\n<\/p>\n
The term \u201c<\/strong>other people\u2019s money<\/strong><\/a>\u201d<\/strong> is common in the rental property industry. You may hear successful investors use it all the time\u2014but what does it mean? Who are these \u201cother people,\u201d<\/strong> and why are they giving out money so freely? Don\u2019t worry\u2014rich relatives are not necessary for this episode of the Real Estate Rookie Podcast<\/em>. We\u2019re not talking about taking money from your Grandma. We\u2019re talking about private money lending<\/strong>.<\/p>\n Who better to bring on to the show than Alex Breshears<\/strong> and Beth Johnson<\/strong>, authors of the new BiggerPockets book, Lend to Live: Earn Hassle-Free Passive Income in Real Estate with Private Money Lending<\/em><\/strong><\/a>? Although tailored towards would-be passive private money lenders, Lend to Live <\/em>drops some serious knowledge that the everyday investor can use. If you\u2019ve ever wanted to know where to find private money<\/strong>, how it works, and how you can use it to grow your real estate portfolio<\/strong>, this episode is a great place to start.<\/p>\n Alex and Beth break down the fundamentals behind private money lending, what makes a great private money lender<\/strong>, and how to vet yours<\/strong> when accepting money. Private money can create phenomenal opportunities for active investors, but it comes with legal landmines that are easily activated if you don\u2019t know what to look for. So, before you start accepting money from a local lender, be sure you read Lend to Live <\/em>first!<\/p>\n Ashley: Alex: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Alex: Ashley: Alex: Ashley: Beth: Tony: Alex: Tony: Beth: Tony: Alex: Beth: Ashley: Alex: Tony: Beth: Ashley: Alex: Ashley: Alex: Ashley: Beth: Tony: Beth: Tony: Alex: Tony: Beth: Ashley: Alex: Ashley: Beth: Tony: Beth: Tony: Alex: Tony: Alex: Beth: Ashley: Beth: Alex: Ashley: Alex: Ashley: Beth: Ashley: Alex: Ashley: Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Check out our\u00a0<\/i>sponsor page<\/a><\/i>!<\/i><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
This is Real Estate Rookie, Episode 210.<\/p>\n
I think one thing that doesn\u2019t 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.<\/p>\n
My name is Ashley Kehr, and I\u2019m here with my co-host, Tony Robinson<\/p>\n
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\u2019s review comes from username, Bravesmith28 and Bravesmith says, \u201cImpacted 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\u2019ve purchased three single family properties since listened to this podcast, and I\u2019m about to do my first short-term rental. I would not have even thought about this without the BiggerPockets podcast, and I\u2019m looking forward to growing my business.\u201d
So, Bravesmith, we appreciate you, congratulations on your success, and if you\u2019re listening to this podcast and you have not yet left us a review, ask yourself what you\u2019re 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\u2019s going on. How are you?<\/p>\n
Well, there\u2019s 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-<\/p>\n
I just kind of spitball it every time.<\/p>\n
I know you do.<\/p>\n
It just kind of rolls off.<\/p>\n
You do such a great job. Yeah.<\/p>\n
Thank you. Thank you. I\u2019m glad it comes across as consistent. That\u2019s what I was shooting for.<\/p>\n
Yeah, and I\u2019m so glad that you have that role, and I only have to remember our names and the episode number.<\/p>\n
I always think the same thing when you\u2019re finishing the episodes and you\u2019re like, \u201cAll right, I\u2019m Ashley Kehr, blah, blah, blah,\u201d and then you close it out. I feel like I would\u2019ve screwed that up every single time.<\/p>\n
Yeah, but it\u2019s 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\u2019s different every time. There is a sheer moment of panic every time where I\u2019m like, \u201cWhat do I say to end?\u201d<\/p>\n
What do I say? Yeah, but you do a great job. You do a great job.<\/p>\n
Thank you, thank you.<\/p>\n
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\u2019s been so crazy, Ashley. We\u2019ve been hosting these monthly meetups, and since that episode aired, I don\u2019t even remember which episode number it was that we talked about those mean reviews, I\u2019ve had so many people at these meetups come to me and say, \u201cI was so upset when I heard you guys say that. I don\u2019t agree with that person at all. I love what you guys talk about. I love hearing about your guys\u2019 stories.\u201d 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.<\/p>\n
Maybe I need to get the courage to read that one review that was directed at me. Maybe one time it\u2019ll be like, was it Jimmy Fallon that does the mean tweets where I read it out loud?<\/p>\n
We do a whole Saturday episode about this.<\/p>\n
It\u2019s 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\u2019re doing a live podcast, we\u2019ll do a couple shots or something, then I\u2019ll be good.<\/p>\n
There you go. In Denver, in Denver next.<\/p>\n
Yeah, yeah, yeah. So, what\u2019s new with you, Tony? What deals are you working on right now?<\/p>\n
Yeah, I mean, same old, same old. We\u2019ve got four rehabs we\u2019re working on right now, another three or four short-term rentals that we\u2019re getting set up that we\u2019ve 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\u2019ll see what happens.<\/p>\n
