a more passive form of investing.

Beth:
Well, I started with… My first loan was only 65,000 or so. It was a second lien position on a property that had a really significant amount of equity in it. And so even though I was in a junior lien position, I was still at less than 40% loan to value. So I had a very significant amount of equity to protect my capital investment. And I’ll let Alex tell her story too, because hers is quite similar and even involved less capital.

Alex:
Yes. So my first loan was actually about $32,000. Again, it was in the second lien position, but it was also in such a great equity position, like total combined loan to value between the first and the second was still under 60%. So it was still a whole lot of equity in the deal. But the other thing I can suggest to people, if you’re starting out with a smaller dollar amount, this might come as a surprise to your listeners in California, but there are still places in the United States where you can go and buy a house for $50,000. So if you are the type of person where you’re like, “I just can’t get over that hump,” and not wanting to be in a second lien, you can then invest, potentially, outside of your local market, into markets that are not valued as highly, and you’ll still be able to be in a first lien position with less capital.

Scott:
One question I’d have here is why would I want to, if I have 50,000 or a hundred thousand? What are some advantages of lending versus making that first actual equity investment in a rental property? Why might I favor lending over that, as a first time investor?

Alex:
It really depends on your goal, your personality traits and basically your lifestyle. So for example, both of us have done… we’ve been landlords or are landlords. We’ve done fix and flips. And for whatever reason, yes, while we’ve done them, that wasn’t something we wholeheartedly enjoyed. From my standpoint, I’m a military spouse, I’ve moved 19 times in 21 years, so I have been the long distance landlord, buyer, house of the VA loan, and then move, and then buy another one, and then turn the previous one into a rental, and it just… I hate being a landlord. I hated it. It did not fit my skill set.
It turns out it didn’t actually fit my goals either, because when most people talk about they want that financial independence, they want that financial freedom, what they’re usually truly wanting is time freedom or geographical freedom. And I kind of got stuck in this because I got geographical freedom kind of forced upon me by Uncle Sam. And that’s why I would rather do lending and I don’t have to babysit tenants or contractors. I have the ability, my spouse currently lives in Europe, I can go to Europe and still fund a loan and still keep my business going. And Beth has a similar story to that too, because she splits time between two places as well.

Beth:
Yeah. And I think it’s important to note that it doesn’t have to be mutually exclusive. I am like Alex also where I prefer private lending because it’s a lot more passive, but I do have an active lending business too, and I’m also a landlord. So I like private lending to be a form of diversification. I think we see a lot of people out there trying to get to a hundred doors, a thousand doors, try to achieve some certain number in their portfolio. And I find that’s kind of unnecessary in my world. I like to have just a small amount of very manageable doors, and then with the additional capital or equity that I have, I’m going to a private lend that money out because it’s much more passive for me and it’s not an additional toilet or a roof that I have to take care of.

Scott:
Love it. And let me give you another answer or reason why I’m so interested in private lending today, is because I think that in 2022, at this point in time, it’s hard to believe that we’re going to see the same levels of appreciation we saw in recent years on rental property investing. And another interesting dynamic that’s going on right now, is because interest rates have risen so much, if I’m buying a property and using leverage as an equity investor, depending on what I believe about appreciation, rent growth and those types of things, debt may actually be dilutive to my return profile in buying a property. So, that leaves me with an all cash investment option. That’s what I’m thinking about here. An all cash investment option, if I think I’m going to get 3% appreciation on a five cap property, that’s an 8% return.
And I’m hearing from you, I can get an 8% or 14% return with potentially less risk as a private lender in this market. So I think that’s a really compelling… And there’s a lot there. I just went through that. It was very fast. So rewind if that didn’t make sense and try out the analysis for yourself, and the calculators, but that’s really powerful stuff to be able to get an eight to 14% return and be in the lending position rather than the equity holder, because theoretically, your worst case as a lender… Well, your worst case is you’re tied up in foreclosure court for several years and you can’t get your money back. Your second worst case is you have to foreclose on the property and figure it out. So anyways, I thought I would chime in there with that. You might actually get better returns lending today than you can as an equity investor, depending on what you believe and where your market is.

Alex:
Well, I’m also glad you brought that up because it’s kind of timely right now because we’re on, what, our second or third fed rate hike. And I hear a lot, and talking to active investors like, “Oh, I’m pausing on buying because I don’t want to deal with these high rates,” so they’re just letting money sit on the sidelines. And I’m like, “Why don’t you just pivot and use the higher rates potentially to your benefit?” You’re like, “Okay, great. Everybody’s borrowing at a higher interest rate. That’s good for a lender. Let’s go do that.”

Scott:
I think it’s a fascinating concept. Quick question though. One of the things that is advantageous about investing in real estate, if I’m in that position trying to make that choice, is I get tax advantages, like a depreciation and things to offset my rental income. As far as I know, the income from this business with interest and points are going to be straight up ordinary income that I really can’t shield effectively from income taxes. One, is that true or do you have any tips and tricks on the tax front? And two, if true, do you recommend that folks really do this inside of their 401(k) or other kind of tax deferred or tax advantage retirement accounts?

Alex:
So the interest component is going to be ordinary income and that, or not ordinary income, interest income, so you’ll get a 1099-INT like you would from your bank. And then Beth can run through some of the other fees, like the origination that you were talking about.

Beth:
Well, that still would count as ordinary business income. There aren’t really any tax advantages you would get, perhaps if you invested in a syndication or if you bought real estate. And that’s why I mentioned earlier that this doesn’t have to be a mutually exclusive deal. I think a lot of people will want to use this as a diversification tactic so that they can have passive income without maybe some constraints of two to three year terms like investing in a syndication, or they don’t want to actively manage real estate or not grow their portfolio. So it’s a definite alternative, or a supplement I should say. And then just in my world, I represent a whole bunch of passive investors. I mean, I guess, in practical terms are considered note investors, whole note investors, and I place them directly into loans.
And I have basically two camps there. There’s some older investors who are liquidating their real estate portfolio. They’re getting older, they want to retire, and actually, they’re looking to simplify their estate planning as well. They don’t want their children to have to inherit these properties and squabble over them. Maybe some of them haven’t really expressed a whole lot of interest in being a landlord, and so this is a simplification of their estate. And then there’s a younger crowd, the 20, 30s and 40 somethings, who are really trying to just manage their daily W-2 and their small growing family, and they just don’t have the time to be a real estate investor actively, and so they find advantages in the private money lending world that is not associated with having to deal with tenants and toilets. So being able to make those great rates of return can kind of offset the tax implications associated with it.

Mindy:
I was able to invest through my self-directed solo 401(k). I do have some self-employment income. I’m a real estate agent among other things. And this was a really great way to juice some of my returns in that account when other things were not juicing the returns. So that’s how I have invested in the past. But I also have other income that I’m already paying taxes on. I’m not looking to increase that income right now. I’m looking to increase my other investment opportunities income at that time. And the way that it works for me, Scott, if you’re not familiar, is that that’s just a regular investment.
I’m not paying it because it’s a 401(k), not a IRA. And here’s where I get super squidgy, if you’re interested, talk to somebody who really knows what they’re talking about, but I don’t pay UBIT or… unrelated business income tax, or any of that stuff that comes with an IRA to invest. So this is something you want to talk to before you invest to see if the accounts that you’re investing in is a good idea, or if there’s tax advantageous ways to invest in different…

Beth:
Mindy, you actually brought up a really good point, because I also invest through what I had at the time was a solo 401(k). And there are people who… I mean, when you do deal with a self-directed IRA, you cannot lend yourself money, but you can lend it to other people and there’s no tax implications. But if you were to, say, buy a property that’s levered in your self-directed IRA, you will get UBIT, and you will have some implications associated with levered money within your self-directed IRA. But you don’t get that when you do private money lending.

Mindy:
Oh, that’s good to know. Okay. And I don’t have a self-directorate.

Beth:
Yeah. So you can’t flip a property in there. I mean you can, but you’re going to pay taxes on it within your self-directed IRA. Private money lending does not have that sort of tax implication in there.

Mindy:
Oh, that’s good to know. Okay. I’m glad I brought that up.

Beth:
Yeah. I’m going to say that I’m not a CPA, so I’m not providing financial or legal advice here, that people should consult a self-directed IRA custodian or a CPA for further information. But yes, that’s to my knowledge, and that’s how we’ve handled our retirement accounts. And that’s where my first loan was through, was from my solo 401(k), lending out 65 grand out of there.

Mindy:
Let’s see, let’s look at a typical loan, a common loan. What is the length of time that you’re going to be in, what are you lending to? Yeah, let’s just start with that because I’ll ask you 50 questions on that. Beth, what is a common type of private money loan that somebody who is just getting started might do?

Scott:
I think you call them the Noah of loans in your book?

Beth:
Well, yeah. We try to describe a practical scenario where we feel that new private lenders should get involved with first. And the standard scenario is lending your money out to a real estate investor, typically for a fix and flip, on a single family residence, because most of us live in single family homes. We have experience with it. We may understand our neighborhood or a market and where the real estate market’s going. And so, it’s kind of a canned in the box kind of loan. But the reality is, and why Alex and I wrote this book, is that there is no prescribed path for private lending.
You can do within legal parameters just about anything you want. So while I tend to lend out around 10 months, because I think that’s just a nice sweet spot for a fix and flip, I’m not going to shortchange them on time in case maybe their windows are delayed by a month or so, but it’s not too long so that a borrower can hang themselves just dragging out a project. But Alex and some other private lenders that we know within our network, they tend to have shorter terms. And so I’ll pun it over to Alex to tell you a little about how she frames her loans.

Alex:
So normally, I’m in about the six month timeframe, and obviously they have an extension that they can add to it that’s already written in the loan documents. I call it the COVID kicker, if we want some fun names. But if they run into a situation where it takes them four months to round up windows, they would have an open line of communication and they could say, “Hey, look, I ordered these today. We closed on this. I knew it was going to be a problem. I’m still waiting on windows.” And we did.
We waited that poor guy waited four months for windows to come in. But because he was so communicative, gave me updates, it wasn’t any big deal when we got to the end of that loan term and he is like, “Hey, the windows still haven’t come in,” because it was a problem I knew from the very get go. So we didn’t have to necessarily hit what I call the nuclear option, where we have to do the foreclosure, because the deal was working fine, it was just powers that be above us could not get him windows in the appropriate amount of time.

Mindy:
Okay. Beth, you just said that you lend for 10 months. What happens if I have borrowed for 10 months, but I finish in eight? That never happens, but what happens?

Beth:
Well, they can pay it off early. I love that. My investors love that too, when they lend out their own capital and I place them in a loan that pays off early or on time. And so we don’t have any prepayment penalties, which is what it’s called. But plenty of private lenders can. And some of my private lenders that lend out the retirement plan, for example, they don’t want to keep pulling their money in and out, and so they may have some sort of prepayment penalty of a couple of months. That’s really not uncommon. But in my world, if we do 10 months and they pay off early, that’s just great for us because I can redeploy my capital.

Scott:
What would the points in interest look like on these typical loans that you guys just described for each of you? Maybe Beth, we could start with you.

Beth:
Sure. We like to have our points and our interest rates commensurate with the level of risk involved. So I think I had mentioned a little bit before, we’re a little bit unique in our market in Washington State where we do first lien positions, but we also do junior lien positions as well. And that means that we can place a second lien behind, typically a conventional loan, 30 year loan, which reduces some risk. And since not a lot of other people do second lien positions, I can command a little bit of a higher interest rate with the associated risk involved with that junior lien.
And so, I would say points at range anywhere from one and a half to three points. I’ve seen other private lenders command more. And then, I say that interest rate is typically around nine and a half percent for really those stupid low loan to value deals that you just can’t walk away from, and the risk is really just not that prevalent, up to around 12%, up to 14% in some cases. But it really needs to be dependent on usury law and other legal parameters defined by your state and at the federal level too.

Mindy:
You just threw out two things that I understand and I want to make sure everybody listening understands. You said second lien position or junior position, and you said usury laws. Can you just give a quick definition of both of these?

Beth:
Sure. A second lien position is a loan that would be in order of priority on title behind a first lien position loan. That can be a deed of trust in certain states. In Washington, it’s a deed of trust. And in other states it’s considered a mortgage. They’re both basically the same thing. One will require a trustee for deeds, and mortgages do not. But essentially, when you get a mortgage, like let’s say with a bank, and when you buy your house, that’s a first lien mortgage.
And when you place a HELOC on it, for example, because I think that’s probably more common, behind that mortgage, then that’s what’s called second lien position or junior lien. And when a property is sold, the liens are what… the lien position is what dictates who gets paid off first from the proceeds of that sale, if that makes sense. So the bank gets paid off first because they’re the first lien mortgage. And then the HELOC or us would be in second position and we get paid off second, and any sort of surplus of funds then would go to the seller.

Mindy:
Okay. And then can you define usury laws?

Beth:
I’m going to pass that one over to Alex because she’s good with that.

Alex:
That one’s fun. So something that most people don’t realize is private lending, we are talking about lending only on investment property, has to be non-owner occupied property. And the reason that is such a big deal, is because owner occupied property is actually regulated at the federal level. There’s licensing at the federal level. There’s consumer laws that have to be abided by. Disclosures, all these other things. So when we’re talking about non-owner occupied property, we’re actually talking about it on a state level.
So that’s a big reason why when so many people will ask, “Hey, does anybody have a template for a promissory note or a mortgage?” And it’s like, “Please don’t do that,” because what’s legal in one state may not be legal at all in another state. So those groups of laws by state are usury laws. They will outline if you need to be licensed to even do the loan, under what conditions can you do the loan, who can your borrower be, and what are those rates and terms, what if there is a ceiling, what is that ceiling, and does that ceiling include all of the fees or just origination points or…

Alex:
… Does that ceiling include all of the fees, or just origination points, or just interest rate? It gets very complicated and often to the weeds very quickly, especially when you’re talking about 50 different states, have 50 different versions of these things.

Scott:
So, it sounds like investment properties are a nice respite from those types of issues. That was a very bad pun that very few people will get.

Mindy:
I got it, Scott.

Scott:
Moving… But, on that note, with usury, you’ve talked about how you lend to, in your book, businesses almost exclusively, and not individuals, as just one of those little tips that will help you avoid some of those problems of where that can get commingled with personal things and be subjected to these usury laws. Is that right?

Alex:
It’s more along the lines of, if you think about usury laws, more like a bucket, so if I am an individual lending money to another individual, that is one bucket of usury laws. Versus, being an LLC that lends to another LLC, that is a business purpose loan, so that is a different bucket of laws. So really, the clarification about being a business lending to another business, that could be actually a reflection of licensing, that could be a reflection of the usury laws they’re trying to stay in, and it could be a reflection of the type of property they’re trying to lend on. In some states, the usury, you might not need a license to lend on single family homes, but you do on anything that would be commercial or vice versa.

Beth:
Yeah, and I think it’s important to say that even if you lend to a business specifically, it doesn’t exclude you from usury law, which is in essence, a consumer protection. But, it is an added precaution, to be able to lend to an entity, so that it further substantiates it as business or commercial purpose and use.

Mindy:
I think now would be a really awesome time to give a disclaimer that says you are entering into a legal contract with borrowers, and there are lending laws that apply to you, so you need to know the laws of the state in which you are lending. Is that true, Alex and Beth? It needs to be the state that you’re lending in, not the state that you live in?

Alex:
That’s where it gets a little tricky. So, if the borrower, the property and the lender are all in the same state, then yes. But, if the borrower and lender and property are in different states, some states will not accept the usury laws of other states. So, if you’re in a situation where it’s potentially multiple states, you really unfortunately have to research both states to see which one will use the other’s laws.

Mindy:
Well, and that’s fair. This is a great return and great returns don’t come with no work at all. We’ve called this passive income, I believe it very close to as passive as you can get, but there’s some work upfront that you have to do in order to make this successful. I mean, you could technically just throw money at people and hope for the best, but that’s not going to see the best returns.

Beth:
It isn’t. You would be surprised how many people do that, especially because private money tends to come from within your own network, and so you think that when you have this personal relationships with somebody, I trust them implicitly, I’ve known them since I was a child, and so inherently, there’s some level of trust where you tend to relax, maybe treating it like a business transaction. So, I get phone calls, unfortunately monthly, from people who have lent money with either bad promissory notes, without a legal advisor to draft them up for them, or maybe they’ve just exchanged money without anything in writing.
And so, that is where that the term scam can come into play, because people will unknowingly get into these circumstances without the legal protection and the legal advice and support from an attorney, who’s well versed in private lending and their particular market, and then so they get caught in a really bad situation and probably lose some capital, as a part of that.

Scott:
How many hours, Alex, would you think that you put in, before really mastering the subject and how much self education needs to go into this before getting in? And for reference, I always talk about that there’s probably 250 to 500 hours that you really need to put in before buying your first property, to get all these mental models associated with real estate investing. What’d you kind of guess is the similar investment for a private lender, here?

Alex:
I think it really matters on where you’re starting, because if you’ve done a couple rental properties, for example, you’ve kind of already learned how to underwrite a property. So, from the perspective of private lending, a big portion of that heavy lift is being able to underwrite it and do your due diligence on, if they said the ARV is 300,000, do I agree with that? And then, being able to use your tools and your sense of the market and say, “Okay, I agree with that aspect,” or, if you’ve even tried to go get a loan yourself in the conventional world, you kind of have an idea as a real estate investor what they’re looking for. They’re looking for credit worthiness, they’re looking for a certain amount of capital, they’re looking at the property itself, and making sure the loan to values are all there.
So, if you’re someone who’s already an active investor, it’s actually relatively small, because you’ve been teaching yourself how to underwrite a deal, and that’s what you’re doing in private lending. And, the portion that you don’t know in private lending, guess what? You can hire it out because you’re going to be hiring a title company, the hazard insurance. You can have your hazard insurance broker look over any of the hazard insurance documents a potential borrower provides. A lot of these little places where there’s a gap in knowledge in private lending, it’s very collaborative and you can bring those people onto your virtual team and fill in that gap for knowledge.

Mindy:
Who do you need to have on your virtual team? You’ve mentioned attorneys, you’ve mentioned title people, you’ve mentioned the insurance broker, who else should be on your team?

Beth:
A good escrow closing agent’s a really good one to have. Right? Good escrow closer, somebody that can assist with property valuations, I think a lot of maybe lay people that don’t have as much experience in real estate, might feel troubled trying to figure out how to properly place a value on a piece of property. And so, maybe having a real estate broker friend or a real estate investor friend, that you can lien on and get a second opinion on, or a third opinion on, is always valuable too.
A third party contract servicer is an excellent way to really make sure that your private money loan after it’s originated and funds are transferred, is seamless. Month to month, that third party servicer basically will do an automatic payment, usually in the form of an ACH and debit that directly from the borrower’s account, and directly deposit it into your account. So, it not only helps manage the monthly payments, if you were to have that on your loan, it’ll also, typically, the contract service here provides you with a 1099 INT, at the end of the year, as well.

Scott:
Awesome. And then, attorney, of course, right?

Beth:
Always an attorney. Actually in our book, we created a resource guide that has some access to some private money lending law firms nationwide, that can provide some additional support and some legal counsel, and also help draft up loan docs too. They’re a great resource.

Scott:
Where can people find that resource?

Beth:
The resource guide is online, after you buy the book, there is a lend to live supplemental materials section, and the resource guide, I believe, is in the supplemental materials, right Alex?

Alex:
It is.

Scott:
Let me go back a minute here to returns, so we just talked about, Beth, your returns of one and a half to 3% on the points, one and a half to three points when you originate the loan, and then nine to 12% interest rates over a 10 month period. And Alex, what do you get? What would be your equivalent on the loans that you do?

Alex:
So, I do it a little bit differently, which is why we work so well together. I actually, I’ve really laughing inside that you asked this question, because so many active investors, that’s their two buttons. They want to know the interest rate and they want to know the origination points, nothing else. So, when you hear how I do it, you’ll understand how this potentially could be problematic. So, what I do since my loans are so short, usually about four to five months, they pay a flat interest rate, so if they have the money for three, four, or five months, they pay the same amount and I give them two options. If they want to make monthly interest only payments, it’s going to be one interest rate. We’ll just say 10%. But, if they don’t want to make that monthly interest payment and roll it all in to the very end, when they go to sell the property, it’s 12%.
I have yet to have a borrower turn down, paying two extra percentage points to not make interest only payments, while the property’s being renovated, because for anybody who’s done a fix and flip, you are hemorrhaging money for the first three or four months. So, anywhere you can put even a little bandaid over that hemorrhage, they’re going to take. So again, it’s just a different way of looking at it and I’m not advocating this is the best way out of all, but just merely trying to point out to active investors, that if you start the conversation about the interest rate and the origination points, you’re missing so many other opportunities, where you could maybe change around the fee structure, change around some other terms alone, that actually will make it better for you, and you’re just wasting your time renegotiating to lower the interest rate annualized down one point.

Scott:
I love it. And, that answers my next question, or begins answering part of my next question, which is, to get to these 8 to 14% returns that we’re talking about, to get on the high end of that, with the structure that Beth outlined, it’s really the fast people pay off the first note and the faster you can, as quickly as you can redeploy the second. Now, you’re getting points multiple times per year, in addition to your rate. Whenever that money’s sitting idle, you’re obviously getting 0%, so that you’re losing against that, to a certain extent. And, in your case, Alex, it’s really just about how much of the year can you keep that money deployed, with flippers, because you’re not making money on points. You’re just making 10 or 12%. Essentially, always 12%, as you just said on the interest only, or the no interest only payments. What’s the term for accruing the interest, until the very end?

Alex:
It just becomes part of the balloon payment at the end, so if I… Because I fund fix and flips, so basically it’s ultimately their retail buyer, is the one paying their interest payment for them, when we go sell at the closing company.

Beth:
It’s called deferred interest.

Mindy:
You’ve mentioned Alex you’ve mentioned flips multiple times. Do you only lend on flipping?

Alex:
That is what I would prefer to do, at least during COVID, because anybody who was paying attention to lending during COVID, the underwriting guidelines for investment property would go up as the cases went up, and then come down as the cases went down, and then we’d go through another thing and the underwriting guidelines would go up. So, we as private lenders, are basically we get our capital back when either the property sells or the property refinances, and at least here, in my market, because I’m in Hampton Roads, we have a very transient population due to the military… Housing was very, very short. They had a very minimal supply.
So, in my eyes, if we have owner occupied underwriting guidelines that weren’t changing as much as non-owner occupied underwriting guidelines and we had a massive housing shortage, I’m going to fund a fix and flip under those conditions because I know basically, as soon as they put that thing on the market, it’s going to be the crazy zaniness that many investors are familiar with over the last two years, versus potentially having to work with a borrower who’s trying to do a DSCR loan to refinance or trying to get their local community bank to agree to refinance when the viral count’s way up through the ceiling. So, that was a little bit more a reflection of what was going on in the market, at the time.

Mindy:
Okay. Beth, do you do mainly flipping loans, or is that-

Beth:
No. I’m completely the opposite of Alex, which is so great to have a good trading point of view. Right? I think I mentioned before, I have scaled my private lending into a full active business, so I consider myself a private money matchmaker. I have capital partners that I lend their money out to borrowers, who are active investors. I do flips, I do buy and hold investors. I’ve seen, particularly with my crowd, that the borrowers have grown up and transitioned from flips, over into buy and hold investing. Some of them maybe have gone from single family fix and flips, over to small multi-family value add, and so we want to grow with them in that process. And, while underwriting has changed significantly in the last couple of years, we were able to navigate that well, with some of our investors, so that maybe you were looking for a DSCR loan, or maybe you were looking to refinance conventionally.
We would pitch it over the fence to some of our hard money lender friends that offer those DSCR loans and have them prequalify the borrower, because I wanted to make sure that they had a solid exit strategy. And really, the second exit strategy for any of those people would just be to put it back on the market and sell it, so that was always a secondary plan B exit strategy for them. And so, we weren’t overly concerned about it, but we might have put a larger equity buffer in place, especially when COVID hit.
If somebody was going to buy a value add buy and hold, I may only lend up to 65% loan to value or combine loan to value, because I needed that extra 5% equity buffer, so that if they needed a refinance out at 70% loan to value, for example, on a cash out refi, or even a rate and term refinance, that 5% slush there could be used by some lenders as capital reserves required to refinance that loan. And so, capital reserves were something that were required much more significantly now, since COVID, that wasn’t really a standard requirement for refinancing prior.

Mindy:
Oh, I wasn’t aware that wasn’t a standard requirement, prior to COVID. You should certainly have reserves.

Beth:
Yeah, it wasn’t as great. Right after COVID, for the remainder of 2020, I was seeing across the board, at least six months cash reserves, in many cases with some other lenders, they were requiring up to 12 months cash reserves, which kind of defeats the purpose. I’m trying to do a cash out refi, you’re asking me to show 12 months of reserves, I don’t have it, I’m asking for a cash out refi. But, when us, as the private lender, are creating that extra 5% equity buffer and they’re working with the right lender that would utilize that as their cash reserves, then I still had a proper exit strategy for them, in place.

Mindy:
Well, let’s move to our hypothetical deal. The vanilla deal. I have somebody that I think I want to lend money to. How do I vet that borrower? How do I vet the deal? Which one do I vet first?

Alex:
Oh, you just stepped into it now, maybe.

Mindy:
Okay, Alex. Please tell me, which would I vet first, the borrower or the deal?

Alex:
You’re going to get two different answers out of us.

Mindy:
Good.

Alex:
We have this debate of the jockey versus the horse, and I am on team jockey. I’m fully looking at the individual, because my general investing philosophy is that I’m betting on that person can act ethically, can make decisions that are good and timely, and then the property, as long as they can deal with the property and make those good decisions and the numbers check out for the property, then I’m okay putting more of my faith in an individual. Whereas, Beth goes the other way, but also has a reasonable explanation for why she looks at it the other way.

Scott:
Before Beth goes, Alex, do you require recourse loans, in that case?

Alex:
Yes. And, the other kind of quirky thing I do is, I-

Scott:
Can you explain what a recourse loan is, and then-

Alex:
Sure. So, the recourse loan means that they are going to be personally guaranteeing the loan, so even though we are lending to an LLC, we are requiring that the personal assets of the equity members of that LLC are basically signing on the dotted line, that if something goes wrong and the loan isn’t able to be fully repaid by the collateral, which is the property, that we have the ability to legally go after the assets to be made whole. And then, I would say the quirky thing that I do, since I have so much faith in people or lack of faith in people, depending on how you look at it, is I will actually ask for three professional references. I want to know three people in the market that you have done business with. I don’t care if it’s a broker you bought a property from, listed a property from, I’m going to call those people and I’m going to talk to those people, and then I’m going to call, and then when I’m talking to those people, I’m actually going to ask them for another professional reference.
I’m going to say, “Hey, do you know about anybody else that’s done deals with borrower, Bob?” And they’re go, “Yeah. You know what? Sam did a deal with him two years ago,” and then I’m going to call Sam. And what I call that secondary ring, that secondary ring is where you get the real information, because that’s not the borrower supplied references, if you get what I’m saying. So, I’m going to dive in that way, more than I’m going to dive in towards a property. It’s not to say I’m ignoring the property, but most of my focus is going to be on the individual, and do I have faith that they’re going to take accountability and do everything they can in their power to make me whole.

Scott:
Sounds like very similar to good tenant screening.

Alex:
Absolutely. Very similar.

Mindy:
Yeah. I am going to say anytime somebody gives you references, call all the references. I was hiring somebody, a contractor and I called the reference and they’re like, “They’re great,” and they call the next reference. They’re like, “I have no idea why they put my name on the list. I am currently in a lawsuit against them, because they did such a bad job,” and I was like, “Oh, well, I’m sure glad they put you on the reference list.” Call all the references. You’re probably not ever going to find the guy I talked to, but you might.

Scott:
Alex, last question before we hear Beth’s typical deal. What is the typical volume that you do for a load? How big are these projects?

Alex:
Most of them, what I do is going to be in the second lien position, so they’re anywhere between about 20,000 and about 50,000, and it gets turned over two to three times a year, just depending on what projects are going on and what investors that I choose to work with are. Some of them have actually moved out of the market, because they’re in the military, as well, so they have moved on to other markets that I do not want to lend in.

Scott:
Beth, can we hear about vanilla deal for Beth, and your philosophy? It sounds like you’re a horse better. You bet on horses.

Beth:
I bet on the horse, because people disappoint me, properties don’t. I said that on just about every call and podcast, but the reality is equity buffer in my world protects all, and when you have equity and a property, no matter how trustworthy that borrower is, sometimes there’s circumstances and variables that are outside of their control. I don’t think anybody real holding a property or a project, in the middle of March 2020, really expected a shelter in place. I certainly didn’t. And so, when you bet on the horse and not necessarily always on the jockey, you have that level of protection in the value of the property, to protect you in case things go sideways, even when you’re not working with a bad player. That’s the approach that I take.
Again, I do this on scale, so the average loan size in my market is about 350 to 375 in my world, and that’s a blended mix of first and second liens. And so, if you want to scale your private lending business beyond just your own capital, you have to streamline your underwriting and choose where you’re going to place a heavier emphasis, and that’s not to say that we don’t underwrite the borrower we absolutely do. But, when you are dealing with multiple loans and inquiries a day and I have a team now, I really need to streamline it to be a little bit more focused on a hard asset, as opposed to the borrower, themselves.

Mindy:
Okay. You have both said that you lend in second position, as well as first position. I’ve never done a second position lien. I like first position. You mentioned high equity when you were talking about a particular instance where it made sense, what sort of equity are we talking about… I want our listeners to know that the second position is a bit more risky, so you need more of a buffer. If there’s no equity in there or there’s barely any equity, you should not be in the second position. In my opinion, I’m not a risk taker.

Beth:
Well, absolutely. I think second position’s got a really bad rap in 2008, because there was a lot of mortgage fraud going on. And so, second lien holders weren’t necessarily being notified when there was modifications of first lien positions, but the reality is that second lien positions, if done carefully and within the confines of what is allowable in your state, they can be an effective private money loan. And so, for us, we typically like, no matter what loan position we’re in, we like to be around 65 to 70% loan to value. That means 30% of the value of that property is an equity buffer to protect me, in case things go sideways, so if it goes into default and I get default interest, or if they’re late fees, or if I have to in engage a legal attorney to help get them to perform, that 30% will help cover those expenses or those costs.
But, I think that sometimes people assume that second lien positions are the same thing as gap funding. Or, in other words, I need a down payment and rehab money, so I’m going to go into a second lien position, behind a hard money loan that the investor got from a local hard money lender. If it’s done behind a conventional loan like we do, because we don’t want some borrowers to have to rewrite their conventional 30 year fixed first position loan at 2%, two and a half percent, I don’t blame him. As an investor, I wouldn’t want to do that either.
And so, there is some safeguards that you can put in place in terms of lower loan to value, putting it behind a conventional loan that is 30 years and doesn’t have quite the default penalties associated with a hard money loan, that’s a short term loan, then you can manage the risk a little bit better. But, not all second lien positions are created equally, so there is a way to do it effectively and safely, but just not do gap funding at a hundred percent loan to purchase price, or a hundred percent loan of value.

Scott:
I love that. You’re saying, I’m going to be second position, and the reason why that’s such a good move in today’s market, is because I don’t want to refinance my first position, just like you said, and everyone has all this equity, because property values have shot up so high in the last couple of years. So, this is a great source of capital, this is solving a number of problems.

Beth:
Oh, it’s created a great amount of deal flow for us, because I’ve got a lot of buy and hold investors who are sitting on a ton of equity, but maybe they’re a self-employed investor and they can’t obtain a HELOC. And so, what’s the next best option? Well, I’m going to be a private money loan for them in second position, they’ve got several hundred thousand dollars in equity in there, and I’ll cross collateralize it with a new purchase, so that they can use that equity, essentially, as a down payment replacement or supplement.
And then, all of a sudden, I’ve got the ability to fund up to a hundred percent loan to purchase price for this new property that they want to bur or that they want to turn into a rental, and then when they go to do their takeout financing, now all of a sudden they have a higher loan amount, and so they can actually do a rate and term refinance at 75% loan to value, or maybe even 80, depending on the lender, and their fees are lower because they’re not actually pulling cash out.
So, for us, it’s been an extremely effective strategy as a lender, but it’s also a great opportunity for a borrower to get what they need across the finish line, with less money out of pocket and to reduce their refinancing costs afterwards, when they go to put it into a permanent financing.

Scott:
Okay. We’ve just created it, we just solved a trillion dollar problem here. That’s fantastic. I love that. That’s it, right? I mean, right now it is 2022, and traditional investment property lines of credit have just dried up. You ain’t getting a line of credit at 2, 3, 4 or 5% anymore on your investment properties. There’s nobody who offers it, I put the call out several times on this podcast. Anybody has an investment property, HELOC company, let me know.
This is the solution, is private money lenders for this type of stuff, and there’s a good solution on both sides of that. If you’re an investor and you actually have a good use for those proceeds, there are private lenders out there who maybe willing to lend to you at a 60, 70% LTV, depending on probably their risk profile, add an 8% interest, with a point or two in there, so this is not going to be free money, but you have a chance to use that money and put it to work on that next project, if that’s something that you’re interested in doing. So, there’s a huge solution here, that’s been a missing link for me, for a long time, in this space. I honestly don’t know which side of that I’d rather be on. The…

Scott:
I honestly don’t know which side of that I’d rather be on, the lending or getting that line of credit on my properties.

Beth:
Well, it doesn’t have to be a choice. We do both. My husband and I do the same thing. Sometimes we’ll cross collateralize our investment properties to take down new rentals. And it’s very strategic in nature. There’s a balancing act between borrowing and levered capital, and paying costs on that, but also keeping some capital reserves and some cash reserves in hand too.
But at the same time, if I’m going to refinance out after I have done my value add, then it’s going to be less expensive for me, and I can actually refinance it at a higher loan to value. Well, that’s kind of worth it right there. And then I also don’t have to get an appraisal the first time around with my private money loan. I can defer that and do my appraisal when I’m doing my takeout financing. And so that’s really meant for conventional commercial, doesn’t really have those kind of stipulations. But there is a big, significant difference when you’re doing a rate and term refinance conventionally versus a cash out refinance. Investors appreciate the ability of not having to rewrite their low interest first lien position, which is what hard money lenders are going to require you to do.

Scott:
Okay. So before we get into… The next thing we have to get into is how do I go about doing this in a practical way. But before I do that, I want to ask one more question structurally about liquidity. So I put this money out, but I lend it out and I now have a project or a use for that. Is there a secondary market for these notes that I can sell to? Is there some place, is there someone, can I have this mortgage out on this second lien position and I need the money quickly. Can I sell it to Beth, and get out of that mortgage, and get my money back in some way?

Alex:
So in that case, it’s going to be the perpetual, it depends. Because this is very popular in real estate. There are note buyers. There’s even people in bigger pockets that talk about note buying and they potentially would be someone interested in buying the note. But what you’re going to run into is they’re probably not going to want to pay a hundred percent of the unpaid principle balance. So you may end up taking a little bit of a haircut.
There are actual companies out there, loan aggregators, that basically are purchasing these loans in their own secondary market. But the downside of those is they are going to want something that’s traditionally very conforming. They’re going to want a full appraisal. They’re going to want a credit check. They’re going to want to see the entire underwriting file. So if you are someone that you think like, “Oh, I can lend this out for six months, but I’m going to actually need it back in two or three. And I can just sell the loan and get recapitalized.” That is true, but you might not get the entire principle amount back.

Scott:
Okay. I lied. I have one more question on this then. And this is kind of separate. States. I imagine that, Alex, you’re in Virginia, is that correct?

Alex:
Yes.

Scott:
And Beth you’re in Washington state, right? I’d imagine that there’s a significant difference in foreclosure potential between those two states and that there’s going to be even more dramatic differences between a state like Texas and California. How does that factor into interest points, risk tolerance, those types of things for a lender like yourselves? Maybe we can start with Alex.

Alex:
It really depends on the usury laws because in some states default interest might not be possible. They might have a very low ceiling for what that upper interest rate and fees can be. So that part, as long as you’re trying to price in, “Hey, if this goes to foreclosure, it’s going to be about $2,400 in legal fees. It’s going to be maybe six months of waiting until I can get through the court system.” And again, everybody kind of goes for that default nuclear option first, when in actuality, there’s lots of little stages you can potentially help along, modify a loan, open communication. So it’s rare for it to get to that point, that nuclear option, where we must foreclose.
It does happen, but to Beth, when Beth mentioned earlier, if you have that equity buffer built in, if it takes a year to foreclose on something but you have 30% equity buffer and the property has been appreciating just with the whole market as a whole, that’s just building in your favor. But yeah, you have to build in and at least have some sort of knowledge on what the timeline is, what those upper limits are for usury for interest rate, any sorts of fees, anything like that. You can work your way into it backwards and go, what LTV am I comfortable with, knowing I have potentially X amount of default interest and X amount in legal fees coming my way?

Mindy:
Okay, Alex, let’s get out of the hypothetical and jump into reality. How are you finding these deals? How is somebody listening to the show going to be able to find deals?

Alex:
This is probably the easiest part. And it’s probably one of the reasons why I love lending. It’s everybody’s first question is, “How am I going to find potential borrowers?” And I’m like, “All you got to do is stand in the middle of a REA meeting and say, you have capital.” That’s literally all it takes. You will become the most popular person in a room within seconds.
But the real problem is how do we kind funnel down to the person or people that are going to be our ideal borrower? So normally the first thing I tell people, before you stand up on your chair in the middle of a REA meeting and say you have capital, get very, very clear on what you are willing to lend on. And just a good rough guideline of what you’re willing to lend under what conditions. So, for example, if you stand up in the middle of this REA meeting, it’s a local REA, they might pitch anything from a horse farm, to apartment development, to trailer park to three-two that needs to be updated from the 1990s.
That, especially as a beginning real estate investor, that’s very hard to fit and parcel out, which one’s the best deal for me to fund because they’re all so different. Versus if you stand up and say, “Hey, I’m going to lend on single family fix and flips, three bedrooms, two bathrooms. They’re going to be within about 10% of the median home price for my area. I want them roughly between this age and this age.” And it sounds kind of weird to kind of narrow it down that much, because they’re going to be like, “Nobody’s going to bring me a deal.” I guarantee you as long as it’s appropriate for the area, somebody’s going to bring that deal to you. So as long as you have a pretty good picture, and that’s even something for the active investors. If you find a private lender in your network, don’t ask them about the rate and terms, please don’t do that. Ask them what are they willing to lend on?
Because saying something like that, you can start procuring your own private lenders instead of the general question, “Hey, do you want to invest in real estate with me?” Well, that could be an elephant farm in Texas or that could be a condominium complex in Florida. Versus the conversation of, “Hey, I’m buying three-twos in this particular city in this particular state, and I’m going to turn around, fix them up and then sell them to families. Is that something you’d be interested in lending on?” And that’s two completely, totally different conversations. So that’s what I would say. Finding is the easy part, kind of chiseling it down to the appropriate person is going to come from establishing what your loan criteria and standards are going to be.

Scott:
But let’s pretend that we’re a complete novice in this. And I hear you. I go to the REA meeting and say, “I have capital.” And then I’m flooded with people who I can’t, I cannot… Are there other tips or tactics from a literal sourcing of that? Cause I’m sure it is as easy as you say there, but other things I can do to prepare myself mentally to go out and find these potential offerings?

Alex:
I would say, realistically, it’s going to sound kind of strange, figure out what the lending criteria are for maybe some hard money lenders in your area. And there’s a reason they have those criteria. And there’s a reason it’s pretty uniform across the entire country, X up to 60, 65% loan to value. They’re going to do a hundred percent of purchase price or 90% of purchase price plus some renovations. If you can see what your lending market as a whole is doing, then you could either position yourself competitively and say, “Look, I will go a little bit above that, but under this guideline. I will do a second in a very specific box.” Those types of things. The other thing I normally recommend for brand new lenders, is do not start with a brand new real estate investor, because then you end up with the blind leading the blind.
So if you have someone in your market that is a very avid fix and flipper, they’re very well known or they’re a landlord that has lots and lots of units. Even if you’re a brand new lender, they will at least should be partaking some of their knowledge and experience and saying, “Look, I’ve done a hundred of these properties.” They can have some sort of sleep at night saying their borrower’s very, very well connected in the real estate community, their borrower’s borrowed money before successfully and repaid it because they still own property. And their borrower has a ton of experience doing that particular business model. So I would almost kind of say, if you’re a brand new lender, look for a more experienced borrower. Yeah, you might get lower rates, but you’re not going to be two new people doing this transaction together, and nobody knows what’s going on.

Mindy:
I’m so glad you said that. Because that was going to be a question of mine. And yeah, I would love to be able to take a chance on somebody but not when it’s your money and you have the opportunity to lose all of it. I mean don’t lend money to somebody that you are not willing to completely lose in the first transaction. But you can mitigate a lot of your issues by just doing your homework.

Scott:
You mentioned a great point here, hard money lending and private money lending. These terms are used interchangeably. In your book you have a great breakdown between the two of those, but could you provide that at a high level here for folks who maybe don’t really understand the distinctions?

Alex:
So what we are calling private money lending is we are lending capital that is secured against real estate, and that capital is capital we somehow directly control. So it’s our capital from our actual bank accounts, retirement account, whatever it happens to be. Hard money lenders are going to fall more into that sort of what an institutional lender would feel like. They’re going to have normally very formalized application process, rate and terms. You have to make sure you check all the boxes. You have to have above a 680 credit score. You have to have six months of PITI in the bank, or else they won’t talk to you because their capital that they’re lending out actually comes with strings attached. They have a business warehouse line of credit from a bank. Maybe they have a fund. And so they have passive investors that they’re obligated to. All those things come with strings attached. Like we will give you this money for you to lend out, but you have to stick within this lending criteria.
Whereas when you’re talking to a private lender, like I mentioned earlier, we have the ability to just throw the criteria out the window if we really wanted to. We can make it within the confines of the usury laws. We can make it pretty much anything we want, as long as it works for, us as the lender works for them as the borrower. Because we are trying to set up a situation where it’s a win-win. Because we are pretty much, we’re reliant on each other. The reason I didn’t go out and buy this three-two ranch is because I don’t want to go out and buy this three-two ranch. I would rather remain passive. So it’s in my best interest to make sure that my borrower performs and it’s in their best interest to perform because they want keep their property.
So you’re forming this kind of symbiotic relationship, whereas anybody who’s tried to get a hard money loan. I’m not trying to be besmirch them. They have a place in the market, but it’s just a very different experience from a borrower’s perspective where it’s very transactional in the hard money loan sense. And it’s very relationship based in the private lending sense.

Scott:
So could I put it simply that Alex, you are a private money lender, and Beth, you are more of a hard money lender at this point. Is that one way to think about this?

Beth:
I liken myself as a private money matchmaker. In the true sense of the word, I guess you could consider me a broker, a private money broker, because I’m placing capital directly into private money loans. Again, we don’t, to what Alex said, I don’t have any institutional capital requirements. And so we have a lot of leeway and some flexibility that a lot of hard money lenders don’t. But yes, I place some of my own capital, but a fair amount of my business is placing other people’s capital.
But beyond being just a broker, we take care of our clients beyond the loan just originating. Which most brokers, they’ll put a fee on there, and then the loan closes, and then they disappear and try to go to originate more deals. For me, I need to take care of every single capital partner that’s within my circle because it’s all been strictly word of mouth for them coming into our group. So I don’t just lose professional reputation if something goes sideways, I lose the seat at the [inaudible 01:05:15] table and I don’t want that to happen. So yes, I’m considered a broker, but really for all intents and purposes, I’d like to call myself a private money matchmaker because we provide full concierge service to both sides of the house, to our borrower and to our lender.

Mindy:
So Beth, I have found somebody that I think I want to lend to. How am I going to take this information and actually put it into practice?

Beth:
Well, for starters, you’re going to have to start doing some conversations with the borrower. You want to make sure that you have a full understanding of the scope of work, what their intentions are, what their experience is. And you’re going to capture a lot of this information through phone calls, emails, in person conversations if you can. I often like to try and meet some of our borrowers at the prospective project or property that they’re trying to acquire. And that way I get a better sense of what they’re trying to accomplish. And more over, I also get a sense of maybe some of their nonverbal cues too. So a lot of things can be masked in an email to you, or filling out a or presenting like a presentation, a lot of investors to provide a overview of themselves in the project.
And then you’re going to go to the point of coming to some sort of agreement in rates and terms with the borrower, like what will work for them, what will work for you. And then when you have some consensus on that, then you’re going to go and vet out a lot of the information that you guys talked about previously. So I’d want to look at documentation like a purchase and sale agreement. I’d want to look at maybe a bank statement showing their proof of funds for their down payment. I might want to look at a schedule of real estate if they hold real estate, or some of their project experience if they’re an experienced flipper. And maybe I’ll take those addresses, and I’ll punch them into a web search, and just validate that they’re actually the vested owner of that property, or that they were the vested owner and the seller of a property they flipped.
So there’s going to be a lot of validation of some of these conversations that you have in place. And so there’s a fair amount of legwork that’s done before the loan gets funded. So it’s not a hundred percent passive at the onset, but once you’re able to get to funding, that’s when it becomes mailbox money for you.

Mindy:
How long would you say typically is elapsing before, between the first time you meet somebody and the time you fund their deal? Cause it sounds like you’re taking time to get to know them, which I’m advocating for. I’m not trying to say rush through that part, but if somebody comes up to you and they’re like, “Hey, I need money tomorrow.” When you’re a landlord and somebody’s like, “I need to move in tomorrow.” That’s a super red flag. Why do you need to move in tomorrow? Why didn’t you make plans ahead of time? When somebody needs funding right away, I would think that’s a red flag. Why? What happened to their other funding?

Scott:
I had a tenant come in and say, “I’m being evicted. And so I to will need to move in immediately.” In one of the applications.