Is there any left to fall out?<\/p>\n
No, there\u2019s none. We bought them all. We\u2019ve got them all.<\/p>\n
Yeah, today I went and looked at a commercial property. So, it\u2019s 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\u2019s 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\u2019t have any reserved of the parking spots. It\u2019s 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.<\/p>\n
So, what\u2019s your plan with the property?<\/p>\n
So, it\u2019s 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\u2019t need the whole square footage of the building. So, we kind of looked at the tenant that\u2019s there now. Their lease is up in January, this coming January, and as of right now, it\u2019s just, of course, they say we\u2019re in negotiations, but that\u2019s coming up really close. So, if that tenant was to move out, I\u2019d be worried about what to put in that unit, but I think there\u2019s 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\u2019re like mapping out the unit sizes that could go in there and the walkways would be here, and we\u2019re like, \u201cOkay, we got to get AJ on the phone. What are we going to do here?\u201d You guys don\u2019t 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\u2019s 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\u2019s always exciting when\u2026 That\u2019s the most exciting part to me, and I feel like I haven\u2019t really gone and looked at a property in a while that I\u2019ve been super excited about-<\/p>\n
You\u2019re excited about.<\/p>\n
\u2026 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.<\/p>\n
Yeah, I can see it. I can see the excitement.<\/p>\n
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\u2019s 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\u2019s acquiring the deals and underwriting them and figuring out how to make money off them.<\/p>\n
And not to go too far off a tangent, Ashley, but I love that. You\u2019re saying that because when we interviewed Pat and Tim Rhode, their podcast will come out after this one, it\u2019ll be episode 216, but they\u2019re 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\u2019t been able to make that shift fully yet in our own businesses, right, and I\u2019m in the same boat where it\u2019s like I\u2019m so excited to start building this team where they can handle all the things that I\u2019m obligated to do, and I can really start focusing on the things that I\u2019m mostly interested in. So, I\u2019m glad that you\u2019re starting to take those steps. I can see the excitement just vibing off your body.<\/p>\n
I know, I\u2019m super up today about it, and I don\u2019t even know if this deal is going to happen. There\u2019s 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, \u201cWait, I could do this at this property. I could do this at that property.\u201d I called the listing agent. I got some more information. I\u2019m going to see that one tomorrow morning now too.<\/p>\n
There you go. You\u2019re on a roll.<\/p>\n
So, it\u2019s just like when you\u2019re motivated and you\u2019re inspired and you\u2019re pumped up, I feel like it gets the juices flowing like, okay, more ideas, more ideas then kind of flow through, and that\u2019s why I love this podcast because listening to it and having these guests on, every single time I get motivated and excited.<\/p>\n
Yeah. Well, let\u2019s talk about the guests today.<\/p>\n
Yeah.<\/p>\n
Yeah, we have Alex and Beth on the podcast. So, Alex and Beth, they actually just recently wrote a book for BiggerPockets, and I\u2019m 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\u2019re kind of talking about what it\u2019s 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\u2019re 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.<\/p>\n
Yeah, and that\u2019s also something super exciting is using other people\u2019s money to purchase a deal, and as you start learning about these different creative ways to finance a deal, it\u2019s looking at a properties, okay, what are the different ways I can make money, but also looking at the property and saying, \u201cOkay, what are the different ways I can finance this?\u201d
So, this episode right here is just a great little crash course on using other people\u2019s money to finance a deal, but also if you actually realize that you don\u2019t want to own the property, you don\u2019t 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\u2019s really important to listen to because there\u2019s all these different types of real estate investing, but they\u2019re 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\u2019re kind on the fence about what you want to do in real estate, this is a great episode to listen to too.<\/p>\n
Yeah, real quick, Ash, I\u2019m 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\u2019s 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\u2019t have the skill set to find those folks. So, really, really pay attention when Alex goes into that piece.<\/p>\n
Okay. Well, let\u2019s get into the show. Alex and Beth, welcome to the show. Thank you so much for joining us. Alex, let\u2019s start with you. Could you tell us a little bit about yourself and your history with real estate?<\/p>\n
Sure. I am a military spouse of 22 years now. I\u2019m currently sitting my 19th address in 22 years, and the reason that\u2019s important is that actually led to the reason I do private lending over other ways of investing in real estate.<\/p>\n