Beth:
Oh, we get those too, Scott. It’s like, “My loan is in default. I need to refinance immediately.” And you’re like, “Okay, thanks for telling me that.” But to answer your question, Mindy, there’s really a balancing act, right? Because people need to use private capital or hard money because they want to be able to create a favorable offer. So oftentimes the pitch is I’m going to pay extra an interest because I want to be able to offer a quick close to the seller.
And so there needs to be some sense of urgency to act quickly, but I also can’t necessarily fund a deal tomorrow because I’m still required to go… Well in my world I’m required. Some lenders may not. But I prescribe getting a title commitment to make sure title is clear, ordering a lender policy to protect your loan from a title insurance perspective. And that takes time. And that requires resources from outside of my control. So there’s a fair amount of time involved, maybe a couple of days. Sometimes I get title turned around in 24 hours in metropolitan markets, but sometimes it can take up to a week or longer. And so there has to be some sort of balance between speed and being able to do your due diligence on the loan too.

Scott:
Does your book contain a checklist for these items, these policies that protect title insurance, and hazard insurance, and those types of things that protect you as a lender?

Beth:
It does. We have a whole section on underwriting. In the conventional lending world, we call it loan processing and loan underwriting. When you’re a private lender, you basically do everything yourself with the help of a virtual team. So we created it in a step that’s called, I think it’s collecting condition. So that you’re collecting all of the documents that you need, both some from the borrower, some from the title company. Maybe you’re collecting some forms that you want them to fill out, like Alex wants the letters of reference and things of that nature, a project performa. In that section in our book, we create a list of a number of documents you can collect, but with the caveat that you really need to be able to collect and review documents quickly. And you need to be able to have the acumen to inspect what it is that you’re collecting.
So I’m not necessarily going to order a full on credit report unless I really know how to evaluate that and understand what that credit risk might mean to me. So I don’t necessarily prescribe getting a credit report, but other lenders may choose to collect that. And they understand what they’re evaluating because they’re maybe a landlord and they’re used to doing those kind of credit and background checks. So we do list out a number of different documents that you’d want to collect, to substantiate the borrower, to substantiate the project, to substantiate the property itself and the valuation of it. But we want to make sure that there’s really some critical thinking around what it is that you’re collecting, and how you’re actually going to evaluate that, and how that might impact your overall approval or denial of a loan.

Scott:
So significant time and money goes into getting these documents, in some cases purchasing policies, like title insurance and those types of things. Is that all, I assume that that is all charged to the borrower in some capacity as part of this. Is that right?

Beth:
I think for Alex, for both of us, it is. Yes.

Alex:
Yes. I mean, it’s really funny that people that are wanting to lend, it seems like their big hangup is I don’t want to pay a thousand dollars to an attorney to drop documents. And I’m like, but you’re willing to give someone a hundred thousand dollars, and the only thing you’re getting back from that transaction is legal documents, and you’re okay with a free template you found online. That’s where your line is? When they don’t even realize that is a cost that you can very easily pass on to the borrower. So you’re not even paying for it.
Private lending’s one of the few ways that I’ve ever found where someone else pays for my protection of my capital. I mean, where else are you going to find that the borrower pays for a lender’s title policy, the borrower’s paying for hazard insurance, the borrower’s paying for flood insurance if required, and the borrowers paying for my legal docs to be prepared. I don’t, it just really boggles my mind, whenever new lenders come to it, and they’re like, “Why can’t I just use a template online and get it free and get it done?” I’m like, “Well, here’s why.” You don’t want to do that. And it’s not a cost to you as a lender.

Scott:
Okay. So this is awesome. So the process seems, you go in the middle of the REA, and you say, “I’ve got money.” And then people come back to you. They then pay for all of the fees associated with underwriting that mortgage. Pay you a boatload of interest. And you’ve got first or second position notes there. That’s all great. What happens if things go south and they stop making payments? How does that work?

Alex:
That can depend on, yeah, I was going to say, Beth’s got a ton of experience in this. You got to tell them about the story where the default actually ended up making more money, because I think that story is very poignant for active investors to hear. And for people that want to get into lending to hear like default, oh my God, the loan is defaulting. This is a huge problem. When in actuality is a lender, it could be a more money making opportunity for you.

Beth:
It absolutely is. I mean, to Alex’s point, I mean the nuclear option really is the last resort. So when a loan goes into default, there’s so many different ways to cure it. And of course it depends on each individual state. So I can only use mine as an example. In Washington state, if a alone goes into default… By nonpayment, I should say, right, because there’s other ways for a loan to go into default. But if they were to go into default for nonpayment, on day 31 is the official day that I could file what is called a notice of default. And it doesn’t get publicly recorded, but it basically puts the borrower on notice that they have 30 days to cure that loan and bring it current, or you will move forward with the next step. If they cure it within that 30 days, your loan is current and it’s all fine.
If they don’t cure it, then you can move on to the next stage, which is called filing a notice of trustee sale. That’s a fancy way of saying a foreclosure. And in my world, in Washington, you have to set an auction date no less than 120 days out. So really from end to end, you’re looking, at best, about a five month process. Things never go smoothly, as you know. And so I’ve had some of these things drag out, probably close to 18 months in certain circumstances. And fortunately I have less than a 4% default rate, which is fantastic. I can count how many times on one hand that I’ve actually had to take a loan all the way to auction. But to Alex’s point, even if it does go to auction, if you do have a healthy equity buffer, it can work out favorably for the lender.
So I actually just wrote a blog for Bigger Pockets, entitled Loans Gone Wild, What Happens When a Borrower Defaults. And we really felt it was important to highlight a real case where a borrower did default. I had to work with my lender to start the foreclosure process, but in the end it really worked out well in his favor. And it just took a little bit of time and effort. So what really happened was that the borrower defaulted within a couple of months. So we started with the notice of default. We had to move on for a notice of trustee sale. She tried to stifle our progress in moving forward with this trustee sale by filing a bankruptcy. She’s required by law, after she files, to follow up with some specific documentation. And each time she filed once under her own soc, and the second time under a false soc, she never followed up with the appropriate documentation. And so that BK was dismissed.
So that put a few speed bumps in there. But then it finally went to auction. And at that point, my lender placed a bid for the minimum amount that he would be willing to take the property for. And that amount effectively is his principle capital investment, any interest and default interest still owed to him, including late fees, and then of course the legal fees that he had collected and paid for upfront as well. So he put a minimum bid in, and he didn’t have to be at the actual auction steps to be able to put in a bid. And then for some random reason, no other person bid on that property, which is a great single family property. Actually had two buildings on it, was right on the river. No flood issues with it. And it was stabilized too.
So he ended up taking the property in his name. Now that doesn’t, that’s the first time that’s ever happened with us. But he was able to take the property. And because we have a wide network of borrowers, we found a couple investors that were willing to pay an assignment fee just to take that property off his hands right away. So he had a lot of options. Because at this point he could have made a five figure assignment fee and still walked away with his full principal interest and legal fees recouped from that as well.
And so, because he was a seasoned investor, he is a passive buy and hold investor with some small multi-families around the Seattle area. And he’s retired. He achieved fire quite early. He’s in mid fifties. He was bored. He’s like, “I could only play so much tennis. So I’m actually going to flip this property myself and I’m going to make some money, more money on it.” And so he did, and this was right in the middle of COVID. He hired his general contractor. He flipped it. He put it on the market. It went pending within, this is.

Beth:
He put it on the market, it went pending within… This is this last spring, so it stayed on the market a little bit longer just because he had some GC delays, but he ended up having a six figure return on there. His cash on cash was stellar, and so this is the perfect example of when we think default is the nasty D word, but at the end of the day he really ended up looking real solid on paper with this investment. And it took about, I would say about 16 months of his time from the time that he originated the loan until he was paid back through the proceeds of his sale.

Scott:
Betting on the horse.

Beth:
Betting on a horse, always.

Scott:
All right. So I think that’s super helpful, and I think that example is super powerful because Washington State is clearly one of these states that it’s going to be harder to foreclose in a property and slower than many other states in the South and Southeast, for example you’d imagine. Is that right? I’m guessing, I’m making an assumption there.

Beth:
Well, I would say that we’re probably better than California, but we’re not as good as Texas and some of the states in the South, yes. It is very, very state by state. Of course, the coastal states are probably going to be a little bit more lengthier transactions up in the Northeast too, I believe, and that’s why it’s important to consult with the real estate attorney that deals both in private money as well as foreclosure. You’re probably going to have to hit up a couple of different attorneys for that because most of the time they don’t practice in both.

Mindy:
Okay. So we talked about red flags… Alex, since you’re lending to the person as much as the deal, “I need money right away,” as a red flag. What are some other red flags to watch out for? I mean, besides the, “Oh, I’m in default,” the obvious.

Scott:
Things didn’t work out with my last lender so-

Mindy:
Yeah [inaudible 01:19:49].

Beth:
Well, even in default they said, “I’m in the middle of negotiating a reduction of principle with my second HELOC. So it’s actually going to be this kind of payoff when we go to fund my loan,” and you’re just laughing and you’re like, “Okay, so you short changed your creditor, but you want me to fund a deal for you?”

Mindy:
Yeah. So there’s one red flag when they don’t have enough money to pay their current creditors. What are some others we could talk about?

Alex:
I would say for me, I’m very much about accountability, so if I’m listening to some of the conversations, I’ll ask very open ended questions, “So tell me about the last couple of deals you’ve done. How did they go? What happened?” And if I constantly hear, “The contractor ran off with half the deposit, my partner wouldn’t answer my email, so duh, duh.” Everything is someone else’s fault, to me that is not my borrower. I wanted a borrower that’s going to come, instead of saying, “The contractor ran half off with half my deposit,” they’re going to say, “I hired the wrong contractor,” or “My partner and I could not agree on this particular aspect of the deal and that’s why we are not moving forward with another property. We just learned we don’t work well together in that capacity.”
I want to hear some self accountability because ultimately that’s what in my mind is very important with executing a business plan for a property because it’s very easy to just stand on the front lawn and point that all the contractor’s doing everything wrong, when the person that made the contractors be there is standing in the front lawn, yelling at the contractors. So I’m very much about self-accountability, so if I see a high degree of that, I’m good, but if I hear a lot of blaming, not so good. Being from Louisiana, there’s a thing called the Cajun underground, and it might feel like everybody’s involved in real estate, but the circle is actually really small. So one of the reasons I do those professional phone calls is because real estate is a small circle, so if somebody has burned someone else in the circle in your market because most private lenders are hyper local, they lend in their immediate area.
Somebody in there is going to know that in the Cajun underground, and somebody’s going to tell what actually happened, so that’s why I say if you’re a private lender and you’re worried about a borrower, go find one of the more popular people in the room because if you stand up as a squeaky wheel and say, “Hey. Mr. Dude has not been paying me for the last six months,” in the middle of a REIA meeting, I guarantee you, he’s going to find a way to get you paid off real quick because you need to be quiet.

Scott:
… another good tip there is probably go on to the BiggerPockets forums and find the most active power users. The people who have posted thousands of times in your local area because they’re out there hundreds of thousands of times, and those people will potentially be at least entry points into that Cajun underground if you’re having trouble finding that in a physical world, the digital BiggerPockets world might be helpful as a starting point there. What about you, Beth, any red flags?

Beth:
Yeah. I mean, aside from some of the common, “Oops, I said this too much or whatever,” I would say that there’s a lot of context that’s provided that’s unspoken. For example, one of the things that I was just talking with my team about is that we often have borrowers that are really engaged up front and they approve terms, and then as soon as you need to get documents back, they go dark. And then they come back and they say, “Okay, we’re sorry about that and this and that,” and they send you maybe a couple of documents and then they go dark again for another week. And you’re trying to understand if they’re really interested, if they’re really engaged. If it’s that difficult to get them to meet you halfway so you can give them money, only imagine how harder it is to collect on that after it’s funded.
So the ones that come in and out of your frame of consciousness are the ones that we tend to not want to work with, and then on the flip side, if they’re lightening up my phone and my email at 10 o’clock at night and calling the next day and asking, there’s a certain level of responsiveness that almost reeks of desperation, meaning they may be in some really turbulent times or they’re desperate for that money because they’re in hot water. And so that’s another sign that we typically tend to look for. You want someone that’s really communicative, but you don’t want them dipping out all the time and just excusing it because they’re too busy, and you don’t want them lighting your phone up all the time in the middle of the night because you have a life, and I already have kids, I don’t want to take care of them too. So trying to figure out these issues upfront before you fund is very important because you don’t want to deal with it after it closes.

Scott:
So these are very qualitative things that you guys are highlighting here. I presume that’s because you’re quantitative the hard, yes, check the boxes are just defined in a policy upfront outside of that, so really much of your time is spent looking for these qualitative things or as much of the skill or the art that goes into this is going to be the qualitative side.

Beth:
Well, absolutely. I mean, to the point that a borrower can actually articulate their project, and then they’re talking about it in terms that are extremely conservative that show that they have an acumen and a level of experience in these types of projects or that they’ve done their due diligence is great. I’m going to have had some borrowers where I’ve asked them for a project performer or a rehab budget, and it’s literally written now on the back of a napkin. I mean, it’s happened. I got a business strategy letter scribbled out on a piece of paper and it wasn’t even aligned piece of paper, but they just wrote it out on a post-it note or something of that nature, and then they scanned it in or took a picture of it.
And so it shows a level of effort and a level of organization in just coming through for the very minimal requirements we have as a private lender. That’s going to showcase how they treat their project, in my opinion. Is it going to be Lucy goosey? Are they really going to be on it and buttoned up and really thorough, really organized? Or are they going to scribble it out on a post-it note and think that we’re good and we can move on from there? I don’t really prefer that.

Mindy:
They’re going to forget stuff. They’re going to go over their little napkin budget. It sounds like dating almost when you’re vetting people. If you wouldn’t date them, don’t lend them money.

Alex:
I’m laughing so hard because I’ve had the opposite happen where they might not be getting enough information to Beth. I’ve had borrowers, I was on vacation with very low cell signal and they sent me 74 photos and 16 videos to my cell phone. My cell phone spent the entire weekend trying to download crap, and I was so mad. I was like, “Why would you do this to me?”

Beth:
And it’s like a sign of trying too hard, right?

Alex:
Right.

Beth:
You don’t want a boyfriend that tries too hard and smothers you. You want him to be just right.

Mindy:
Exactly. Okay, let’s say that I’m interested in being a private money lender, but I am so busy with all the things that life is throwing at me. I don’t have time to do this myself. Beth, you have mentioned a couple of times that you invest other people’s money for them. How do I vet a broker? How do I find a broker? How do I make sure that they’re well respected and they’re going to be the best option for my money? And give me the overview, how I find somebody and what I’m expecting from that relationship.

Scott:
Mindy, it’s not a broker. It’s a private money matchmaker.

Mindy:
Private money matchmaker. I’m sorry.

Beth:
Thank you, Scott.

Mindy:
Everybody’s a broker. Private money matchmaker, where do I find one?

Beth:
Well, you can find them in every market. Fortunately for me, we’ve really grown organically. I mean, just a little backed up on our stories. My husband and I, he was my boyfriend at the time we really started lending out our own-

Scott:
He didn’t smother you?

Beth:
… Oh, my boyfriend didn’t smother me. We started lending out our own money, and that from two of our investors. One was a golf buddy of my husband’s and the other was a school dad, and it just grew from there because once people hear that you’re passively investing and it’s easy and it’s relatively low risk, and somebody else is doing a lot of the legwork for you but you get to choose which deal that you like, it kind of grows. And so word of mouth is one way. Ask around at those REIA meetings like Alex was saying. You’ll find other private money lenders that are experienced in this and might want to actually lend your money. You can Google. I’ve had people locate us through Google and web searches, private money lenders and seeing if they do whole trustees or private mortgages. There’s two schools of thought here.
Some do private individual home notes, that’s what I do where I individually place the lender in a loan. They’re individually named on the promissory note. They’re individually named on the deed of trust, so everything goes in their name and no money is passed through us. It goes strictly through a third party escrow, and they don’t transfer any money until they’ve had a chance to review and approve the legal documents that have been drafted on their behalf. And then the other part would be a pooled mortgage fund which some private lenders do that too, and in essence it’s like a syndication, but it’s not private equity, it’s private debt.
And so you’re taking people’s money and you’re pooling it into this private debt fund, and then you’re originating loans that way. So you can search for them, trust deed investments or private money lender in my area, and then you can call down on them or search for them on their website and ask for references. But really, we’ve grown our circle strictly through word of mouth, so chances are somebody within your network is doing it and might be able to refer somebody or a business to you that is doing the exact same thing that I’m doing in my state.

Scott:
I was just going to ask, just to be clear. Your business, for example, makes money from points on the origination essentially?

Beth:
So my business makes money both on origination points as well as we do take a small spread on the interest, so if I lend it out at 12%, for example, I might take a quarter percent up to a whole percent from the top and pass through the rest to the investor. And this really helps me cover some of my overhead because I do have a large team that helps provide, like I said, that full white glove service from the time that the loan inquiry comes in through the time that the loan is paid off. My team is there to help out every step of the way, so we do take a small interest spread on there as well that’s called a management fee.

Alex:
The one thing I would add to that which is something Beth does is, she sends out copies of the loan documents. Obviously, they’re redacted so you can’t identify people or properties. So a potential new investor can actually see the legal documentation that’s going to be safeguarding their capital, and they should be able to call up that person and have a conversation say, “Hey, I don’t know what this paragraph means. Why is this in the document?” And if they can’t spend the time or accurately explain that, that might be a red flag too if you’re looking for someone to broker your capital.

Beth:
We have a pretty prescribed onboarding process for investors, so once they come to us, of course, they’ve had some sort of referral to us in many cases, but the full onboarding process really starts with the conversation either through email or on the phone and then we’ll get on a Zoom call. We want to make sure that we’re a right fit for them. As I mentioned, since we’re in the Seattle market, the average deal size for us is around 350 to 400, so unfortunately since the market has appreciated so much over the last five to 10 years, we really can’t take smaller amounts of capital otherwise you’ll be sitting on the sidelines waiting for us to find a small loan for you. And really loans under a hundred thousand dollars even in second position really don’t help a Washington based investor in the Seattle market get across the finish line.
And so we’ll make sure that we’re a right fit culturally for the investor and that they have enough capital and have enough understanding of how we operate before we move forward, and as Alex mentioned, we give them a prospective investor package with a redacted set of loan docs, but we also give them a two to three page investor overview that we give them for loans to show them how we package it up because it has a borrower overview. It has a business purpose strategy and an extra strategy defined in there. It also gives some specifications on the property itself, so we’ll give links out to an online valuation report. We use a company called HouseCanary to do that for us, and it helps us do pull comps without having to have access to the MLS. We’ll do links out to Zillow and to Redfin just so they can go online and sniff and smell the property and check it out online and do a little due diligence on it.
And so we give them a sample of that so they can see how we present it, and then we get them back on a phone call or a Zoom call or meet them for coffee again, and we talk through any additional questions because invariably it comes back with the what ifs, what happens when my loan goes into default? We talk about that because it’s really important for our investors to understand what the risks and rewards are before they move forward with the deal because the last thing I want is for them to not be able to sleep well at night. They come to us to be able to passively invest, and if they’re really concerned about their deal after it funds then I’ve got some problems, and that takes me away from revenue generating activities. So we go through a really prescribed process, and that even includes afterwards sending them some previously funded deals so that they can evaluate them from a wide swath of investors.
I have some that have really high risk tolerance, and they want double digit returns. I have some that want really lower risk, and so they’ll concede on interest rate a little bit. We want to give them some sample loans that we funded and see where they fall into, so it’s fun because they get to come back and say, “Well, I like this deal and I would take this one and here’s why, but I don’t like this one that you gave me because I don’t like the location of the property or I don’t like a commercial mixed use building used as collateral,” something of that nature.
Or, “I like this deal, but I think the terms are too long or the loan amount was too high. Maybe I would’ve wanted it a little lower,” or something like that. And so that’s a really iterative process for us to go through so that they can vet us, and that we can vet them as well at the same time and make sure that we’re really submitting deals to them that are going to be a right fit because we don’t cattle call our loans. That’s a pretty poor customer experience, so we really want to earmark the right kind of loan for that particular individual.

Scott:
I love this. I think a clear picture is [inaudible 01:34:19] in my head here. If you’re trying to lend 2050, a hundred thousand dollars in that ballpark then really I really like Alex’s approach here, and going into these areas maybe with lower property values where you can really get to network and be gritty in the area, get to know these people and find, what was the Cajun underground?

Beth:
Underground.

Scott:
The Cajun underground.

Beth:
The Cajun underground.

Scott:
In these local markets, and if you have a lot more capital, perhaps, sitting around your 401(k) and you don’t want to invest all this time trying to find a private money matchmaker or broker or a debt fund like this, it might be a really good alternative. And then either way you have a really good shot at earning eight to 14%. There is risk, if property values do decline we will see some risk in this market but, perhaps, less than what you’d see as an equity investor in real estate in a lot of cases. But I think it’s a really interesting asset class that we have not touched on here in the BiggerPockets Money Podcast before, and this was absolutely fascinating, so we really appreciate it guys. Thank you. This was a fantastic show. We’re at two hours, but it was all super valuable, and we’re very grateful.

Mindy:
And if you found this episode valuable, we’ve got more. Alex and Beth were on the BiggerPockets Real Estate Podcast discussing a different aspect of this book, How to Vet a Private Money Lender. So I think it’s a really good exercise to listen to episode 642 of the Real Estate Podcast if you’re considering doing this just from a different standpoint, from the investor standpoint so you know what people are looking for when they’re looking for a private money lender. Also, they’re on the Real Estate Rookie Podcast which airs tomorrow if you’re listening to this episode the day that it comes out. That’s episode 210 of the Real Estate Rookie Podcast.

Scott:
[inaudible 01:36:18] podcasts.

Mindy:
We’ve got a lot of podcasts. They’re all amazing, and on that show, they talk about the five things every borrower should do to expedite their loan closing. This is ways that you can send your lenders or your borrowers to that episode as well to help them help you make money off of them.

Scott:
But before we get out of here, Alex, Beth, can you one more time tell us about the book and where we can find each, find or learn more about each of you?

Alex:
Beth is going to have to tell you the title of the book because it’s 15 words long, but we have an email address that we give out to people. It’s [email protected], the number two, live.com. That comes to both of us, so you can reach us. We are both on BiggerPockets, so just search for our name. We’re happy to chat with people on BiggerPockets as well, and then our website is lend2live.com. And then Beth, I’ll let Beth do her website and her stuff.

Beth:
Our book is called Lend to Live: Earn Hassle-Free Passive Income in Real Estate with Private Money Lending. Of course, you can get it on BiggerPockets.com. We were just released at the beginning of August on Audible, and it comes out on amazon.com, Barnes & Noble and a handful of other retailers as well in mid-August. And you can find me on BiggerPockets. You can also find me on Instagram @lend2live.beth, and I’m also on Facebook as well. My company is Flynn Family Lending.

Scott:
Awesome. We will link to all of this stuff, and I highly encourage you to go there on the show notes at biggerpockets.com/moneyshow328. There’s a wealth of information, and this show should be the tip of the iceberg in the private lending space for you. The next stop obviously is Lend to Live the book by Alex and Beth here, and then I think there’s a whole wrap. That’s the beginning of the rabbit hole, there’s hundreds of hours of more learning there, but also a large amount of wealth to be harvested and made in this space.

Mindy:
Alex and Beth, thank you so much for your time today. I’m so excited for this episode. I think that people are going to be inundating you, so clear out your inbox.

Alex:
Thank you.

Beth:
Thanks for having us.

Mindy:
We will talk to you soon. Okay. That was Alex and Beth. That was one of my favorite episodes that I think we’ve ever done. This information is so fantastic. I do want to circle back to the very beginning where I said, this is going to sound like a scam, but it’s not. I have made a lot of private money loads in my life. I tend to side with Alex who lends more to the person than the deal, and I will say that I have never had somebody default on my loan. I have never had any negative consequences from making my loans, and I have made 10 and 12% interest when I’m making these loans. It is absolutely a legitimate way to do business. It is absolutely a legitimate way to make money, and if you are at all interested pick up a copy of this book because you are going to learn so much. It is like a masterclass on paper.

Scott:
Yeah. This is, I think, a special set of information. It’s a perspective changer for me. There’s no way that private money investing is not a part of my future unless interest rates drop back down to zero and the market’s flood again with ridiculous amounts of capital in this space, but that’s not going to happen. This is an opportunity area. This is a way to generate serious passive cash flow and income in the form of interest in a way that is hard to get in real estate like rental property investments today without going to short term space, for example. And we also heard Beth say how she can cash flow or short term rental without having to have any guests by doing private money lending in this space, so I think it’s a great opportunity and something to seriously consider, and I hope my excitement came through because I’m thrilled.
And I think these two were perfect potential perspectives to do that, the jockey and the horse perspective. If you’re like Mindy or Alex, you have to bet on the jockey, and if you’re like Beth, who is managing larger pools of capital and doing many more loans, she can’t bet on the jockey. She can’t get to know all these people. She has to bet on the horse for that. It makes perfect sense, different strokes, different approaches, so I thought I was blown away, and I will be definitely trying to learn as much as I can from Alex and Beth over the next couple of years.

Mindy:
I could not have said it better myself, and we ran super long, so Scott, we should get out of here.

Scott:
Let’s do it.

Mindy:
From episode 328 of the BiggerPockets Money Podcast, he is Scott Trench and I am Mindy Jensen saying, let’s make lots of money.

David:
This is the BiggerPockets Podcast show 651.

Craig:
If your friend is asking about what you’re doing and how much you’re paying for the mortgage and how much he’s paying for the mortgage and all that, I always recommend being 100% honest because if you can empower somebody to do the same thing as you and to empower someone to house hack, then you’re going to completely change the trajectory of their lives, and that’s worth so much more than a couple hundred dollars a month or being a little bit sketchy about how much you’re getting paid or how much you’re paying and all that. So I highly recommend if you’ve got the opportunity to help somebody see the light and they’re asking to 100% just tell the truth. It’s way easier than lying.

David:
What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast. Here today with a Seeing Greene episode, where I have called for backup. On this show, we’re going to be taking your questions as always, but with a little bit of a twist. We’ve got several other BiggerPockets personalities that have come in to help me by answering your questions. So you guys are in for a treat. You’re going to get my perspective and a lot of other people’s.
First, today’s quick tip. Do you need a group to help support you on your journey to your first or next property and a place to get your specific questions answered beyond this podcast? Well, check out biggerpockets.com/enroll if you want more info or to participate in one of our five different bootcamps. Thank you for being a loyal listener. We’re offering a 10% discount off your enrollment by using the code BOOTCAMP10. Almost 50 bucks off and a free year of pro membership can be yours. Already pro? You get a screaming price on this already great value opportunity. Invest in yourself and check out the BiggerPockets Bootcamp.
All right. Let’s go to our first question.

Ashley:
Hi, everyone. My name is Ashley Kehr, and I’m excited to be here today on Seeing Greene. I am the host of the Real Estate Rookie Podcast, along with Tony Robinson, and I’m also hosting two bootcamps coming this fall. So let’s get to today’s question.
Today’s question is from Juan Murano. His question is, “I’m getting into the thought of investment properties and I want a mentor. I do have a friend that does it, but she buys single-family in multifamily homes out of state, which scare me. I don’t know where to start my research for rental properties and areas to purchase in. How do I figure that out? I feel like little things like landlord states and tenant states leases for rental properties and finding people scare me. I don’t want to find videos on it. I want to be able to do my own research. Where do I start?”
Well, this is a great question, Juan, and there’s a couple things in here. So let’s start with your first one is that you want to find a mentor. So right in your question to me, you said that you do have a friend that buys single-family and multifamily homes, which I think right there is someone that could possibly be a mentor to you. Even if that ends up not being the real estate investing strategy that you want to go into, I think that they have invested in real estate there’s going to be a ton of value for you.
So just starting those conversations with that person, and even if you don’t feel like they’re adding a lot of value to what you want to do, it is going to motivate you and inspire you to be able to talk to somebody who is investing and also give you maybe that courage to get past analysis paralysis too. So I would say, start there with your friends. Start opening the conversation and talk to them as much as you can. Maybe offer to buy them some coffee or take them out to lunch I think is a great start.
Then you talked about where to start with the research or the areas to purchase them. So if you’re going to do out-of-state investing, one thing that I really like to look at is where are other people investing. I know you said you don’t want to watch a video on it. You want to be able to do your own research, but you have to start somewhere with finding markets and think about how many markets there are across the whole US. There are a ton.
When you look at the map, then you can bounce around from city to city. So if you were to pull up Zillow or realtor.com, you can hone in on one city, but you start zooming out and you start looking and, “Wow, there’s properties here that maybe in my budget.” Then you head over to Ohio, and then you’re bouncing down to Florida and going all over.
So what I recommend is go online. Go on the BiggerPockets forums. Go on social media. Start following other real estate investors, and look where they are investing. Then maybe pick three to five cities that interest you, and then do your research from there. So start your own market analysis and go through and look at the things that you want to evaluate in a market.
So for example, first of all, are properties within your budget? Maybe you have loan approval for up to 150,000 or that’s your cash to purchase a property, you’re not going to go into markets where you’re buying $500,000 houses and that’s maybe the average home sales. You’re going to look for markets that have houses that are available for $150,000. So that’s a big thing there.
The second thing is is you want to be a landlord, and you are 100% correct that there are different laws and regulations in different states. So there’s landlord states that are favorable to the landlord, and then there’s states that are also favorable to the tenants. So that also could be a great starting point for you is looking at states that have landlord-friendly laws, meaning that the laws there are beneficial to the landlord, and that is most likely going to give you a better investment than if you are going into states where the tenant has the benefit.
So I invest personally in New York. That’s where I’m from, and it is definitely a tenant-friendly state. So when an eviction comes up on a property, it is a lot harder to get that tenant out of the property than it would be, per se, if you were in Texas or a state that is a landlord-friendly state. So if you are going out-of-state anyways, that is definitely something to look at.
Other things to look at are possibly what is the median income in that market? Can people there afford the type of property or the type of rent that you want to charge? What are the rental rates there? So there’s a lot of things. Also, the industry, what kind of jobs are in this community, in this market? So if you’re looking at a market that only has one big business there, and that’s where a lot of employees, a lot of the people in the town, what happens if that business shuts down? All those people move to a different market because there’s no longer jobs there. So that’s why I always like to find at least three prominent places of employment that bring people in for those jobs.
So for example, in Houston, Texas, there’s healthcare, there’s a lot of oil jobs there. So looking at these markets, what’s bringing people into them? Then also look at the trends too of people moving into those markets. So those are just a couple of the many things that you can look at when you’re doing market analysis, but I would say start building a list of things that you want to look at in a market.
In my bootcamp, we go over this too, in the rookie bootcamp, as to all these things we list down to things you can analyze when you’re finding your market, but I think watching BiggerPockets YouTube videos and videos of other investors can definitely help you, but you still want to verify and do your own research.
So my recommendation for your question would be to go to your friend for a mentor, post it in the BiggerPockets forums to see if anybody out there is looking for help with anything. Do you have a special skill or something that you can do to add value to another investor so that they do mentor you?
Then second, look where other people are investing and then verify the data that you see in those markets to see if it suits what your goals and what your real estate investing strategy is, and then go from there, and make sure you do not get stuck in analysis paralysis. So make sure you take action. Every deal is not going to be a home run, and your first deal does not have to be a home run deal. So make sure you remember that and you don’t get too stuck in over analyzing.
Well, thank you, David, so much for having me on Seeing Greene. If you guys want to learn more about what I do, you can follow me on Instagram, @wealthfromrentals, and back to you, David.

David:
All right. Well, thank you, Ashley. That was a fantastic answer, and what a way to start this show. There’s enough information in that reply for an entire podcast. I love the points that you made. The looking for the employment is really big. I think a lot of investors look at the cashflow they’re going to get. They want to find the ROI, but they don’t dig in and say why is it doing that, why are people moving here, what are the driving forces and fundamentals behind the number that pops up on your spreadsheet. That’s what a real good investor does is they understand at a pretty high level what makes a market drive, why the supply is what it is, why the demand is what it is, what the benefits of that market are, and what the drawbacks are as well because every market’s going to have drawbacks.
You just have to understand, “Why are they drawbacks? What are they? Is that something I can live with?” You’re never going to find a perfect market. That’s a mistake a lot of people make because they keep looking forever because every market they find has something wrong with it, but there’s always going to be something wrong with every single market. That’s just the way that life works because if there wasn’t, somebody else would’ve already bought all of those houses and there wouldn’t be an opportunity. So thanks for that, Ashley. That was fantastic advice.
Our next question comes from Tony Spencer about short-term rentals, and we have none other than BiggerPockets published author Avery Carl here to answer on this topic.

Avery:
Hey, guys. It’s Avery Carl, BiggerPockets author of Short-Term Rental, Long-Term Wealth, and the BiggerPockets short-term rental bootcamp instructor. Today’s question comes from Tony Spencer in the Seattle area. Tony currently owns his home with a basement apartment and is about to go live with his first Airbrrrrnb and will have 300,000 to put down on a second Airbnb suit. He says he’s a member of several Airbnb social media groups and, “I’m looking to buy my second short-term rental very soon.” He also says he sees that everyone is panicking about their lack of bookings compared to the last few years. Sounds like it could be due to maybe the new algorithm with Airbnb and/or inflation in general.
His question is, “Do you see the STR market trending in any certain direction with fears about the economy or do you think that there might be an upcoming opportunity in this asset class cooling off in the near future? Finally, I’m basing this question off anecdotal evidence from social media posts, but I’ve yet to see any current data about STR bookings being down across the board. Do you know where I can find such current data to support or deny this information? Thanks as always. Love the show.”
Okay. So Tony, this is a really, really good question, and I’m going to try to not be too long-winded in my answer. So I have seen a lot of people panicking about bookings over the past few months, I would say, especially back in April and May when Airbnb rolled out their new algorithm. It did affect some things. That has since been corrected. Airbnb has walked that back a little bit. So we’re not seeing as much of an issue with that.
I also think that a lot of the panic that we see in social media posts is from people who bought in the last 18 months, especially people who bought at the end of 2020 or during 2021 who have not been through normal seasonality yet. So May is typically a slow month because it’s right between everyone having been on vacation in April and for spring break, and then also everyone about to be going on vacation for the summer. So May is a pretty quiet month in terms of STR. So I think it’s a combination of owners who bought in a really high year who haven’t been through normal seasonality yet, and then the Airbnb algorithm messing with everyone’s bookings on top of that.
In terms of the market trends, I think with my real estate agent business, I’ve seen that now really is the best time in the past two years to get under contract on a short-term rental. In 2020 and 2021, every single property that hit the market, even if it was just a completely astronomical number that made no sense at all, was getting a hundred offers. Now with the uncertainty with the economy and also interest prices, I mean, interest rates going up, there’s some uncertainty in the market, which has created an opportunity for buyers.
So the weaker-handed buyers have been shaken out of the market, and also, there’s a lot of sellers who I call them FOMO sellers. They’ve seen that their neighbors have sold six months to a year ago for just crazy prices, and they see the market changing and they’re like, “Oh, no. I missed the boat. I guess I better list now.” So it’s creating more supply in the market.
So last year, you had to make these crazy aggressive offers on every single property. Now, you can actually negotiate with sellers. You can offer under asking. You can ask for sellers to contribute to closing costs again. You can actually get better deals than you’ve been able to in the past two years. Now, interest rates are certainly a factor, so you want to make sure that you account for that line item, but in terms of actually being able to get deals, it’s a really good opportunity right now for buyers.
In terms of finding current data on booking, so I’ve seen people answer that question both ways of some people have less bookings than last year, some people are doing better. My personal ones are actually doing a little bit better than last year. So I think that’s due to a number of factors. I think that time in the market, so people who have more reviews are typically seeing a little bit more traction in the current market.
So I don’t necessarily think that bookings are down across the board just like the real estate market in terms of sales is not national but regional. I think that with short-term rental and bookings and things like that, everything is really very market-specific as well. So what’s happening in one market with bookings is not necessarily happening in every market with bookings. So there might be some that are up or down, but it’s not necessarily an across the board thing.
A really good place to find current data on what bookings are looking like, there’s a few different places where you can find short-term rental data. AirDNA is one. It’s paid. Rabbu is another one. It’s free. Then also, if you already are a short-term rental owner and you have PriceLabs, which is a pricing tool that is used to dynamically price your property, there’s a function within PriceLabs called the Market Dashboards, and it’s a 30-day snapshot of how the entire market in that area has been performing. So I would check out all of those places and use data from several different sources because no one dataset is necessarily perfect. So take a look at all of that data from all three of those sources and draw your own conclusions from there.

David:
Wow. Thank you for that, Avery. Once again, just like with Ashley, you brought a ton of value in the reply there. Couple things stand out to me that I want to capitalize on and highlight for our listeners. First would be very good point, 2021 was probably going to be known as in baseball, that was the juiced ball era when everyone was hitting the home runs or maybe it was the steroid era, but numbers were artificially inflated for that period of time because COVID had shut down a lot of the world and people wanted to travel to get away from the big cities that were closed and go to more areas that had a little more freedom and less restrictions. So they traveled and Airbnb exploded.
Now, we’re still sitting on the momentum of that amazing time and that’s why many listeners here are thinking, “Hey, I want to get into short-term rentals.” I traveled during that same period of time and I enjoyed it. I want to buy the house. You combine that with the fact that it’s becoming very difficult to find cashflowing properties as more demand continues to flood into the asset class that we at BiggerPockets love real estate investing, but supply stays relatively constrained and you’ve got more competition. So in order to make a cash flow now, you’re looking at short-term rentals.
So there’s several factors that have evolved to create this world that we’re getting into, and I do think this is just my two sense, right? I’m planning that over the next three to five years there’s going to be a ramp up period to get the short-term rentals that I’m buying right now going. I don’t think I’m going to buy it and step into 100% occupancy or close to that right off the bat. I think it’s actually going to be slow. I think in the future, the people who manage really good short-term rentals are going to be getting repeat guests. I think that because there’s so much competition for people going on Airbnb and they have tons of homes to choose from. As more and more people start renting out their houses, more and more investors like us buy these houses and put them on VRBO, on Airbnb, everywhere that you can find them.
There’s more supply to choose from. So as supply goes up and demand stays the same or doesn’t keep up with it, you’re going to see prices come down. So to combat that, I’m planning on getting return guests. I want to give every guest such a great stay that instead of going on Airbnb and saying, “Where should I stay in this market?” they go, “I’m going back to that house that I stayed at last time.” I think that many people would be good to do the same.
So think about your reviews. Think about the experience you’re giving your guests. Remember, when you buy a short-term rental, you are not buying passive income. You are actually buying a business and you’re going to have to run it with the same effort that you put into a business or hire a manager that will do that for you. It’s a great asset class to get into, but it is definitely not the same as just buying a fourplex and letting your property manager that you pay 8% rent the units out and collecting that check. There’s more work that goes into it.
Avery, thank you very much for that awesome answer and the level of detail that you put into that. All right. Next up is a question from Daniel Leja about house hacking, and who better than BiggerPockets house hacking extraordinaire Craig Curelop, who wrote the book on house hacking for BiggerPockets publishing to help me answer?

Craig:
Hey, everyone. This is Craig Curelop, house hacking extraordinaire and instructor for the BiggerPockets house hacking bootcamp. Today’s question comes from Daniel Leja from the bay area of Berkeley, California. Here it goes. “On the BiggerPockets Podcast I’ve been listening for years,” and he hears a lot of people talking about house hacking, but doesn’t recall too much about renting to friends and family. He did a 14 plus bedroom house hack for a few years, which is a little bit crazy, and from his experience, there’s a lot of differences between renting to a standard tenant and renting from friends and family. So Daniel’s question is, “How do you differentiate and how do you treat renting to a family member and a friend versus just a standard tenant like a stranger you don’t know?”
So there’s a few different things that I would personally do differently here when renting to friends and family or a stranger. Obviously, when you’re renting to a stranger or just traditional tenant that you’re getting, it’s a little bit more of a transaction. So you need to make sure you do your background check and credit check and all that good stuff.
So I wouldn’t do a background check on a friend or family, but I would do a credit score because you definitely want to make sure their credit score is still good, but if they’re friends and family, then I’ve probably got a pretty good idea of their background. Now, if you are curious about their background, I would definitely recommend doing the background check, right? It doesn’t really matter either way, but, again, I probably would avoid doing that for friends and family.
The second thing is that if you’re renting to a friend or family member, you already know them, you likely already know their tendencies, and so there’s a little bit less of a risk for you. When you’re renting to a friend or family member, there is that obligation to give them the friends and family discount. So I would probably charge them 50 to 100 dollars less in rent so that they can basically live with you, and again, it’s a little bit less of a risk for you because you know that you get along with this person and you know their tendencies.
For a security deposit, I would charge the same amount that I would anybody else, but I would just charge one month’s rent. So if you’re going to give them $100 discount on the rent, give them $100 discount on the security deposit. Then there is that balance when you’re dealing with a tenant-landlord relationship. You would like to be friendly with your tenants, but you don’t really like to be friends with your tenants. However, if your friend is moving in, you have to be friends with them.
So I always like to use the reference of hats, right? So 95% of the time when you’re moving in and out of the house and you’re going out to dinner and all that, you guys are going to be friends, but if something ever comes up where you need to discuss something in the lease, you need to discuss renewing rent, you need to discuss a late payment, then you say, “Hey, man. I know we’re friends, but right now we’re not friends. I am your landlord. You are my tenant, and that’s the relationship we’re going to have for this conversation. You need to pay me this amount on this time,” or whatever the discussion is. You make sure you have that and you make sure the roles are defined in that conversation, and you sit down and you be serious with them, right? I think with friends a lot of times you’re going to be joking around and smiling, but don’t do that if you’re having a serious conversation with them.
You 100% have them sign a lease. I have seen time and time again friends just do verbal leases. I literally witnessed this less than a week ago. They signed a verbal lease, didn’t really sign any lease, and then the guy decided they wanted to move out early, but there was no lease in place. So now one guy is getting screwed and it’s the landlord that’s getting screwed over. So I recommend always signing a lease, whether it’s your sister, your friend or a complete stranger. Always sign a lease.
If your friend is asking about what you’re doing and how much you’re paying for the mortgage and how much he’s paying for the mortgage and all of that, I always recommend being 100% honest because if you can empower somebody to do the same thing as you, and to empower someone to house hack, then you’re going to completely change the trajectory of their lives, and that’s worth so much more than a couple hundred dollars a month or being a little bit sketchy about how much you’re getting paid or how much you are paying and all of that. So I highly recommend if you’ve got the opportunity to help somebody see the light and they’re asking, then 100% just tell the truth. It’s way easier than lying.
Oftentimes too, friends will ask for a little bit of leeway, a little bit of discounts, all of that kind of stuff. I really would not discount it any more than the already agreed upon amount. So if you’re going to do $100 off, stick to the $100 off. Make sure they pay on time, and if they don’t pay on time, charge them the late fees, right? Treat your business like a business even though a friend is moving in.
So that’s my answer on how you treat family and friends differently than tenants. A lot of it is the same. You just maybe give them a little bit of a discount and you have a little bit more leeway.

David:
Also some great advice. This is an amazing episode. I should have done this a long time ago. Just bring in the Avengers to do the heavy lifting for me here. All right. There’s something that I really want to call out about the question as a warning sign. So one of the things that you learn in jujitsu is people will get themselves into a horribly compromising situation. Okay? It’s almost like a checkmate, and then they go to the instructor and they say, “How do you get out of this?” The answer is usually, “You just never let yourself get into that. Okay? You made a mistake three moves ago that led to this.”
If you think about like going down a slide at a waterpark or something, when you’re three quarters of the way down and you’re like, “Okay. How do I stop? How do I go back to the top and start over?” once there’s that much momentum going in a negative direction, probably you’re not getting out of that situation. It’s going to happen. There’s a big word I was trying to think of there, but it’s still too early in the morning and I couldn’t find it.
So when somebody says to you, “Are you making a profit on this property?” that’s letting you see what’s in their mind. They are tipping their hand, if we’re going to use the jujitsu thing here. They’re showing you what they’re about to do. You need to be very careful about that.
So let me give you an example from my personal life. This was when I was young David. I still had hair. I was about 100 pound skinnier almost. My dad was very handy. He was still alive at that time. So there was a house down the street from where we lived and I had a lot of capital and I had already bought maybe one or two investment properties or maybe I hadn’t bought anything yet. I think I’d just been toying around with the idea.
I looked at the numbers and I was like, “Hey, why don’t we buy this house and flip it?” My dad knew how to do the work. I had the money to buy it. So we were sitting there talking about it. My brother Chris said, “Hey, I want to do this too.”
I’m like, “Okay. Well, if you put in part of the down payment, you can have that percentage of the profit.” We were just going to pay my dad to do the work.
He said, “Okay. Well, how much would I have to put in?”
I basically wrote it down, “Well, if you take X amount of the capital we’re putting into the deal, you will get that same number of the profit. So if you’re putting in 20% of the equity, you’ll get 20% of the profit.”
My brother thought for a minute and he’s like, “That’s not fair.”
I was like, “Well, what do you mean?”
He’s like, “You’re asking me to put in 80% of all of my money, but I’m only going to get 20% of the profit.”
He was very young, and I just remember thinking, I got frustrated, “It doesn’t matter what percentage of your money it is. It matters how much we’re putting in the deal,” but he had a different standard of fairness than I did. Eventually, that’s why I didn’t bring him in to doing that deal.
That’s what I want to bring up is there are many different standards of fairness. The entire concept of fair is actually very subjective. There’s an article in BiggerPockets blog if you go look up, Google what is fair in the blog. I can’t remember who wrote it, but I remember it was very well-written that talks about different ways of looking at the world.
So if your friend or your family is going to rent your house, their idea of fair might be, “You’re going to give me a hookup. You’re not going to make me pay like a normal landlord did. We’re friends. You won’t treat me like everyone else because that wouldn’t be fair. Remember when I bought the ice cream when you didn’t have money? Remember on your birthday when I got you a better present and you forgot about my birthday last year?”
Well, now you’re just making that up to me. You see how this can get out of hand very easy. So if someone’s asking the question, “Is that fair that you’re making a profit?” it’s probably just not someone you want to rent to. There was another example that I can think of in my life where I was going to rent out rooms to different people and fair market rent was $500 a room or $600 a room. So I said, “Hey, this is what you would pay.” The question that my friend came back with is, “Well, how much is that of the total rent? Why am I having to pay more than one quarter of what the mortgage would be on this house?”
I was like, “Because we’re not basing your rent off of what my mortgage is. We’re basing the rent off of what you would pay somewhere else,” and that tipped their hat. I realized, “Ooh, I’m not renting to this person. They’re already showing me that we’re going to have problems later,” because if my mortgage was $2,000 and market rent would’ve been $3,000 or maybe $500 a room for a six bedroom, they were wanting to be paying one fourth of what my mortgage was, not what market rent was.
So keep an eye out for that. If you get any kind of an inkling that someone has a completely different standard of fairness, it’s like trying to have a conversation with someone in a different language. You would not ask someone for help. If you went and spoke English and they replied back in French and you didn’t speak French, you would go on and find another person to ask for help. This is the same thing. The standard of fairness is like a language. Everyone needs to speak a common language if you’re going to move forward with your deal. So save yourself some headache by keeping that in mind.