That\u2019s awesome. Well, we can\u2019t 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?<\/p>\n
Sure. So, we now have a book out on the BiggerPockets platform, and it\u2019s about private lending, and then really it\u2019s from the perspective of how to be a private lender, but active investors can also find value in it in that it\u2019s going to kind of teach you what private lenders are looking for, and you can also kind of work your network to say, \u201cHey, this is how I\u2019m going to safeguard my capital. Here, I\u2019ve read everything in this book. This is the action steps I\u2019m going to take.\u201d So, it\u2019s really kind of written for both sides of the house.<\/p>\n
Awesome. Well, we can\u2019t wait to learn more and kind of get a crash course in both of those things. And Beth, what about you?<\/p>\n
Yeah, so I started in real estate investing in the early 2000s. I\u2019d always considered it to be something that would be a side hustle. I grew up at my dad\u2019s 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\u2019s 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.<\/p>\n
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\u2019m really curious. So, both of you, and I know we\u2019ll 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\u2019ll 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?<\/p>\n
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\u2019t 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\u2019t like children because I don\u2019t want to babysit other human beings. Anybody who\u2019s ever had to deal with contractors and tenants know all you\u2019re doing is babysitting adult human beings, and it drove me crazy, whereas when I was lending money, whether it\u2019s 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\u2019t have to babysit them. I didn\u2019t have to go and say, \u201cHey, you installed the wrong beige tile in this room. It needed to be this other tile,\u201d 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\u2019ve lived being a long-term landlord from 2,000 miles away is just miserable to me. But not saying it\u2019s a bad way to invest. It just, it didn\u2019t suit my lifestyle as a military spouse.<\/p>\n
Beth, what about you?<\/p>\n
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\u2019t 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\u2019d 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\u2019t 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.<\/p>\n
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\u2019ve 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\u2019s a thing that happens in the world today.<\/p>\n
All the time.<\/p>\n
Absolutely. I mean, BiggerPockets, everywhere you talk about it, it talks about other people\u2019s money, right? Well, where are the other people in OPM? And they do exist out there.<\/p>\n
Okay. So, let\u2019s start to tailor this for rookie investors. You\u2019re a rookie investor and maybe your ears picked up like, \u201cOkay, I don\u2019t have money. Maybe this is the way I can find money.\u201d As a rookie, a new investor, how do you find the people like you, those other people? What are some steps they can take?<\/p>\n
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\u2019re a little more on the lurker side of life, not creepy, but we\u2019re paying attention to who\u2019s in our market and what they\u2019re doing and how they\u2019re doing it.
So, I would say showing up consistently and just talking about your business plan, if you know your numbers, \u201cHey, I\u2019m looking for three-bedroom, two-bathroom homes in this city for this price range, and I plan on doing moderate rehabs,\u201d and that gives everybody in your network a good idea of what you\u2019re looking to buy. So, if you have also happen to have wholesalers in the room, they know, \u201cOh, wait a minute. I just heard this person say they want three twos in this city with this purchase price,\u201d and anybody that has capital in the room also would be like, \u201cOh, okay. Well, I\u2019m interested in lending in that city too.\u201d So, it ends up being a point where you have to build your network.<\/p>\n
Beth, what about for you? What advice do you have for new folks that are looking to find those private money lenders?<\/p>\n
Yeah, I completely agree with Alex. I think it\u2019s going to become more of a local network type of thing and not looking at the national level for private lenders. There\u2019s a saying that people don\u2019t 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\u2019re 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.<\/p>\n
A common question that Tony and I received often and I\u2019m 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\u2019s no correct way, but what advice can you give to someone to here\u2019s 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?<\/p>\n
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\u2019s not this is hard and fast, this is everything we do, it\u2019s two points for origination, 10% annualized rate. It\u2019s 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\u2019re 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\u2019re asking someone to send you $100,000 and everything\u2019s going to run through closing. So just to be clear, no one\u2019s exchanging money outside of closing, but you\u2019re going to send $100,000 to this closing company and just kind of hope and pray this person performs like they\u2019re saying.