Craig:
Next question is from Austin Weber out of Fort Worth, Texas. “Hey, David. I love the show, especially you’re Seeing Greene episodes. My question is about where the lines are drawn for bill splitting versus claiming house hacking income. My girlfriend and I just bought our first house, which is on a conventional loan, only in my name currently. She isn’t particularly interested in learning about real estate, but she’s happy to help me do it, except she does not want to house hack. However, she will be paying me rent every month. So it isn’t exactly a house hack, but the money is going towards paying down the mortgage. I was curious if that is something I could claim as additional income and pay the taxes on in order to supplement on a W-income to show a history of rental income to help with additional loans in the future.”
So it sounds like Austin here is he’s going to charge his girlfriend a little bit of rent, that rent is going to, hopefully, he’s asking if that rent will count as income and his debt-to-income ratio to help him qualify for a larger mortgage. I would say, oftentimes, if you can get a lease signed, then your lender will take 75% of that lease and use that towards your debt-to-income ratio.
Now, each lender is different and these rules seem to change pretty frequently. I feel like almost every six months these things are changing. I would say, one, try to get your girlfriend to sign a lease and see if the lender would accept that, and then you may not have to really pay taxes on that amount because it is going to be such a small amount you’re going to be leaving there and all that. If you do want to claim that as income, supplemental income, again, it’ll be a pretty nominal amount. It’ll probably get washed out from depreciation anyway. So I would recommend doing both, right? Claim the income. It’ll get washed out on the depreciation on your house more likely than not, and then use that lease to help you boost your income and your debt-to-income ratio. David, I know that you’ve got a mortgage company here. So I’m curious to hear your thoughts on what Austin can do.

David:
Thank you for that, Craig. This is a very good question. Unfortunately, the answer is not a positive one. No. If you own a primary residence and you collect income for that property, you cannot use that income to help qualify for future property. So it will not be included in your debt-to-income ratio. So if your girlfriend’s paying you 800 bucks, you can’t use that $800 and say that that is your income. However, if you claim it, it will still be taxed. So that’s just something to keep in mind that IRS rules are much different than the lending rules when it comes to your DTI.
All right. Our next question comes from Max Wheelhouse in Philly, and who better to answer a question from Philly than my good friend Matt Faircloth? Also a BiggerPockets published author. You wrote the book on raising private capital. Matt, let’s hear what you have to say.

Matt:
Thanks, David Greene. Hey, guys. Matt Faircloth here. I am the author of the awesome book BiggerPockets bestseller, Raising Private Capital, and also one of the educators in the BiggerPockets multifamily bootcamp. Seats are limited so make sure you join us. Can’t wait to see you guys there. Honored to be here with you guys. Got a question coming in here, which is really interesting, a multifamily question, David. This is coming from Max from Philadelphia. Max lives in Philadelphia. He’s doing some deals all the way up in Redding, Pennsylvania Scranton area. He’s got a smattering of multifamily assets, 30 units, so scattered around. His cousin is running it for him. Max, like a lot of people, wants to trade up and scale into larger multifamily properties, which means selling all those assets and buying something larger. So really exciting stuff. A lot of people that have built a smaller portfolio want to scale into larger portfolios.
Here’s a few tips, Max, a few thoughts that I got for you. Love that you’re keeping into the family. You got your family want to invest with you. You got your cousin that’s running those assets for you. That’s awesome. Just don’t treat family like family when you do business with them. You still got to have written contracts when you’re working with family. So don’t not have the level of paperwork you will with someone else just because it’s family. Because it’s your blood doesn’t give you a discount on paperwork and LLC setups and those kinds of things. So as you scale up and do larger deals, make sure that you and your cousin have a written agreement and that your family members that want to invest with you also have written agreements.
Great attorneys are there to do that for reasonable numbers. Use an attorney to do it to set up yourself for a syndication because what you’re talking about for people investing with you as you scale your business and as you roll up, even though they’re family, it’s still a syndication. So you still need to do those things.
Other things that I want to just point out here for you, Max, is that in your question you talk a little depth about how, “Well, I don’t have this kind of skillset yet to run a larger multifamily, and I don’t want to let my family down.” I get it. Here’s a few consolations for you. Larger multifamily functions just like smaller multifamily in a few facets. Unit turns, well, you’re going to go and turn an apartment the same way you would in a bigger apartment building that you would in a smaller apartment building. It actually gets easier because the units are likely around the same size. If you’ve seen one of them, you’ve likely seen all of them. They look all the same in that.
So the upgrades and turns that you do on a small multifamily are going to be very, very similar to what you’re going to do in a larger multifamily. You’re still going to have common area maintenance, probably grass to mow, and maybe hallways to get swept and things like that. You’re still going to have utilities that are paid by the landlord. Some are paid by the tenant. You’re still going to have real estate taxes you need to monitor. Make sure the town’s treating you fairly with regards to your tax bill. Those are all the same.
Here’s a few things that are different in large multifamily that you need to prepare yourself to get ready for and to start to think about as you scale into larger multifamily. You’re going to start setting aside a little bit of money each month for capital reserves, X amount of dollars per unit. There’s a lot of opinions on that. The older the building, the more you want to set aside for things like roof repairs and window replacements and HVACs going out on you and that kind of stuff.
Additionally, and this is a good thing, for larger multifamily, there is a compounding effect to rent increases. If you have a 100-unit department building and you’re able to raise rents by 50 bucks on every apartment, that is $5,000 per month that you’ve increased the income on that property, and 50 bucks, it’s not that much to do. You might be able to justify 50 bucks from every tenant by doing some common area improvements, by maybe adding a small amenity onsite, one of those kinds of things. So there is a way to force appreciation very quickly in larger multi. So be prepared for the algebra that it takes to raise rents times the amount of units that you have. Over a shorter period of time, you can increase your revenue.
The biggest factor you got here, Max, before I leave you is that payroll is a major factor. The small multifamily portfolio you have likely does not have full dedicated staff. If you go and do what you’re talking about doing and buying a 50, 60, 70-unit apartment building, you may have a dedicated maintenance technician or even a dedicated leasing agent. As you get into larger and larger properties, you may have a dedicated site manager that runs the entire property for you and does all the ins and outs of that property. Be prepared to budget for the payroll for that person. Maybe it’s partially your cousin. Maybe it’s someone that works for or with them in managing that portfolio.
Best of luck, Max. Sounds like you’re well on your way. David Greene, back to you, my friend.

David:
Okay. Thank you, Matt. That was also awesome. You’re in a really tough spot there, Max, and I can understand. I think that you should listen to your feelings in this. When your emotions are telling you, “I don’t want to borrow money to get into an asset class for the first time,” you should listen. You need to be especially careful when you’re borrowing other people’s money. That’s not a position that you should ever be in when you’re new and you’re learning on somebody else’s dime. My personal opinion, you learn on your own dime. Once you’re really good at it, then you can actually start borrowing money from other people.
So I’ll give you another personal anecdotal example from my life. It’s funny that this came up because today is the first day ever that I borrow money from a family member. My mom and her new husband have just let me borrow $200,000, and I’ll be paying them 10% interest on that money, and she was terrified, which is funny, because of everyone in the world that she could trust to give her money, do you think I would be at the top of that list? I probably am, but she was still just so, so nervous.
So she finally signed the documentation today and she’ll be wiring over that money, and she just texted me during this and said, “Man, this is such a relief. I feel so good. I’m finally taking some steps to take control my financial future. I worked for that money and now that money is working for me.” So congratulations, mom and Bruce. Glad that I could help you guys out, but this is a good example of how borrowing money from family becomes complicated. Even though I’m her son and she can trust me, there’s still some nerves when it comes to letting people borrow money. So don’t get into that space until you’re actually experienced in doing it.
You’re already doing the right thing. You’re reading the Multifamily Millionaire by Brandon Turner and Brian Murray, who works at ODC with Brandon. I love that because that book talks about how you make money in small multifamily, which Brandon specialized in and how you make money with big multifamily, which Brian specialized in. So once you understand both sides, there’s a pretty clear connection between the two. So you’re on the right path. Don’t give up. Keep going. Thank you, Matt, for your encouraging advice.
Okay. Let’s keep it moving. Our next question comes from Ethan F. in Utah and will be answered by Ashley.

Ashley:
Hey, you guys. It’s Ashley again, and I have another question. This question comes from Ethan in Utah. “My wife and I have stumbled into real estate and we have a question about it. We call this strategy property waking, leaving a wake of rental properties as we change our personal residence. There are two principles to the strategy. The first principle is to not sell your primary residence, but turn it into a rental property when you move. It’s okay to refinance, but ideally, you will have a cashflowing property. The second principle is the next primary residence has to have a house hack or rental in it. This will ensure you have the ability to save for the next property. Also, when house shopping for your next primary residence, you should be thinking about how you will have rental income while you are in it, for example, short-term rental, duplex, et cetera, and how you will maximize rental income when you leave.
Our question is, is there an opportunity cost to doing this that will hit us later on? Are we missing some critical details in this plan? Do we have an obvious blind spot we just aren’t seeing? Something worth noting, we also have the ability to invest in the stock market and other assets with decent returns and little management fees. So we are thinking not just about cashflow and equity, but what will the cash out look like and how will it be taxed. Would we be better just selling off properties and just invest the profits?
So we do know when you sell your primary residence and have lived in the property for two of the last five years, you can avoid capital gains tax, which is a huge benefit. If we have to sell rental property down the road, we will get hit with capital gains if we don’t do a 1031 exchange, but hopefully, we’ll have more equity in the home at that point, and we will net out with a higher profit. Instead, the goal is to have each home we leave become a rental property that cash flows. Typically, we are buying at nice zip codes because we live there. So we will have to leave more money in the property in order to have it cashflow. Thank you for answering our long-winded question.”
Okay. Ethan, let’s go through this. First of all, this is awesome because I recently last year discovered a wake surfing behind a boat, so I love the name property waking, and I think this is great. Congratulations on your success of doing this thus far of getting these rental properties in place using house hacking for your primary residence and being able to save money that way. That is super awesome, and I’m really excited for you guys.
The best part is is that you’re asking a question where you are having options. Yes, it may seem like a hard decision if you’re doing the right thing or the wrong thing, but I think you’re in a position where no matter what path you choose to go down with your real estate investing strategy, that’s going to be a win for you, but I understand that you’re asking this question because you want to maximize your return and maximize your investing. So let’s break this down.
So the first question you had is, is there an opportunity cost to doing this that will hit you later on? So are there any blind spots, something that you weren’t seeing? The first thing to think of is, are you actually ever going to sell these properties? So as you mentioned, if it is a primary residence, you will not get taxed on the property. You lived in the property for two of the last five years. So one option you could do is to when you get a property, if you lived in it for two years, is that fifth year, go and sell it and you will get the tax-free gains on that.
The next thing is if you do decide to go and sell the investment property and you are getting taxed at capital gains is what is the value of that to you? Why would you want to go and sell the property? Why do you need this lump sum of money? So you did mention that you have the ability to invest in other asset classes that may be more passive to you.
So let’s look at how much time are you putting into managing these properties, how much time are you putting into acquiring these properties, and figure out maybe what … Is it every week you’re putting in five hours towards this? One thing that you can do is you can do a time study. So actually, sit down for two weeks in everything you do, just write it down and how long it took you. So you can do this for your personal life. You could do it just for managing your properties, but take a look at that, and what is your time worth to you. So what are you cashflowing off those properties right now and how much time are you putting into it? Put a dollar amount to each hour that you’re putting into this property. You also have to take into account any cash that you have put into these properties too.
So put a dollar amount to your time and say, “You know what? I’m actually not getting that great of a return because I’m putting so much time into this,” where maybe you’re getting a 15% return on your investment when you’re investing into these rental properties, but if you go and put it into, say, the stock market and you expect to get a 10% return on your money, maybe it’s worth giving up that 5% because you don’t have to do anything except put your money into the account and let the stock market do its thing. So I think time freedom and evaluating your time that you’re putting into it is going to play a big part into helping you figure out which investing strategy is best for you.
As far as blind spots down the road, yes, you could get hit with a huge tax bill, but if you bought this house for $100,000, and 20 years from now, and you’ve cashflowed from it, made money from it every single year, and 20 years from now you go and sell it for a million dollars, okay, what’s the tax going to be on that? It’s going to depend on what the capital gains tax rate is at that time, but say you get hit with 30% on your taxes. So you’re going to take that 30% away, but you still made that huge gain. So it might be worth it to take that lump sum and pay the taxes too on it. So that’s definitely something you have to look at is, are you going to see as much appreciation and value of when you want to sell the property?
If you’re going to hold the property just for a short period of time and then you’re going to sell it and maybe it hasn’t even appreciated that much, you’re going to get hit with a tax bill because of your depreciation on the property that has … So when you are taxed on the property, you’re going to look at the depreciation that has come off the property too to see what profit is actually going to be calculated by the IRS when you’re selling that property. So even though you bought the property for $100,000, if you held it for a while and it’s depreciated down to $50,000 and you’re selling it for 200,000, that tax basis is going to be that 50,000 minus the depreciation, not what you bought the property for.
So all these things are definitely great to tax plan with an accountant or a CPA, especially one that has experience with real estate investing. Every year, sit down with them. It’s great to have a CPA to do your tax return, but even better to actually tax plan and say, “Hey, these are the things I’m looking to do in my business with my real estate investing strategy this coming year. What are some things I need to know?” Having that CPA to help you tax plan can save you so much money.
Another option that you could do too is if you decide, “You know what? This is too much work for me managing these rentals, I don’t want to outsource it. I just want to be done and I want to take the money, invest it into the stock market,” go and do seller financing. So find another investor who wants to take over these rental properties, and then that has your taxes spread out over time because you’re not taking that lump sum from the property, and you’re getting monthly payments from the seller financing, and then you can go in turn and take that and invest it into the stock market or another asset class, and it spreads out how much you are taxed each year onto the income you received from that property sale.
So let’s go on to the next question that you had is that you want to look at investing the profits into something else. So even though we are a real estate investing show here, I think it is great to diversify your portfolio. So maybe if you decide that, yes, you want to invest into the stock market and maybe you’re going for some index funds, which I love to invest into, is that you look at, “Okay. What’s the property we should sell this year, and we’re going to take the profit from that, and we’re going to invest that into the stock market, but we will hold the other properties?”
So in that scenario, I would look at which property right now is going to qualify for the lived in it for two years out of five years, and that’s going to be a tax-free gain. That’s the one I would sell. That’s the one I would get rid of. Then I would invest that lump sum, but you had also said in here that you have saved some money and that you use that because you are house hacking your current property now.
So maybe you just take those savings and keep everything you have in your portfolio now. Take those savings instead of buying your next rental and invest that into the stock market or the other passive income stream that you want to have and then start saving again and then go towards your next rental.
So I think it’s awesome. I think it’s amazing that you have so many options. One thing to note to look at too is when you are house hacking and you want to do them as short-term rentals or long-term rentals, make sure you’re understanding in the market that you’re investing in if those short-term rental laws or regulations can change. So are there really strict short-term rental regulations in place now where it’s a very small chance that they will change because if you have these properties and they’re running as short-term rentals right now and they’re in a market that maybe doesn’t have any rules or regulations so that one day the town or the village can come and say, “You know what? We need to start regulating this. It’s getting out of hand,” and they put a stop at that, is that going to hurt your business too?
So I think looking at your strategy and making sure that it’s foolproof going forward to help you make your decision as to what houses you want to keep and which ones you want to get rid of, but Ethan, congratulations to you and your wife on property waking, and best of luck to you guys. Send me a message on Instagram, @wealthfromrentals. I’d love to talk to you about this more and maybe get you on the Real Estate Rookie episode. So that would be great. Well, David, thanks for having me back to answer this question.

David:
All right. Thank you, Ashley, once again for some very good feedback. I really love seeing you flourish in your role as a BiggerPockets Podcast host. You are clearly stepping up your game. So thank you for that.
All right. What Ethan F. refers to as property walking, I think, is probably one of the most solid strategies that everyone listening to this should be doing. You combine it with house hacking and you’ve got a guaranteed way to become a real estate millionaire without much work. You literally just buy a new primary residence every year using a very low down payment option anywhere between three and a half to five percent. Maybe you could get up to 10 for multifamily properties, and then next year you move out of it and you do it again, and you got yourself a rental property that you put 5% down instead of 20 to 25 percent down. It is a no brainer.
The only thing I would add to this is that in addition to buying one house to live in for yourself, maybe try to buy another house long distance real estate investing using the BRRRR method, flipping a house, some of the other strategies we talk about, but make this your meat and potatoes. This should be the staple of your diet, and then anything that you’re buying on top of that every year can be the fun food that you supplement your regular diet with, but this is a great strategy. Keep it up, keep doing it, and let us know how it goes.
Our next question comes from Steve in Reno and will once again be answered by Avery Carl.

Avery:
Hey, guys. It’s Avery again. This next question comes from Steve in Reno. Steve says, “Reno is a tough cashflow market so I’ve been looking into short-term rentals. I feel like it’s a great market for STRs with lots of conventions and close proximity to Lake Tahoe. Assuming the yield curve inversion does, in fact, lead to a recession in the next year or two, travel and vacationing tend to be one of the first things to go away. How would you suggest I proceed so I don’t get caught with my pants down?”
Okay, Steve. So I have a lot to say about this particular question. I would say the number one thing you want to do before you even do anything else, check the regulations in Reno, and not just the current regulations, call the city and see if there’s anything coming down the pipe, if there’s anything that’s been discussed or brought up in the most recent city council meetings about potential changes because just because the rules are the way they are now does not mean that they’re always going to be that way, especially in a metro market like that.
If we are, in fact, entering into a potential recession, I think the most important thing when choosing where to invest in a short-term rental is choosing the right market. So I don’t know a lot about Reno, specifically, but the first markets to go in a recession are the markets that are really difficult and expensive to get to. So if it’s an area where you pretty much have to fly there if you want to go there, you can’t really drive, the majority of the tourism coming to that area or visitors coming to the area are having to fly and it’s expensive, that is going to be a red flag for me. I try to stick to markets that are more drivable, that most of the visitors and tourism coming in are driving because along with that, it makes it a little bit more affordable to get there. So accessibility and affordability are really important when it comes to what tourists are willing to pay and what they’re willing to do. So keep that in mind.
How would I suggest that you proceed so you don’t get caught with your pants down? So if you’re buying in a metro market like Reno, I would suggest that you are able to convert it to a long term if possible, and I don’t give that advice for every single market. If you’re buying in a vacation market, totally different. That’s a separate strategy, but talking about a market like Reno, I would want to make sure that it is something that you can still cashflow or at least at the very least breakeven on if you do have to convert it to a long term because people just aren’t traveling there.
I really don’t think that we’re going to see a situation where no one will be traveling anywhere like COVID, for example. So you will still probably be able to at least breakeven without having to convert to a long term, but it is nice that you can do that if you want to in a market like that. So I would just say make sure you don’t spend too much to where the numbers don’t work as a long term, and then also of course, always the BRRRR strategy. You’re not necessarily a full BRRRR but a value add, where you’re buying a property that you can add a lot of value to so you’re not spending as much on the property itself, so your expenses will be less when it comes time to start short term running it. So I hope that answers your question, Steve.

David:
All right. Thank you, Avery. Great advice. I think, in general, anytime you’re buying a short-term rental, if you can find the angle of you could convert it into a long-term rental so that it would cash flow, I’m a fan of that, in general. Then also just to put in there, if you can figure out a way to add value, adding square footage, buying a property below market value, buying a property that needs some work and fixing it up so that you’re going to make the ARV higher, all of that is a great way to hedge the risk that is inherent in short-term rentals because it is true that we could be seeing a recession, that it’s very likely that travel could go down.
So what I’m doing when I’m telling everyone else is plan that whatever numbers you’re running you’re going to maybe get 70% of that. So whatever the data is telling you, just takes 70% of it and run your numbers that way and make sure that you’re at least breaking even or coming close, and you can weather that storm if it does come because we don’t invest in real estate for one year, we invest in real estate for the long term.
Our next video comes from AJ in Long Island and will be answered once again by Craig Curelop.

Craig:
Next question is AJ from Long Island, New York, who started house hacking back in 2012. He’s got a whole lot of equity in his house. So his question is if he wants to buy another investment property, does it make more sense to just pull equity out of his current home using a HELOC to invest in another or are there are other options that he can do?
So AJ, there are a lot of options you can do. I would like to say you probably have a good amount of equity in your house if you bought it back in 2012. So the HELOC would be my personal favorite. The reason why is that you can get a pretty good amount in your HELOC if it’s appreciated over the last 10 years, and that’ll likely be enough for a 20% down payment somewhere in the US. The great thing about that is that you’re only going to be paying for that HELOC when you draw down upon it. So you’re not really in a rush to find a deal, you’re not really increasing your mortgage right away, and all that kind of stuff.
So another option would be to refinance it. So if you refinance it, then you’re going to get a whole bunch of cash back, probably a little bit more than you would if you just did a traditional HELOC, but you’re going to be required to pay that additional monthly payment no matter what. So you don’t really have that option of acting when the deal comes you’re going to have the money, you’re going to be paying the extra cash flow, and you’re going to feel the pressure to find a deal as soon as you can.
That’s my thoughts. Again, you have the option between a HELOC and a refinance. My personal, what I would recommend is just go with the HELOC so you have a little bit more of that flexibility. David, what would you do?