So you can have a conversation with them and say, \u201cHey, this is how I\u2019m going to protect you in the deal. You\u2019ll be in the first lien position or first mortgage, first deed of trust, whatever it happens to be in your state. I\u2019m going to have adequate hazard insurance. I\u2019m going to get lenders title insurance. We\u2019ll have a legal professional that\u2019s knowledgeable in lending draw up the documentation.\u201d So, when you start talking to them about all these ways that as an active investor I\u2019m 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\u2019re like, \u201cOh, okay. Well, I hadn\u2019t even thought about that. I\u2019m glad you thought about that.\u201d<\/p>\n
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\u2019t even begin to comprehend what those terms even mean?<\/p>\n
Sure. So, anytime in the lending space somebody talks about points, it\u2019s usually in the context of percentage points. So, two points for an origination fee would be 2% of the loan amount. So, if it\u2019s a $100,000 property, it would be $2,000 in origination if it\u2019s 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\u2019s a 12% annualized interest rate, that means you\u2019re 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\u2019ve kind of had that shock of looking at your mortgage statement and be like, \u201cI only had like $26 go towards my principal balance this month because I just closed on my house,\u201d so it\u2019s a little bit different from that structure. These are generally interest-only payments and they\u2019re for a short time period, whereas your primary residence is 30 years and it\u2019s an amortized payment.<\/p>\n
Thank you so much for explaining that. Would you say that\u2019s 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\u2019re trying to figure it out is just put something on paper that works for you and present it to the person you\u2019re 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\u2019re kind of putting together a structure or an offer?<\/p>\n
I was going to say there\u2019s so many more terms to consider other than just the rate and the points to pay for the loan. I think that\u2019s 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\u2019ll operate, and what kind of needs they\u2019ll 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\u2019ve had some lenders that have shown up to job sites before and you\u2019re like, \u201cOh, what are you doing there?\u201d They have to be included and communicated to effectively to understand where you\u2019re at on a project, but you also, to Alex\u2019s point, don\u2019t 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.<\/p>\n
I love that point, Beth, about making sure that there\u2019s also a good working relationship there. Like you mentioned the phrase you don\u2019t 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\u2019s 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\u2019t have friends, I didn\u2019t have family, I didn\u2019t have really anyone in my close circle that could do that for me, and I\u2019m sure there\u2019s 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\u2019m 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?<\/p>\n
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\u2019s really important to showcase what you\u2019re doing out there in terms of what are you learning about. Even if you don\u2019t 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\u2019re doing and maybe it\u2019ll peak their interest to want to invest in your projects and in to you particularly.<\/p>\n
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\u2019ll start with you on this one. So, say that I\u2019m out there, I\u2019m sharing my journey, and again, say I have no deals. Right? I\u2019m a complete rookie, and I\u2019m sure in my journey where I\u2019m underwriting these deals, and I\u2019m posting on my Instagram story, and I\u2019m going to the meetups, and I\u2019m 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\u2019m meeting people, should I be asking them like, \u201cHey, would you ever be interested in lending in a private money situation?\u201d Or should I wait until I have the deal and say, \u201cHey, I know we\u2019ve never talked about this, but would you be interested?\u201d Just kind of walk us through what you feel is the best approach for a rookie that\u2019s done zero deals to start that conversation.<\/p>\n
I would say probably the first case, let people know of early, ahead of time, this is the type of property I\u2019m 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, \u201cHey, 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\u2019m going to be able to refinance out.\u201d That shows anybody, especially a private lender, that you\u2019ve 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\u2019s very important to us that the exit strategy you\u2019re putting forward actually is feasible, that you\u2019re going to be able to do it.