David:
Thanks, Craig. Love your help with that answer. This is going to make a lot of people a lot of money. I’m glad to see you guys on the Seeing Greene episode helping me out here. We’re going to switch it up for a little bit at this segment of this show. I like to read some of the comments that come out of our YouTube channel. If you didn’t know, if you’re listening to this as a podcast, you can also listen to it on YouTube. I’m not paid or endorsed by YouTube to say this, but one of the things that I did was I switched over to YouTube Premium. I think it’s $15 a month or something. YouTube will play even when the app is closed. Ever been listening to a YouTube video that you were really liking and then a text message came in and you’re like, “Ah, I can only open it up when the banner shows up on my screen and YouTube will keep playing, but if I have to close the app to reopen my text app, then the YouTube video would stop playing?” and you’re stuck like, “Do I keep listening or do I reply to this person?” I know many of you are smiling because you’ve been in that same dilemma.
Well, I solved that by getting YouTube Premium and now, I can listen to it all the time. So YouTube is pretty much always playing. When I combine that with my AirPods that I have, I could always be getting new content, and that’s how I stay ahead of the game. It’s why I don’t get caught off guard by changes in the market or different strategies or problems that could be coming because I’m always staying educated, and I would love for you guys to do the same. I’d love to be in your ears all the time with this soft silky voice warning you about how you can avoid mistakes in real estate and pointing out areas where you can make money.
So with that being said, go to YouTube, listen to us, and then leave some comments. I want to hear what you think about this show. What did you like? What do you wish we would talk about more? What topics do you want us to get into, and where do you think I screwed it up? Yes, you can give me negative feedback as well. I don’t take it personal.
All right. Our first comment comes from Chris Calero and he says, “Absolutely love these kind of videos. I feel like many of my questions were answered.”
Well, thank you, Chris. I believe when you say these kind of videos, you’re referring to the Seeing Greene episodes. I’m really glad to hear you guys like these. You know when Brandon Turner stepped away from the podcast, go do other stuff, we wanted to figure out a way that we could continue to bring you even more value in different ways because we didn’t have that big, beautiful beard right behind me helping give commentaries. So glad that you guys like these. I want to keep them going too.
Next comment comes from SL, “I’ve heard you mentioned basically staying away from Missouri on a few episodes and I’m wondering why. I’ve relocated here and have four flips going on and two BRRRRs going. That’s a lot happening here. I think you underestimate Kansas City, Missouri and Kansas City a lot.”
Well, to my knowledge, I don’t think I’ve ever specifically said don’t invest in Missouri. You may be referring to where I talk about the Midwest. I have given some warnings about staying away from those markets, and I appreciate you saying this because it gives me a chance to clarify what I meant when I make those kind of comments. I don’t think that there is a bad market in the country. Every market works if you understand the strategy. I think that there are people who take shortcuts and are prone to making mistakes in certain areas more than others.
So one way I think investors get into trouble is it’s very obvious right now that there’s not a lot of cashflowing properties available. Very hard to find anything that cashflows at all. So when the road becomes steep, you got to climb uphill to find the better deal. Many human beings will stop walking up and they’ll just look for a downhill road. If you’re trying to get cash flow, which most investors are, and if you’re newer and don’t have a ton of capital, which the majority of investors are in that situation, the downhill road leads into the Midwest.
Homes are priced much cheaper. The price-to-rent ratios are much stronger. It becomes very attractive to say, “Oh, I’m just going to go there. I’m going to go buy in Indiana.” I have mentioned Indiana more than Missouri just because I hear so many new investors saying, “I’m buying in Indiana.” 90% of them are all in Indiana. I don’t think that that market is strong enough to warrant having 90% of investors there. So why are they there? Well, they’re there because the prices are very low and it doesn’t feel as scary.
The concern that I would have is that you think that when you buy a property with a low price point and a strong price-to-rent ratio, but you don’t factor in. You’re not going to see growth. Rents don’t go up there. The money that I’ve made in real estate from the cashflow side has not been when I bought it on year one, it’s been five years later, 10 years later. Think about buying in Denver, Colorado five years ago or even 10 years ago. When you first ran the numbers on your duplex, they probably didn’t look all that sexy. Five years later with high growth wages going up inflation, you’re looking really, really good. It’s that idea of delayed gratification that I’m really getting at. I want more people to take a bigger picture of you. I don’t want them looking for a quick fix where they can get a bunch of cashflow and then start spending that money or quit their job or make major life decisions because they bought two properties. You want to be in this for the long haul.
Now, it sounds like you, SL, are doing great in Missouri. If you have four flips going on in a market that’s tough to flip in, you’re finding deals below market value. You should be doing what you’re doing there. If you have two BRRRRs going on, which are very similar to flips, I’m assuming these are deals that you got below market value that also cashflow. If you’re finding stuff below market value, you can make it work anywhere. So you should keep doing this, and other people who are understanding the Kansas City, Missouri market or Kansas City, they can do the same thing, but I don’t want people who are not getting stuff under market value, who are not getting great deals to just go pick something off Zillow and go buy it and say, “Well, everybody else is doing this so I will too.”
Our next one comes from Stephanie Mocris who says, “I’m honored to have my question answered by David Greene.” She got the E at the end of my name right. Way to go, Stephanie. “It was pretty surreal hearing him say my name on the podcast. David, I am saving your words like gold. Thank you again for all that you and your team are doing for other learning real estate investors. You guys are changing people’s lives.”
Well, thank you, Stephanie. Not only did you put yourself out there and asked the question on YouTube, but then you looked and saw that we put your name out on the podcast and went on YouTube again and put another comment, and now you’re getting mentioned again on the BiggerPockets Podcast. You can now officially tell people, “My name is Stephanie Mocris and I have been featured on the biggest real estate podcast in the world.” So way to go. Good for you.
In case you guys are wondering why my background looks different than normal, well, this month, maybe the last 30, 40 days or so, I will be traveling looking at different investment property, checking out properties I’ve already bought, attending a couple different events. So right now, I am in Scottsdale, Arizona looking at new investment property out here. After that, I’ll be headed to Austin for Keller Williams Mega Camp, and then I’ll be heading up to the Blue Ridge Mountains in Georgia to check property out there.
So join me on this journey wherever you are, where you’re looking at properties. Put the podcast on. Listen as you’re going. There’s nothing as fun as looking at houses, analyzing opportunity, and hearing BiggerPockets in the background doing it while you’re there. It’s a perfect combination. It’s like peanut butter and jelly. It’s like Pop Rocks and Coke. You can’t do anything better than this.
So thank you, guys. Please go to the comment section on YouTube. Let me know what you think about the show, and I would love to include you in the commentary on the next Seeing Greene episode.
If you are listening to this podcast on an app, please take a quick second to give us a rating and review. We really like honest feedback on iTunes. I guess they call it now maybe the Apple Podcast app, Spotify, Stitcher, wherever you listen to shows. Please give us a review, and keep in mind, we love constructive feedback. So if you give us advice of what you’d like to see different, I will do my best to see that come to fruition.
Ultimately, what I would love is to have a new podcast drop every single day of a different type. So you’ve got Seeing Greene on one day, a traditional episode on another, a coaching call on another, a round table discussion about what’s happening in real estate on another. I’d just love for all of you guys to have as much fun and be as addicted to real estate as I am. So let us know what you would like to see.

Matt:
Hey, Dave. We’ve got a good one here. I’ve got one from Janelle from Bay City, Michigan. Another multifamily question. Janelle faces a problem that a lot of people do when they’re looking for multifamily deals. She’s like, “Hey, guys. I’m looking on LoopNet, and Crexi, C-R-E-X-I, for multifamily deals. First question is, should the price be valued and based on the cap rate of the area and the actual NOI?” Get back to what she means by actual in a second here. “Then if the new owner is able to create an NOI increase in the performance, shouldn’t that be to the benefit of the new owner to then refi and/or sell based on the new NOI?”
In essence, what Janelle’s saying here is that when she’s looking at properties, the broker is pricing the property based on future performance. Let’s break that down. First, let’s talk about how properties are priced. They’re priced based on a cap rate, which is simply a risk factor on a neighborhood. So Detroit, Michigan may have a higher cap rate because Detroit has a perceivable higher risk factor as an investment area than some city based on Raleigh, North Carolina may have, right?
So without drilling into local cap rate specific inside of a market or whatever, it’s just simply a risk factor that folks may want to have, maybe willing to take a higher risk and invest in an area like Detroit versus Raleigh. So the cap rates will be high. The higher the cap rate, the higher the rate of risk that you’re willing to take for an investment in that market. Cap rate’s calculated by looking at the purchase price of a property. So if a property is selling for a million dollars and you look at the cap rate of 5%, that if I take that million, multiply it by the cap rate of 5%, the property should be able to produce a NOI of $50,000.
NOI is simply the rent that a property produces minus all of it expenses except for debt. So all your expenses except for debt service equals NOI. So income minus expense, NOI. There it is. So a million dollar property at a 5% cap rate should be producing 50 grand per year in downside and downline revenue after expenses are paid and you can apply that revenue towards debt service or another way to look at it is the NOI is how much money a property would make if you owned it free and clear. So that’s what all that stuff means.
Now, what Janelle’s facing here is a broker is saying, “Well, we’re going to take a property and we’re going to sell it to you for more, let’s say 1.2, 1.3 million based on that $50,000 NOI because at some point in the future, you should be able to raise rents or build a laundry room or do some common area improvements or … Well, the market has gone up more and the owner hasn’t increased rents.”
That’s not really the way the broker should be doing it. So what Janelle’s saying is that the broker’s pricing, putting today’s price for future performance, which isn’t really a fair way to do it. There’s some kid glove guidance I’ll give you guys here. Okay? You want to talk to the broker. This is always worth a phone conversation, not worth just a, “Oh, it’s overpriced and move on,” or you don’t want to rub the broker’s nose in something where like, “Hey, you’ve included future performance or work that I’m going to do as a buyer. You’ve given credit to the seller for those improvements that haven’t been done yet.”
You don’t really call them out. You want to just say, “Well, I’m going to be making an offer. I make my offers based on current performance, Mr. and Mrs. Broker.” So just tell them this is how you do it. This is how you’ve been taught to do it, and this is how you’re going to be pricing the property. Just say, “Well, here’s what the last 12 months worth of performance says the property did. That’s called a trailing 12, and I’m going to look at the trailing 12 on the property and say it did $20,000. The market cap rate that I understand it to be is this,” and you could even ask the broker what they think the market cap rate for that market is and they’ll tell you. Then you give them a price based on actual performance.
If it doesn’t match what they’re asking on the property, then kindly, politely call out that, “Well, I’m pricing it based on actual performance. You can put your own factors on there, but this is how I’m pricing it,” and be willing to put your offer in writing and put some backup in writing too, but again, you don’t want to go calling names or throwing rocks to the broker here because this is they’re living. You can kindly approach them with some feedback and don’t be afraid to put your offer in writing with some real backup of how you’re coming up with your calculations.
I’ll underscore one more thing I just said. Make sure the broker tells you what they think the market cap rate is because it’s given them some input. If they’re completely off on that, then that’s another factor you could dig into or maybe talk to some other brokers about what they think the cap rate for the market you’re looking at is. It is a bit of an art in this kind of thing. So make sure that you’re willing to do that art and get your conversation skills really, really tight and talking to the broker about these kinds of things. Best of luck, Janelle. Sounds like you’re well on your way. Back to you, David.

David:
All right. Thank you, Matt Faircloth, once again for a great answer. Appreciate you and appreciate all of you listeners as well. This has been a little bit of a longer episode because we brought a ton of value. So I’m going to let you get out of here. Thank you again for checking out this Seeing Greene episode while I’m in Scottsdale, Arizona. Appreciate your guys’ attention, time, and love, and we love you back. Check out another episode and let us know in the comments on YouTube what you think. I will catch you on the next one.

CNBC’s ‘Halftime Report’ investment committee, Bryn Talkington, Josh Brown, Steve Weiss and Jim Lebenthal, discuss their takeaways from the Fed minutes.

Ashley:
This is Real Estate Rookie, Episode 210.

Alex:
I think one thing that doesn’t get talked about enough early on in real estate is not so much about how do I do this thing. Everybody wants that very technical, how do I BRRRR something, how do I refinance something, but nobody talks to the kind of beginners, the rookies about is this method of investing going to suit your personality, your skill set, and your goals, and that is never a conversation I had on 20 years ago when I started investing. It was like, hey, everybody, I knew bought a house, used their VA loan, and then they moved, and they rented it out, and then you just rinse and repeat.

Ashley:
My name is Ashley Kehr, and I’m here with my co-host, Tony Robinson

Tony:
And welcome to The Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, information, motivation, and education you need to kickstart your investing journey. What I like to do to start these episodes off is read some reviews from the wonderful people in our rookie community. This week’s review comes from username, Bravesmith28 and Bravesmith says, “Impacted my life greatly. This podcast has been constantly pushing me in my real estate investing career. Listening to this podcast has got me thinking about different strategies to funneling leads to figure out what the property can be used for financing. I’ve purchased three single family properties since listened to this podcast, and I’m about to do my first short-term rental. I would not have even thought about this without the BiggerPockets podcast, and I’m looking forward to growing my business.”
So, Bravesmith, we appreciate you, congratulations on your success, and if you’re listening to this podcast and you have not yet left us a review, ask yourself what you’re doing with your life. All right? The more rating and reviews we get, the more folks we can reach, the more folks we can help, and that is our ultimate goal here at The Rookie Podcast. So, Ashley Kehr, boring banter time, tell me what’s going on. How are you?

Ashley:
Well, there’s one thing I just need to know before you can even get into anything with the podcast. When you do your intro, after I say our names and you say what this podcast is about, do you have that memorized, or do you have it written in front of you? I just need to know because you-

Tony:
I just kind of spitball it every time.

Ashley:
I know you do.

Tony:
It just kind of rolls off.

Ashley:
You do such a great job. Yeah.

Tony:
Thank you. Thank you. I’m glad it comes across as consistent. That’s what I was shooting for.

Ashley:
Yeah, and I’m so glad that you have that role, and I only have to remember our names and the episode number.

Tony:
I always think the same thing when you’re finishing the episodes and you’re like, “All right, I’m Ashley Kehr, blah, blah, blah,” and then you close it out. I feel like I would’ve screwed that up every single time.

Ashley:
Yeah, but it’s only just our names and our Instagram accounts, and then the ending, I just, see you later or see you next time or thanks for listening. It’s different every time. There is a sheer moment of panic every time where I’m like, “What do I say to end?”

Tony:
What do I say? Yeah, but you do a great job. You do a great job.

Ashley:
Thank you, thank you.

Tony:
And on that point, right, we read one of the reviews. It was a mean review saying that they hate our boring banter and this, that, and the other, and it’s been so crazy, Ashley. We’ve been hosting these monthly meetups, and since that episode aired, I don’t even remember which episode number it was that we talked about those mean reviews, I’ve had so many people at these meetups come to me and say, “I was so upset when I heard you guys say that. I don’t agree with that person at all. I love what you guys talk about. I love hearing about your guys’ stories.” So, just know that for the folks that appreciate me and Ashley sharing our personal stories at the beginning of the episodes, we appreciate you guys.

Ashley:
Maybe I need to get the courage to read that one review that was directed at me. Maybe one time it’ll be like, was it Jimmy Fallon that does the mean tweets where I read it out loud?

Tony:
We do a whole Saturday episode about this.

Ashley:
It’s a review where I laugh and cry at the same time. So, one day, I will work up the courage to read it out loud on the podcast. Maybe, Tony, one time we’re doing a live podcast, we’ll do a couple shots or something, then I’ll be good.

Tony:
There you go. In Denver, in Denver next.

Ashley:
Yeah, yeah, yeah. So, what’s new with you, Tony? What deals are you working on right now?

Tony:
Yeah, I mean, same old, same old. We’ve got four rehabs we’re working on right now, another three or four short-term rentals that we’re getting set up that we’ve already purchased. So, just busy, busy, busy. I think, depending on where this hotel deal goes, we might slow down a little bit on the acquisition side just to kind stabilize this hotel and stop my hair from falling out. So, we’ll see what happens.

Ashley:
Is there any left to fall out?

Tony:
No, there’s none. We bought them all. We’ve got them all.

Ashley:
Yeah, today I went and looked at a commercial property. So, it’s two units, and the majority of it, 80% of it, the larger unit is vacant, and then there is a smaller unit that is occupied right now, but there’s also a kiosk for a local bank that has an ATM there, and I cannot believe how much they pay in rent just to put this little ATM kiosk in the parking lot. It takes up no space. They don’t have any reserved of the parking spots. It’s not part of any of the building square footage, just off to the side, and they pay a ridiculous amount of rent, and when I was meeting with the property manager today, he said that at all of the buildings, he manages almost every single one, they reach out to a bank and ask them if they want to put a ATM kiosk in the parking lot of their plaza. So, I thought that was really cool.

Tony:
So, what’s your plan with the property?

Ashley:
So, it’s actually another investor that wants to buy it because he owns the adjacent property, and so, we went into it kind of looking at it for him, but he doesn’t need the whole square footage of the building. So, we kind of looked at the tenant that’s there now. Their lease is up in January, this coming January, and as of right now, it’s just, of course, they say we’re in negotiations, but that’s coming up really close. So, if that tenant was to move out, I’d be worried about what to put in that unit, but I think there’s huge potential in the front of the building. So, the other investor can take the back of the building and use it for what he needs, and then the front of the building, I think would be great indoor climate-controlled self-storage because there is none in the area.
So, just walk in this property, Daryl and I could visualize it. We’re like mapping out the unit sizes that could go in there and the walkways would be here, and we’re like, “Okay, we got to get AJ on the phone. What are we going to do here?” You guys don’t know AJ Osborne, self-storage king. But yeah, so that was exciting. But first we need to find out if the other investor can occupy the other unit, and if it makes sense for his current business to step in and take over this one. So, we had a little meeting with him and it was like you need to go to your manager and you need to break down, okay, what’s your new overhead going to be? How much can you increase your business by? And is there going to be a profit? Is this going to be worthwhile?
So, once we get those numbers in, then we can analyze the deal a bit better and see how it turns out, but exciting. It’s always exciting when… That’s the most exciting part to me, and I feel like I haven’t really gone and looked at a property in a while that I’ve been super excited about-

Tony:
You’re excited about.

Ashley:
… and I could just visualize this is how we can make income off of it because of different things they do. And so, yeah, just pumped up today from that.

Tony:
Yeah, I can see it. I can see the excitement.

Ashley:
And you know what? It actually made me realize this is what I need to get back to because Daryl handles a lot of that now is the acquisition side. It’s like I need to get a lot of other stuff off my plate so I can get back to the thing that I really love, and that’s acquiring the deals and underwriting them and figuring out how to make money off them.

Tony:
And not to go too far off a tangent, Ashley, but I love that. You’re saying that because when we interviewed Pat and Tim Rhode, their podcast will come out after this one, it’ll be episode 216, but they’re the founders of GoBundance, and in that episode, they talked about how they coach entrepreneurs to move from 100% obligation to 100% interest, and I feel like you and I have always struggled with that. Not struggled with it, but we haven’t been able to make that shift fully yet in our own businesses, right, and I’m in the same boat where it’s like I’m so excited to start building this team where they can handle all the things that I’m obligated to do, and I can really start focusing on the things that I’m mostly interested in. So, I’m glad that you’re starting to take those steps. I can see the excitement just vibing off your body.

Ashley:
I know, I’m super up today about it, and I don’t even know if this deal is going to happen. There’s so many moving pieces, but just day one going in and visualizing, and then I was so pumped up on the way home that I drove by this property that I drive by pretty much every single day, and I see it out of the corner of my eye and everything, but after looking at this other property, I was just like, “Wait, I could do this at this property. I could do this at that property.” I called the listing agent. I got some more information. I’m going to see that one tomorrow morning now too.

Tony:
There you go. You’re on a roll.

Ashley:
So, it’s just like when you’re motivated and you’re inspired and you’re pumped up, I feel like it gets the juices flowing like, okay, more ideas, more ideas then kind of flow through, and that’s why I love this podcast because listening to it and having these guests on, every single time I get motivated and excited.

Tony:
Yeah. Well, let’s talk about the guests today.

Ashley:
Yeah.

Tony:
Yeah, we have Alex and Beth on the podcast. So, Alex and Beth, they actually just recently wrote a book for BiggerPockets, and I’m going to give you the full title. It is called Lend to Live: Earn Hassle-Free Passive Income in Real Estate with Private Money Lending. So, essentially, the premise of this book is both Beth and Alex operate as private money lenders, and they’re kind of talking about what it’s like to be a real estate investor from that angle, but they also give people, I guess, advice on how to find private money lenders to work with. So, they’re kind of hit it from both sides, and I think they do a really good breakdown for new investors who have no experience, who have no deals about how those folks can go out and find and work with potential private money lenders, even if you have no one in your network.

Ashley:
Yeah, and that’s also something super exciting is using other people’s money to purchase a deal, and as you start learning about these different creative ways to finance a deal, it’s looking at a properties, okay, what are the different ways I can make money, but also looking at the property and saying, “Okay, what are the different ways I can finance this?”
So, this episode right here is just a great little crash course on using other people’s money to finance a deal, but also if you actually realize that you don’t want to own the property, you don’t want to be a landlord, and Alex says a statement about her in the beginning as to why she became a private money lender, and I think it’s really important to listen to because there’s all these different types of real estate investing, but they’re all different kinds of roles and passivity and being active in them, and they have different kind of responsibilities that you have when you pick a certain kind of real estate strategy or different type of way to invest in real estate. So, if you’re kind on the fence about what you want to do in real estate, this is a great episode to listen to too.

Tony:
Yeah, real quick, Ash, I’m glad you mentioned what Alex said at the top of the show about defining why she became a private money lender because I think that’s going to break down a lot of limiting beliefs that real estate rookies have when it comes to finding private money lenders and that they don’t have the skill set to find those folks. So, really, really pay attention when Alex goes into that piece.

Ashley:
Okay. Well, let’s get into the show. Alex and Beth, welcome to the show. Thank you so much for joining us. Alex, let’s start with you. Could you tell us a little bit about yourself and your history with real estate?

Alex:
Sure. I am a military spouse of 22 years now. I’m currently sitting my 19th address in 22 years, and the reason that’s important is that actually led to the reason I do private lending over other ways of investing in real estate.

Ashley:
That’s awesome. Well, we can’t wait to hear more about that, but you are here today because of something exciting that has come out. So, do you want to share that news and then we can move on to Beth?

Alex:
Sure. So, we now have a book out on the BiggerPockets platform, and it’s about private lending, and then really it’s from the perspective of how to be a private lender, but active investors can also find value in it in that it’s going to kind of teach you what private lenders are looking for, and you can also kind of work your network to say, “Hey, this is how I’m going to safeguard my capital. Here, I’ve read everything in this book. This is the action steps I’m going to take.” So, it’s really kind of written for both sides of the house.

Ashley:
Awesome. Well, we can’t wait to learn more and kind of get a crash course in both of those things. And Beth, what about you?

Beth:
Yeah, so I started in real estate investing in the early 2000s. I’d always considered it to be something that would be a side hustle. I grew up at my dad’s flip projects and his rehab projects and begrudgingly had to be there, but it gave me a lot of foundation to want to invest in real estate when I got older. I just happened to get into private money lending because of a blind date that I was set on. He’s now my husband, and we are running a private money matchmaking business, I would call it, in the Washington market, and over the years, we just kind of realized that a lot of people wanted to passively invest in real estate through private lending, and it became kind of a long arduous journey to grow it into an active business. So, Alex and I decided with our corporate education and academia background, we just kind of wanted to go public with private lending.

Tony:
So, Beth, I mean, you threw me for a second there when you said you started lending because of a blind date. I thought you became a private money lender to the person you went on the blind date with, but not quite how it worked out. I like your story a little bit better. So, I’m really curious. So, both of you, and I know we’ll get into this a little bit later, but both of you decided to lend or to become real estate investors because of the private money approach. So, Alex, we’ll start with you. Why was that the route that you chose to go down over the traditional buying a property and getting the tenants and doing that whole thing?

Alex:
So, just to be fair, I did those other options. I was a long-term landlord. I did fix and flip. I was absolutely miserable doing both of those things. I think one thing that doesn’t get talked about enough early on in real estate is not so much about how do I do this thing. Everybody wants that very technical, how do I BRRRR something, how do I refinance something, but nobody talks to the kind of beginners, the rookies about is this method of investing going to suit your personality, your skill set, and your goals, and that is never a conversation I had on 20 years ago when I started investing. It was like, hey, everybody, I knew bought a house, used their VA loan, and then they moved, and they rented it out, and then you just rinse and repeat, and while that can be a viable way to do something, it did not suit our skill set.
Just as an example, my husband and I do not have children. I don’t like children because I don’t want to babysit other human beings. Anybody who’s ever had to deal with contractors and tenants know all you’re doing is babysitting adult human beings, and it drove me crazy, whereas when I was lending money, whether it’s JV or kind of just as a lienholder on a property, I still had some relationship with them. It was still kind of collaborative which is what I enjoyed, but I didn’t have to babysit them. I didn’t have to go and say, “Hey, you installed the wrong beige tile in this room. It needed to be this other tile,” and stuff like that just drove me insane.
So, I finally just kind of happened upon this and I just discovered kind of, hey, this actually suits my personality. It suits my skill set and then also suits my lifestyle because, like I mentioned earlier, I move so much so the idea of trying to have six rentals in six different places we’ve lived being a long-term landlord from 2,000 miles away is just miserable to me. But not saying it’s a bad way to invest. It just, it didn’t suit my lifestyle as a military spouse.

Tony:
Beth, what about you?

Beth:
Well, my journey into private landing was kind of born out a necessity. So, as I mentioned, I was set up on a blind date. At the time, I was just a single mother of two. I was working part-time as a tech consultant, just trying to get my life back together. I had done flips, live-in flips, but my ex-husband was the other half of the sweat equity, and I just didn’t really see how I could possibly do it again and go it alone. And so, when Matt, my now husband, brought up the idea of getting in a private lending, he wanted to do it again, he’d done it in the past and had a couple of interested friends that also wanted to invest their capital, I was intrigued.
I mean, I learned about real estate investing through my parents, but I never knew how they sourced the capital for their project. So, after that date, and I tell this story all the time, I went home and googled private lending. I didn’t even know what it was, and I thought what an interesting way for me to be able to invest passively in real estate and still afford me the opportunity to grow my generational wealth and be a mom first. And so, that was the reason I got started into it.

Tony:
So, just to kind of clarify, what you guys are saying is that there are people who exist that are willing to take the money that they’ve earned and give it to someone else so that that person can then go invest in real estate, and all that person has to do is pay the first person back. That’s a thing that happens in the world today.

Alex:
All the time.

Beth:
Absolutely. I mean, BiggerPockets, everywhere you talk about it, it talks about other people’s money, right? Well, where are the other people in OPM? And they do exist out there.

Ashley:
Okay. So, let’s start to tailor this for rookie investors. You’re a rookie investor and maybe your ears picked up like, “Okay, I don’t have money. Maybe this is the way I can find money.” As a rookie, a new investor, how do you find the people like you, those other people? What are some steps they can take?

Alex:
I would say the first slices is realistically is going to your local meetup or local REIA event and just participating. That could be in virtual events. They get together at a micro brewery, coffee shop, whatever it is because a lot of times the private lenders like we are talking about today are not going to come forward with a formalized rate and term sheet. We’re a little more on the lurker side of life, not creepy, but we’re paying attention to who’s in our market and what they’re doing and how they’re doing it.
So, I would say showing up consistently and just talking about your business plan, if you know your numbers, “Hey, I’m looking for three-bedroom, two-bathroom homes in this city for this price range, and I plan on doing moderate rehabs,” and that gives everybody in your network a good idea of what you’re looking to buy. So, if you have also happen to have wholesalers in the room, they know, “Oh, wait a minute. I just heard this person say they want three twos in this city with this purchase price,” and anybody that has capital in the room also would be like, “Oh, okay. Well, I’m interested in lending in that city too.” So, it ends up being a point where you have to build your network.

Tony:
Beth, what about for you? What advice do you have for new folks that are looking to find those private money lenders?

Beth:
Yeah, I completely agree with Alex. I think it’s going to become more of a local network type of thing and not looking at the national level for private lenders. There’s a saying that people don’t care about what you know until they know that you care. So, lead in with personal relationships first. Always talk about the kind of work that you’re doing, and the more that you share about that, the more that people will become interested and want to know more and perhaps maybe invest in you and the projects.

Ashley:
A common question that Tony and I received often and I’m sure a lot of other investors get too is if they do have somebody that is willing to lend to them privately, the question that we get asked is how do I structure it, what is the correct way to structure it? And there’s no correct way, but what advice can you give to someone to here’s a starting point as to the first offer to have them put together some kind of deal? Do you have any advice or tips for that as how they should even approach the person with an offer, or do you just leave it up to the private lender to tell you what their terms are?

Alex:
I would say it kind of goes both ways. Private lending in the way we are talking about private lending is very much a relationship model. So, not necessarily this is it. There are some guidelines. Legally, we have to stay within these certain guidelines, but for the most part, it’s not this is hard and fast, this is everything we do, it’s two points for origination, 10% annualized rate. It’s really going to matter on the property, the person, just the deal as a whole.
But I would say having that discussion early on of what they lend on because for example, some private lenders might not lend on multifamily. They will be only single-family home investors. So, getting a real clear idea what they’re willing to lend on will be a great starting point and then specifically how you can protect them. So, if you are an active investor and you’re asking someone to send you $100,000 and everything’s going to run through closing. So just to be clear, no one’s exchanging money outside of closing, but you’re going to send $100,000 to this closing company and just kind of hope and pray this person performs like they’re saying.
So you can have a conversation with them and say, “Hey, this is how I’m going to protect you in the deal. You’ll be in the first lien position or first mortgage, first deed of trust, whatever it happens to be in your state. I’m going to have adequate hazard insurance. I’m going to get lenders title insurance. We’ll have a legal professional that’s knowledgeable in lending draw up the documentation.” So, when you start talking to them about all these ways that as an active investor I’m going to protect your money as a lender to me, that usually really kind of helps calm the fears of that potential new lender because they’re like, “Oh, okay. Well, I hadn’t even thought about that. I’m glad you thought about that.”

Ashley:
So, Alex, you mentioned something in there. You said that an example of a structure could be two points and then 10% interest annualized. Can you explain that for somebody who doesn’t even begin to comprehend what those terms even mean?

Alex:
Sure. So, anytime in the lending space somebody talks about points, it’s usually in the context of percentage points. So, two points for an origination fee would be 2% of the loan amount. So, if it’s a $100,000 property, it would be $2,000 in origination if it’s a two points origination fee. Annualized interest is the amount of interest you would pay over the course of 12 months. So, just to keep numbers simple, if it’s a 12% annualized interest rate, that means you’re roughly paying about 1% of the loan amount every single month in interest-only payments which are different than amortized mortgage payments which a lot of the people who might be, you bought your primary residence, and you’ve kind of had that shock of looking at your mortgage statement and be like, “I only had like $26 go towards my principal balance this month because I just closed on my house,” so it’s a little bit different from that structure. These are generally interest-only payments and they’re for a short time period, whereas your primary residence is 30 years and it’s an amortized payment.

Ashley:
Thank you so much for explaining that. Would you say that’s almost like two things that somebody could look at as a starting point? So, some of the advice I always give rookie investors when they’re trying to figure it out is just put something on paper that works for you and present it to the person you’re trying to get to finance your deal and then negotiate from there. Besides the interest rate and points, is there anything else that they should think of ahead of time when they’re kind of putting together a structure or an offer?

Beth:
I was going to say there’s so many more terms to consider other than just the rate and the points to pay for the loan. I think that’s the obvious choice to lead in on the conversation with working with lenders, but really performance matters greatly, understanding the length of the terms, how they’ll operate, and what kind of needs they’ll have from you as the borrower. The last thing you want, especially as a rookie is to have a lender that might want to meddle. I mean, I’ve had some lenders that have shown up to job sites before and you’re like, “Oh, what are you doing there?” They have to be included and communicated to effectively to understand where you’re at on a project, but you also, to Alex’s point, don’t need a babysitter.
So, understanding how the lender will operate, what kind of terms it can offer, if you have a hiccup in your deal and maybe you need a few more bucks to get across the finish line, are they willing to do so, are they flexible. So, those are some of the more qualitative aspects to vetting out a lender that I think are probably more important than rates and terms. Of course, you need to back into a specific profit margin, so your numbers need to pencil out correctly, but that really to me is one of the last factors to take into consideration when looking at a lender.

Tony:
I love that point, Beth, about making sure that there’s also a good working relationship there. Like you mentioned the phrase you don’t want a babysitter as your private money lender, and to someone that maybe has never worked the private money before, they might be willing to take money from anybody, anybody that’s got a pulse and is willing to give them that those funds. But I think, yes, when you get to a certain point, you definitely want to vet that private money lender to make sure that there is a good match there.
I want to go back just really quickly to the finding the private money lender piece because I always think about where I was when I started my investing career, and I had no network of people that had the liquid funds or the network worth to be a private money lender to me. I didn’t have friends, I didn’t have family, I didn’t have really anyone in my close circle that could do that for me, and I’m sure there’s a lot of rookie investors that are probably in that same boat. So, Alex, you mentioned going to the local meetup and kind of building relationships through there, but Beth, I’m curious to hear your take because you said that you work now as a matchmaker between new investors and private money lenders. Can you give us some more details on what that looks like?

Beth:
Sure. I think that one of the best ways to be able to legitimize yourself as a borrower is not only attend these types of REIA meetups, local real estate investing meetups so that you can share your story and make personal connections with people, but also sharing your successes or a little bit more about who you are on social media. I will tell you that most private lenders that I work with will do their digging. We put our inner psycho on and start stalking you on the internet to see what we can find out about you first, and so, it’s really important to showcase what you’re doing out there in terms of what are you learning about. Even if you don’t have any experience, where are you going to grow your experience and your education about real estate investing? That will naturally attract people to come and investigate what you’re doing and maybe it’ll peak their interest to want to invest in your projects and in to you particularly.

Tony:
Yeah. So, I want to get into the flip side of this actually being the private money lender, but one last follow up before we do. Alex, I’ll start with you on this one. So, say that I’m out there, I’m sharing my journey, and again, say I have no deals. Right? I’m a complete rookie, and I’m sure in my journey where I’m underwriting these deals, and I’m posting on my Instagram story, and I’m going to the meetups, and I’m talking to people. What happens when I actually find the deal that I need private money lending for? How do I actually open up that conversation with folks to see if they might be interested? As I’m meeting people, should I be asking them like, “Hey, would you ever be interested in lending in a private money situation?” Or should I wait until I have the deal and say, “Hey, I know we’ve never talked about this, but would you be interested?” Just kind of walk us through what you feel is the best approach for a rookie that’s done zero deals to start that conversation.

Alex:
I would say probably the first case, let people know of early, ahead of time, this is the type of property I’m shopping for, this is the business model I want to pursue. For example, if you are a BRRRR investor, maybe having a conversation with your local community bank or a mortgage broker so you can have a preapproval so when you start that conversation, you can say, “Hey, look, I want to BRRRR my first property, but I need funds to actually close on it, but I have a preapproval from a bank. I know I’m going to be able to refinance out.” That shows anybody, especially a private lender, that you’ve kind of thought about the numbers, you have the credit worthiness to refinance out because us as lenders are only paid out when you either sell the property or refinance the property. So, it’s very important to us that the exit strategy you’re putting forward actually is feasible, that you’re going to be able to do it.
And so, I’d say letting people know what you’re doing, how you’re doing it. Talking about your underwriting would really help too because if I could go in and scroll through Facebook, for example, and see you’ve analyzed five deals in the last two weeks, and you’re putting out numbers that seem realistic, even if you didn’t get the deal, put a contract out and didn’t get it, but you’re still putting numbers forward that are realistic, okay, your ARV isn’t super inflated. Your rehab cost budget looks pretty healthy and pretty accurate. To me, that’s going to let me know that, okay, they might be junior, they might be green, but they’re taking the steps, they’re educating themselves, and they’re learning about the process, and they’ve thought about how to get my money back to me.

Tony:
Beth, would you agree with that same approach?

Beth:
I’d a hundred percent agree. To the point that a borrower can really address lenders from the point of view of a lender, practicing underwriting deals, creating project proformas, sharing out your knowledge and not even just practicing it, but sharing with lenders and not be afraid to hear your deal kind of sucks. I’ve said it to a lot of investors before too. They actually appreciate that candor, and it gives them the practice of being able to present a deal, present themselves with a prospective lender, and I think that that’s just good experience to have, and when you pair yourself with a lender with experience or even another investor, right, maybe it’s doing some practice role-playing with another active investor, trying to pitch a deal to them as if they were going to invest as a creditor on the project, it’s just really good experience to have.
The more that you can practice and articulate your numbers, the better you’re going to come across to a lender, even without experience because we lend to borrowers all the time who are just getting started. Our mantra is everyone is just starting the same journey, they just may be on an earlier chapter than we are, but they still deserve a chance. So, without experience, you still have a chance to make a move so long as you’re practicing each of those steps along the way in terms of finding the right deal, underwriting it, presenting it to a lender, showcasing what you can bring to the table, and how you can safeguard their capital investment in you and the project will certainly go a long ways towards establishing some credibility.

Ashley:
That’s great advice. I love that step of don’t be afraid to take criticism as an investor pitching your deal. That’s almost like a checks and balance right there by having the private lender give you that criticism, give you that feedback. So, that’s awesome. I want to now take it and transition it to the other side. So, maybe someone listening is like Alex, and Alex, you hit it on the head right there by saying it’s babysitting adults when you have tenants. That was what made me want to quit property management was getting videos from a tenant videoing her ceiling because the tenant upstairs was banging their toilet seat too loud when they shut it, things like that. So, what if you want to be a private money lender? How do you put yourself out there without getting tons of people coming at you like, “Oh, give me money”? How do you weed through the deals? What’s your best advice for somebody who wants to start out as a private money lender?

Alex:
So, for private money lending the way we are doing, it tends to be very hyper local. So, if you happen to live in an area where you are willing to lend, I would recommend first stop is talking to an attorney that is familiar with lending specifically in your state. That may not be the person you closed your loan with when you bought your primary residence because a lot of those attorneys, not that they’re not capable, but they get emailed the mortgage documents from the lender. They didn’t self-generate them. So, I would say making sure you have that, you know what the legal guardrails are. Do you need to be an LLC? Do you need your borrower to be an LLC? How many loans can you do in a year and not be licensed? Do you even need a mortgage broker’s license?
And then second off, we are always lending on non-owner occupied property. It has to be investment property. So, again, because that owner-occupied property falls underneath federal regulations, whereas non-owner occupied property falls under state regulations. So, I would say knowing your location first where you’re willing to lend and then figuring out the laws that are associated with that location, and then start drilling down to what are you willing to lend on? Are you okay doing just single-family homes that need a quick fix and flip? Are you willing to take on something that has considerable damage from a flood or fire, maybe needs mold remediation? Do you want to handle projects where everything’s being taken down to the studs and they’re adding another thousand square feet? So, it sounds kind of counterintuitive when I say limit, limit, limit, pick a state, pick a market, pick a type of property, but the second you kind of put yourself out there, you’re going to get pitched everything. And so, the closer you can get to that ideal, quote unquote, ideal situation, it’s going to bring the right deal forward faster.

Ashley:
Alex, I think that’s such a great point you made, basically building a criteria. You hear that so often when you’re going after single-family homes or small multi-family. Have your criteria so you can weed through the deals. I’ve never even thought of, as a private money lender, have your criteria set too as to what you’re going to lend on, what kind of return you want. So, thank you for sharing that. Beth, what advice do you have for rookies that would like to get into private money lending?

Beth:
Well, just to add onto what Alex said, I mean, in our book, we actually have a personal assessment that is more of a pre-step to even getting started which allows you to really explore what your personal risk tolerance is, as she said, kind of ring-fence in what you want in terms of a project, a property, the loan size, the interest return that you’re expecting, but also exploring why you’re doing this to begin with because as she mentioned, getting into a real estate meetup room and saying that you’ve got money to lend, you kind of become the most popular person in the room. So, making sure that you understand that you want to do this passively, like I did. I started because I wanted to maintain being a mom first, and boy, it blew up into being an active business really fast, and it was hard for me at first. I think we’re finally in a good state where it can become more passive again, but really understanding why you’re getting into private lending to begin with, and so, that assessment really helps.
The second thing that I would add on is that private lending is not a DIY project. To Alex’s point, it takes a team. It takes a virtual team. It takes a team in place in the market that you’re going to be lending on if that’s not your local market. If you’re going to have some questions around hazard insurance, you might need to make a relationship with an insurance agent that can help vet out the insurance binder for you to make sure that it’s sufficient enough and that if there was a claim on a property that you get paid out. You’re going to need help evaluating projects and properties. That might mean that you need to get some valuation support from a real estate agent or another active investor who can take a look at a deal and give you a second opinion. You definitely need attorneys there. You need a title, an escrow company, or a closer. Some states close through attorneys. But having a whole team ready in place for you is extremely important because private lending starts with a relationship, but it still needs to be handled like a business transaction. There needs to be legal documentation created, signed, notarized, recorded, and put into place first so that nothing happens after the loan originates, or we try to mitigate as much as we can, right?

Tony:
Beth, Alex, I want to ask both of you a question and just give me a quick yes or a no, then we’ll kind of deep dive from there. Beth, have you ever lost money on a private money deal before?

Beth:
No.

Tony:
Alex, have you ever lost money on a private money deal before?

Alex:
No.

Tony:
So, you guys have both been pretty successful with this, and I mean, I’ve shared my journey obviously on the podcast. My second deal that I ever did as real estate investor, this house in Shreveport, Louisiana, lost $30,000, took me a year and a half to sell that stupid thing. So, I mean, there’s always risk in real estate investing, and even as a private money lender, there’s risk there as well. So, the fact that both of you have never lost money in a deal, you’ve been successful, I guess, what red flags should I be looking out for as a new private money lender to make sure that I don’t lose money on that deal?

Alex:
I would say making sure you don’t kind of mix that business with friendship because most people are going to say, because I see it on the BiggerPockets forum all the time, “Hey, my cousin’s best friend has a $100,000 they want to lend to me as a lender. Now I don’t know what the next step is.” And normally they’re just like, “Oh, they’ll give me the $100,000.” So, I would rather that everybody take home the message that things need to flow through the closing table because, like to Beth’s point, there’s going to be professionals that are involved in this transaction that not necessarily you’ve hired them to be on your side, but there’s other people looking out for the wellbeing of the deal. The title company is obviously going to be doing title search which includes some background information, like if there’s federal tax liens, they’re also going to appear on the title report.
So, having those professionals in place and being able to call and ask questions and say, “Hey, this works, does this fit what I’m looking to try and do?” So, I’d really say leaning into that team of experienced professionals is going to be the best way, or even just talking to another private lender and say, “Hey, I got this deal. I’m looking to fund it. This is the parameters. What do you think?” And everybody’s risk tolerance is going to be different. You could post that same question to 10 different private lenders and you’re going to get everything from yes, no, and maybe, and for different reasons from each private lender. So, I would say just really leaning into that network that Beth mentioned is going to be crucial for anybody new to private lending.

Beth:
Yeah, I would add while I haven’t personally lost any principle, nor have any of my investors in my circle, I’ve had plenty of investors or would-be private lenders come to me with stories of having lost principle. I just want to point out first that when people do lose principle, it’s not to any fault of their own. They trusted in the good intentions of others. Sometimes they just get mixed up with a bad player. Oftentimes, there’s a couple of key things that happen. One is the legal documentation just isn’t there. They either have poorly written documentation that doesn’t cover them legally, or there just wasn’t any legal documentation to begin with. I see that a lot. I’m concerned and I’m surprised actually how many deals occur without any legal documentation or promissory note, and then it’s not secured against real estate as well, making it really difficult to go after the borrower after that loan is in place.
So, the other issue that I would say that is even if it is secured by real estate, a really big issue here is that their borrower sometimes just has no skin in the game. Maybe the lender funded a hundred percent of the purchase price, and even then some of the rehab with a promise that they’ll get both an interest income as well as maybe a small equity share when the project is done. The problem with that is that they’re immediately underwater if the borrower goes dark, or maybe a general contractor comes in and scams the borrower to no fault to the borrower, but the GC runs off with a whole bunch of money and the borrower gets upset and just walks from the project. Why? Because it’s too easy. There’s no skin in the game.
So, an equity buffer, which for rookies is measured out in what we call an LTV or a loan to value which really means how much is the loan amount against how much it’s worth. So, if you have a $100,000 loan on a property that’s only worth 75,000 because you gave $25,000 for a cosmetic rehab also, as a lender, you’re immediately underwater. Your loan to value is in excess of a hundred percent. So, I really prescribed having a really significant equity buffer in place. We typically do our loans at 65 to 70% loan to value, and that gives you a 30% equity buffer in case something happens. And then we also try to require the borrower to come to table with some skin in the game, whether that’s in the form of a down payment, sometimes they’ll collateralize another property that they own, like a rental, in order to have some sort of tie into the project themselves that makes them want to perform.

Ashley:
Beth, in that scenario, do you allow them to go to another private lender to make up maybe another 20%. Say you’re lending them 60 and then they bring an additional 20 of their own. Do you allow that, or is it just, you’re bringing 60, and then they have to bring the 40 on their own, as in their own funds as you’ll look for proof of funds?

Beth:
Sure. Yes, we have. I will say it’s very circumstantial. There have been a few cases where the seller was willing to carry back some money in second position, meaning if we’re going to fund 600,000 out of a million-dollar deal, the seller says, “I will carry back that $400,000 behind your loan for a five-year term at 5%.” And if they’re willing to do so, on occasion, we’ve let that happen for experienced borrowers. I wouldn’t say that’s something that I would recommend for a lot of lenders. And one thing I don’t really like and allow is to have private lending fund that remaining balance, the down payment, also known as gap funding. Whether that’s secured or not, it’s just, again, they don’t have any skin in the game, and so, the borrower could easily walk. I try to make sure that I understand where their down payment’s coming from, and I’ll let Alex chime in on this because I know that she has a little bit more personal experience with these types of scenarios.

Alex:
Yeah, we often see new real estate investors working with, again, people in their networks who are new lenders and they say, “Oh, I have $20,000. I want to be a lender on this deal, and I’m going to do gap funding.” And a lot of times what they end up doing is they just give this active investor $20,000, they may or may not even get a promissory note back, and then they say, “Hey, here you go. This is the 20% down that you needed for that $100,000 house,” and while we might have been in a fantastic bull market for the last 18 years, however long it’s been since 2008, now that we’re kind of in a place in the market, in the economic cycle where that just rampant appreciation asset value, that’s going to be potentially a source that’s going to eat away at your equity buffer.
So, right now, your loan might be at 80% loan to value, but six months from now when they finish the rehab, if the market continues to soften, maybe you’re now at 90% or maybe you end up at 100%, and if you are someone that’s willing to take on that second lien, if you even put a lien on the property for that extra 20,000, you’re very easily going to be underwater. If anything goes wrong with that property, the tenants damage it, it’s has a fire and burns down and they don’t have adequate insurance, the market gets soft, there’s things that can happen that are outside the borrower’s control where if you’re providing that gap funding, you’re automatically underwater. And just for my personal risk tolerance and where we are in the economic cycle, doing that 20% down gap funding for another active investor so they can go and get a loan for the other 80% is just too far out of my risk tolerance with where we are in the market right now.

Ashley:
Well, thank you guys so much for sharing that with us. All of the information today has been great. So, if anybody wants to learn more, where can they find your book?

Alex:
They can find the book on the BiggerPockets bookstore. It’s available now, and the Audible and ebook version will be available on Amazon. There is an ebook version also on BiggerPockets, but the Amazon and Audible will be available middle of August. I think August 16th is the release date for those. So, anybody wants to listen while they’re driving around town, you can get the Audible version in a couple weeks.

Ashley:
Awesome. And you guys can go to biggerpockets.com/bookstore to check out Lend to Live, and also all the other BiggerPockets books. Beth, where can people reach out to you and find out some more information about you?

Beth:
Well, I’m on BiggerPockets so they can reach out to me there and message me there. I also have a website, flynnfamilylending.com. That’s my private lending matchmaking business, and so, I can be reached there as well.

Ashley:
And Alex?

Alex:
You can reach me at our email address. It’s [email protected], and the two is the number two. That’ll reach either one of us. Please feel free to reach out and I’m on LinkedIn and BiggerPockets as well. So, just look for my name and happy to have a connection there and send a message there as well.

Ashley:
Well, thank you guys so much. We really appreciate you coming on and giving us this little crash course on private lending, and rookies, definitely check out this book because even if you have ways to finance your first couple of deals, you can never have enough money in real estate. So, this will be a great resource to help you get started, whether you want to find private lending or you want to be a private lender. Well, Alex and Beth, thank you so much for joining us today. I’m Ashley, @wealthfromrentals, and he’s Tony, @tonyjrobinson on Instagram, and we’ll see you guys back on Wednesday for another episode of Real Estate Rookie.

Dave:
Hey, everyone. Welcome to On the Market. I’m your host, Dave Meyer. We all know that the housing market over the last couple of years has been absolutely red hot, but starting at the beginning of 2022, there have been a lot of headwinds that have caused people to wonder if the housing market is going to crash or see some modest declines over the next couple of years. And if you listen to the show, you probably know that on a national level, the housing market is still doing pretty well, but we are starting to see some pretty significant signs that the hot market we’ve been in is starting to cool down. But really, real estate investing is all local. So as an investor, what you’re probably wondering is what’s… It doesn’t matter as much what’s happening on a national scale, you’re probably curious what’s happening in a market that you currently invest in or one that you’re thinking about investing in.
So today, that’s what we’re going to talk about. We are going to talk about which markets are doing well and are showing signs that they can continue growing despite these economic headwinds. And we’re going to talk about the other types of markets that are showing some weakness and potentially are going to see declines over the next couple of years. Now, I’m going to mention some specific markets here, but I obviously can’t discuss every single market in the country in this podcast so I’m also going to share with you some data points that you should be looking at in your own individual investing so you can make your own evaluation on whether or not your specific markets are poised for further growth or they might see some setbacks in the next couple of years.Before we jump into it, let’s hear a quick word from our sponsor.
All right, so today we’re going to get into which markets are poised for growth and which are at risk of seeing declines over the next couple of years. Before we do the specific things that are happening right now, let’s just do a quick couple minute recap on what has led to this point in the housing market. First, we all know that home prices have been going up like crazy. They are up 43% since the beginning of the pandemic. So if you started in March of 2020 and went to July of 2022, prices have gone up 43%. That is insane. Usually, that takes decades to see that level of growth. And so, obviously when you see that kind of growth, people wonder if we’re in a bubble. And that is a good question. There is certainly some level of speculation, which is what causes a bubble. There is some level of speculation in the housing market, but there are also strong fundamentals that led to this really rapid appreciation.
Those fundamentals are first and foremost, demographics. I say this all the time, but it is true and it is not going to change. Millennials are now the largest generation in the US, and they’re at peak. Family formation and home buying age, that leads to a lot of demand. Second, we have seen interest rates near the lowest they have ever been and likely will ever go. And that also raises demand and improves affordability. People can just spend more on houses when interest rates are super low. Third, inflation and the abundance of money. We’ve talked about this a lot as well. We’ve seen the Fed injected trillions of dollars into the economy, and that pushes up asset prices and something that we saw for a while, not just in the housing market, but in the stock market and the crypto market as well.
And then lastly is extremely low inventory. We have seen days on market, which is the amount of time it’s takes to sell a home hover around 15 to 18 days over the last couple of years, when normally it’s 30 or 40 or 50 days to sell a house. And when there’s just so few houses on the market, it’s going to increase prices. That’s just how supply and demand work.
So there is some speculation, and this is important because when we talk about whether or not housing prices are going to go down, we have to understand why they went up in the first place. And these four things, demographics, low interest rate, inflation and low inventory are vitally important to what the situation is right now. When we’re talking about prices going down, we have to ask ourselves, “Are any of these four things starting to decline?” And the fact is, yes, some of them are. Let’s just take them one by one.
Demographics, that’s not going to change, right? Millennials, they are the age that they are, and maybe they will put off buying house or forming a family by a year or two, but you can’t really escape demographics. This is something that just drives economic forces long in a much more significant way than any of these short term trends. And so demographics are going to contribute to high demand in the housing market for the foreseeable future. Two, inflation. The money has already been printed. There’s new bills coming out in Congress that might even print more money. And so there is likely going to be more inflation over the next couple of years.
Now, I do think there are some signs. As of this recording, we did just see that in July, the CPI went down from 9.1% year over year to 8.5% year over year. That is an encouraging sign. But even if inflation peaked, and it is definitely too early to tell whether it peaked or not, it is likely going to be a very slow return to normal for inflation even if we did hit a peak. So I do think inflation is probably still there and going to be contributing to the housing market over the next couple of years. So far, demographics and inflation both support the housing market and have, at least I should say, it puts upward pressure on the housing market.
Now on the other side, interest rates are really what’s putting downward pressure on the housing market. Interest rates have risen. They were about 3.1% in January of 2022. As of this recording, they’re in the low to mid 5s for the average 30 year fixed rate mortgage. And that’s for the record, not for investors. That’s just for owner occupants.
And so that’s a really significant change. I mean, that is hundreds, if not, thousands of dollars per month in mortgage payments that it has gone up. And that just means people can’t spend as much on a home because their payments are going to be so much higher each month because of interest rates. We found some data from Black Knight, that puts out great data by the way, shows that housing affordability is now at its worst point since the early 1980s. And this is really important for pricing in the housing market because if people can’t afford to buy homes, they’re not going to. And so that decreases demand. And when demand falls, that is when prices can fall as well.
This just is a really important thing because from 2008, like after the recession, the housing market crashed and prices went down 20% and we entered this really low interest rate period that lasted nearly 15 years, housing from 2008 to 2020 was really relatively affordable. It’s like one of the cheapest it’s been at least in the last 40 or 50 years in the United States. And now fast forward, two years later, we’ve gone from a relatively very affordable housing market to a relatively very expensive housing market. And this is going to put significant downward pressure on the housing market.
The last thing here is inventory of course. This is sort of the X factor because so far over the last couple years, inventory, the number of houses that are on the market for people to buy has been down a lot, like a joke of a number. It’s been down to numbers that are maybe 1/3 or half of what they are normally. And so that has contributed to a lot of competition, which pushes up prices. This is the X factor because in some markets it’s starting to come back really dramatically, while in others it’s actually declining. And so we’ll get into that in a little bit.
So hopefully, this gives you some good context for what’s going on here, that demographics and inflation are probably going to keep putting upward pressure on the housing market, interest rates are putting downward pressure, and inventory is the X factor that’s sort of working on a market by market basis.
Okay. So that’s on a national scale, but what we want to talk about is a regional scale. What is happening in the individual housing markets and how are you as an investor or aspiring investor going to be impacted by this? And because we’re still in the midst of this market cooling period, there’s really no way to tell for sure which markets conceded decline. So I just want to get that out of the way. I don’t have a crystal ball. I don’t know exactly what’s going to happen. This is just my best reading of the data as it exists today.
I want to look at a few different measurements and lead indicators because obviously we don’t know for certain. So in those types of situation, what I do and I recommend you do is try and look at a lot of different data sources and see if there are themes that are emerging between different ways of measuring this. And that gives you a good general sense of what might happen. The data I want to look at is year over year price data. So that means I’m going to look at data that from June 2022 as compared to June 2021. We’re going to look at month over month price data, which is basically just last month compared to this month. We’ll look at inventory and days on market. Remember, that’s sort of the X factor. And then we’ll also talk about affordability a bit.
So first things first, year over year. In no markets are prices coming down year over year. I just want people to sort of internalize that because there are so many headlines right now that it’s like, “The housing market is cooling. It’s crashing. There’s a correction.” And that I do think is true. I do think there is a correction, we’re in the midst of that. But to keep that in context, there is no market that I’ve seen where housing prices have gone down on a year over year basis. And normally in the housing market, we look at year over year data because it’s seasonal, right? Because prices always are a little bit higher in the summer, they go down in the winter. The best way to measure the market and the way that most economists and housing market analysts and pretty much everyone looks at it is year over year data.
And so in that respect, nothing has gone down yet. But we can look at this data still and tell some interesting things because year over year, most housing markets were going up like crazy for the last couple years. So in Austin, for example, last year it went up 45% year over year, but now it’s down to 23% year over year. And 23% is still absolutely absurd. But the fact that the growth rate went from 45% to 23%, it got cut in half essentially, is really significant. It shows that the housing market is cooling. We’re not in this red scorching hot ultra competitive market anymore where things are just going up and up and up. They are starting to moderate. So that’s Austin. And on a year over year basis, Austin I think is the most dramatic shift that we’ve seen. But we also see cities on the west coast that are experiencing this as well.
So Sacramento went down 13.4%, San Jose at 11, Phoenix at 11, Seattle at 10 and Riverside, California at 10. So those are some of the most dramatic drops that we’ve seen in growth rate. So remember, I’m just going to say it one more time. That does not mean that prices went down year over year it means the rate of growth declined. So that’s something you should be looking at in your market as well, is, where things growing at 30% year over year and now they’re at 2% or 3%, that to me is a big sign that your market is shifting a lot. So year over year, normally in normal times, that’s what I’d really focus on. But because things are changing so much right now, I do think it’s important to look at month over month data. And in certain markets, it does seem like prices have actually peaked and are starting to come down.
And as I mentioned, normally we see a peak in the summer, things start to come down and then they peak again the next summer. And usually, that’s like July, August, maybe even September. But it looks like we might have hit a housing market peak in June and we’re seeing certain west coast cities that are now seeing declines on a month over month basis. So from May to June, for example, in San Jose, California prices went down 5%. In Seattle, they went down 4%. San Francisco was 3. Denver was one and a half. Portland and Phoenix are also up there. So these aren’t crazy numbers. We’re not seeing things drop really dramatically. And you won’t. The housing market doesn’t work like stocks. It doesn’t work like cryptocurrency. You’re not going to see a 20% drop in a month. That will never happen. Almost never. I shouldn’t say never. But that is very unlikely to happen.
But on these two basis, you’re seeing a trend occur, right? These cities, mostly on the west coast is what I’m seeing, that are seeing the most dramatic drops are Sacramento, San Jose, Seattle, San Francisco, a couple places in Denver and Utah are all showing that they might have hit a peak and are starting to decline. Honestly, these are kind of predictable. I think for anyone like me who follows these markets and was predicting which cities might see declines first, it was these cities, right? I mean, I probably would’ve thrown Boise on there and we’ll talk about Boise in a little bit. But the super expensive markets where affordability is relatively low, those are going to be the ones to go down first, because as we discussed earlier, what’s putting downward pressure on the housing market is affordability.So the cities that have the lowest affordability are the ones that are going to go down first.
And so again, I think it’s important and I want to just reiterate that these declines are not that large. And the market in this period, like in the last year, has seen huge increases in inventory, a lot of these markets. And we’ve seen huge declines in affordability. But all that said, the housing market is holding up, in my opinion, relatively well. I do think things are likely going to go down more. Don’t get me wrong. That’s my personal opinion. I just believe that. But I just want to reiterate that things are not going crazy despite really adverse conditions for the housing market. Things are only going down modestly. And to me, that sort of reiterates and reinforces my belief that I’ve held for a while is that we are unlikely to see a crash in the housing market. And I’d say that somewhere between 15, 20%, like I just see that as being very, very unrealistic.
Okay. So those two data sets year over year, month over month, both pointing to west coast cities, super expensive cities starting to see declines. But let’s look forward, right? Those are things that already happened. And to look forward, we can use what I call a lead indicator. That’s basically a data point that helps you predict a different data point in the future. So the lead indicators I want to look at are days on market and inventory, because those are a good measure of supply and demand. And if those things start to go up, it could predict housing market price declines in the future.
And so let’s just look at where we are with inventory. So inventory, like I said, was super low throughout the pandemic. It was a fraction of what it used to be, but that is starting to change. San Francisco is the first market in the country to officially return to pre pandemic inventory level. So that’s really significant, because to me, if prices are going to decline, you have to get to a normal housing market first. And having pre pandemic, inventory numbers is how you get to a normal housing market. And so San Francisco is the first city in the country where we’ve seen that. San Jose, another city is right behind that, just 1%. Las Vegas has seen its inventory skyrocketed. It used to be 40% below where it normally is, now it’s just 7% below. So it hasn’t reached pre pandemic levels yet, but it’s getting darn close. We’re also seeing Phoenix and Austin.
So again, what I said at the beginning of this show is that you want to look at multiple data points and see what trends emerge. So we’re already seeing trends emerge, right? San Francisco, San Jose, Las Vegas, Phoenix, Austin, they are showing up on all of these different data points as places that are potentially going to see housing market declines. I don’t know if that’s going to happen, but the data is suggesting that these are some of the weakest markets in the United States.
Okay. So that’s basically what we’re seeing, right? When I do my research and I look at particular markets that are overvalued or likely going to see these declines, these cities are leading the way. Now, if you are investing in a city and you didn’t hear me mention it and you’re thinking, “Oh my God, my city is doing great. There’s no chance to decline,” that’s not what I’m saying. I’m just giving you like the top five or 10 that are at the highest risk. And so if you want to figure out for yourself, which you should, you can download some data. I’ll put the link that I created. You can download the data to get inventory and pricing information and days on market for every city in the country. We’ll put that in the show notes. You should do this research for yourself.
The next thing I want to talk about is just some context about if you start to see more declines, like how bad it could get, because I think that’s what people really fear. You see 3% decline in Seattle and you’re like, “Okay, I can live with 3%. That’s not crazy. But is it going to be 20% like it was in the great recession?” Well, I don’t maintain economic models. I can’t say for sure, but we did find some research that is from Moody’s Analytics. It’s one of the biggest analytics market research firms in the whole country. They did some forecasts and they predicted basically which markets were likely to do well and likely to see declines between now and 2024. So it’s just cool because it gives you sort of like an 18 month time horizon, which I think is a really good way of looking at this because that’s probably, in my mind, we’re going to probably see inflation for a while and uncertain economic conditions for a while. And so forecasting out about 18 months I think should be a good frame of reference for you.
What they predicted was that three cities in Florida were actually going to be the most at risk. So it’s the Villages, which is one of the fastest growing communities in the whole country. It’s called the Villages, Florida, Punta Gorda and Cape Coral. So those are three, followed by Spokane, Washington. So they think those are going to be the worst till 2024. And according to them, the biggest decline in the country will be for the Villages at negative 13%. And that’s significant, right? 13% decline when you’re leveraged and when you’re buying into super expensive asset is a pretty big deal.
But keep in mind first that during the great recession, home prices did decline 20% nationally, and we are talking about the absolute worst city. If you start looking at some of the other cities that they’re predicting, it’s more in the 3, 4, 5, 7% decline. And so this is sort of what I… I have said something a couple months ago that my projection through 2024 was plus or minus 10%. So at best, it would be up 10% in the next through 2024. And at worst it would be down 20%. And I think this sort of reinforces that idea. I know that’s a super wide range because we just don’t know. It’s harder to make a better prediction than that, but I do think this reinforces the idea that the worst case scenario on a national level is probably not worse than a 10% decline.
On the other hand, Moody’s forecast that some cities are going to grow, and this sort of reinforces what we talk about on the show all the time, that certain markets are going to decline, certain markets are going to go up. Apparently, Moody’s Analytics agrees with us and they think that these particular markets, honestly, I have barely heard of any of these cities, are going to go up. So the top one is Albany, Georgia, and they’re giving that 10%. They think through 2024 it’s going to be a 10% increase. Then we have Casper, Wyoming. I’ve actually been there. I’ve heard of that one, 8%. New Bern, North Carolina at 7.6%. Augusta, Georgia, 7.2%. And Hartford, Connecticut at 7%. So again, we are seeing that some markets are going to keep growing in all… The most likely scenario I should say is that some markets are going to keep growing maybe up to about 8, 9, 10% up until 2024. Some markets are going to decline probably at worst in the 10 to 12% range through 2024. So it’s a wide spread.
I think that’s super interesting because it makes it sort of a researcher’s market, right? Like if you’re listening to the show and you like looking at data, that means that some markets are not going to do well. Some are going to do well. And if you do your research, you might be able to find the markets that are going to outperform the national housing market right now.
So across all of this research, I just want to sort of summarize the different things that we’re seeing as commonalities for the markets that are likely going to decline. Number one is massive appreciation. If something went up 60%, it is probably more likely to go down. Second is increasing inventory in days on market. And I really want to stress this one. You can find this data in the download. We’ll put that in the show notes. You can look at this on Realtor or Redfin, there’s data for this. But if inventory and days on market are starting to approach pre pandemic levels in your market, that is a very significant sign that your market might start to see housing declines. I don’t know if it’s going to happen for sure. Not in every single market, but to me, that’s the number one thing I would be looking for.
Next is migration hotspots. A lot of places like Boise and Austin and Phoenix saw huge increases in housing prices because a lot of people were moving there and with a potential recession. With just the economy just like slowing down, there’s a lot of uncertainty, migration is likely going to slow down. It doesn’t mean people are going to move back to where they’re from, but I think it’s going to slow down and that’s going to take a little fuel out of the fire.
And then the last thing as we talked about before is about affordability. Look at places that are really unaffordable. Those are the most likely to see declines. And based on some of the things that we’ve seen, you can see these are places like Austin, Sacramento, Phoenix, Boise is on that list, and honestly, a lot of cities in Florida. So those are some of the places where according to Black Knight, the payment to income ratio, which is basically how much money you make in versus what your mortgage payment is, is above 70%, which is absurd and makes it at what some of the least affordable markets in the entire country. If you want sort of a list of some of the big markets that I’ve seen that I personally believe are at sort of a higher risk…
And again, I don’t have a crystal ball. What I’m doing here is I’m looking at these different metrics, year over year data, month over month data, inventory data, days on market and affordability, I’m looking at all of that. I keep seeing certain cities come up over and over again even though these are independent analyses, and what I see are that Austin, Boise, Phoenix, Las Vegas, Reno, also Fort Myers, Florida, couple cities in Colorado where I invest, Colorado Springs, Denver, Boulder, definitely they’re already starting to see declines, Salt Lake city and Provo in Utah and Spokane, Washington. Those are ones that I just keep seeing over and over again. Again, I can’t tell you what’s going to happen, but those ones continue to show signs of some weakness and some wobbliness.
On the other hand, there are cities that are looking strong. And the one that keeps coming up, it’s kind of a random city. I mean, I grew up near here, but you never hear it sort of mentioned on a national level, but Hartford, Connecticut showing very strong signs, Baton Rouge, Louisiana, Virginia Beach, Virginia. If you want a large city, one of the biggest cities in the country, Chicago, Illinois still looks like a very good housing market. Albany, New York, Honolulu and Philadelphia all look relatively strong. And again, this is just me sitting here in August, in the beginning of August, telling you how the data reads. It’s going to change. And so if you’re an investor, you have to keep looking at these things over and over. This is just a snapshot in time on what we’re looking at today.
So that’s what I got for you guys. Hopefully this is helpful to you if you are worried about a housing market correction, or some people are excited about a housing market correction. Maybe you can’t afford to get into the housing market right now and you’d like to see prices come down and you’re wondering which markets that you’ve been looking at might start to see something come down and make it relatively more affordable for you to jump into it. So hopefully, this is helpful.
Just remember these couple of things. One, every market is going to be different. We’re seeing that more than ever. Over the last couple years, everything was going up. But in a normal housing market, regional differences, city differences are very significant. We’re returning to a time like that. Make sure to look for yourself. There’s going to be a lot of articles about this. Hell, I just listed a bunch of cities. That’s just my opinion. Don’t take my word for it. Go investigate this for yourself. Look at the data for yourself and determine what you think is going to happen.
Next, I also want to point out that even within a market, different neighborhoods and different asset classes and different price points are going to be pretty different right now, too. You’re starting to see like James, on one of our recent shows, was saying that in Seattle, high price point luxury market is getting hit way harder than affordable stuff and more affordable side of the spectrum was actually continuing to go up. That’s in the same market. So you need to be looking at these things. You can download some of the data, again, completely for free on biggerpockets.com. Just click on the link in the show notes. Just remember that this is sort of a researcher’s market. This is a good time to be someone who’s interested in data and dig into this.
Thank you all so much for listening. We’d love to know what you’re seeing in your market. We’re super curious, and it’d be helpful for other investors. So if you are doing this research and learning more about your individual market, we encourage you to go on biggerpockets.com. This show has its own forums. There’s an On the Market forums on biggerpockets.com. So we encourage you to go onto BiggerPockets forums, check that out and tell us what’s happening in your market. I will be on there. I would love to hear for it. I will respond to you. So go tell us what is going on in the market so we can all learn together as a community. Again, thank you all so much for listening to On the Market. My name’s Dave Meyer. If you want to interact with me and give me feedback about this show, I really appreciate that. You can do that on Instagram, where I am @thedatadeli. We’ll see you all next time.
On the Market is created by me, Dave Meyer, and Kalin Bennett. Produced by Kalin Bennett. Editing by Joel Ascarza and OnyxMedia. Copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.