And so, I\u2019d say letting people know what you\u2019re doing, how you\u2019re 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\u2019ve analyzed five deals in the last two weeks, and you\u2019re putting out numbers that seem realistic, even if you didn\u2019t get the deal, put a contract out and didn\u2019t get it, but you\u2019re still putting numbers forward that are realistic, okay, your ARV isn\u2019t super inflated. Your rehab cost budget looks pretty healthy and pretty accurate. To me, that\u2019s going to let me know that, okay, they might be junior, they might be green, but they\u2019re taking the steps, they\u2019re educating themselves, and they\u2019re learning about the process, and they\u2019ve thought about how to get my money back to me.<\/p>\n
Beth, would you agree with that same approach?<\/p>\n
I\u2019d 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\u2019ve 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\u2019s just good experience to have, and when you pair yourself with a lender with experience or even another investor, right, maybe it\u2019s 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\u2019s just really good experience to have.
The more that you can practice and articulate your numbers, the better you\u2019re 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\u2019re 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.<\/p>\n
That\u2019s great advice. I love that step of don\u2019t be afraid to take criticism as an investor pitching your deal. That\u2019s almost like a checks and balance right there by having the private lender give you that criticism, give you that feedback. So, that\u2019s 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\u2019s 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, \u201cOh, give me money\u201d? How do you weed through the deals? What\u2019s your best advice for somebody who wants to start out as a private money lender?<\/p>\n
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\u2019re not capable, but they get emailed the mortgage documents from the lender. They didn\u2019t 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\u2019s 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\u2019re 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\u2019s being taken down to the studs and they\u2019re 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\u2019re going to get pitched everything. And so, the closer you can get to that ideal, quote unquote, ideal situation, it\u2019s going to bring the right deal forward faster.<\/p>\n
Alex, I think that\u2019s such a great point you made, basically building a criteria. You hear that so often when you\u2019re going after single-family homes or small multi-family. Have your criteria so you can weed through the deals. I\u2019ve never even thought of, as a private money lender, have your criteria set too as to what you\u2019re 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?<\/p>\n
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\u2019re expecting, but also exploring why you\u2019re doing this to begin with because as she mentioned, getting into a real estate meetup room and saying that you\u2019ve 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\u2019re finally in a good state where it can become more passive again, but really understanding why you\u2019re 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\u2019s point, it takes a team. It takes a virtual team. It takes a team in place in the market that you\u2019re going to be lending on if that\u2019s not your local market. If you\u2019re 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\u2019s sufficient enough and that if there was a claim on a property that you get paid out. You\u2019re 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?<\/p>\n
Beth, Alex, I want to ask both of you a question and just give me a quick yes or a no, then we\u2019ll kind of deep dive from there. Beth, have you ever lost money on a private money deal before?<\/p>\n
No.<\/p>\n
Alex, have you ever lost money on a private money deal before?<\/p>\n
No.<\/p>\n
So, you guys have both been pretty successful with this, and I mean, I\u2019ve 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\u2019s always risk in real estate investing, and even as a private money lender, there\u2019s risk there as well. So, the fact that both of you have never lost money in a deal, you\u2019ve 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\u2019t lose money on that deal?<\/p>\n
I would say making sure you don\u2019t 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, \u201cHey, my cousin\u2019s best friend has a $100,000 they want to lend to me as a lender. Now I don\u2019t know what the next step is.\u201d And normally they\u2019re just like, \u201cOh, they\u2019ll give me the $100,000.\u201d So, I would rather that everybody take home the message that things need to flow through the closing table because, like to Beth\u2019s point, there\u2019s going to be professionals that are involved in this transaction that not necessarily you\u2019ve hired them to be on your side, but there\u2019s 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\u2019s federal tax liens, they\u2019re also going to appear on the title report.
So, having those professionals in place and being able to call and ask questions and say, \u201cHey, this works, does this fit what I\u2019m looking to try and do?\u201d So, I\u2019d 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, \u201cHey, I got this deal. I\u2019m looking to fund it. This is the parameters. What do you think?\u201d And everybody\u2019s risk tolerance is going to be different. You could post that same question to 10 different private lenders and you\u2019re 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.<\/p>\n
Yeah, I would add while I haven\u2019t personally lost any principle, nor have any of my investors in my circle, I\u2019ve 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\u2019s 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\u2019s a couple of key things that happen. One is the legal documentation just isn\u2019t there. They either have poorly written documentation that doesn\u2019t cover them legally, or there just wasn\u2019t any legal documentation to begin with. I see that a lot. I\u2019m concerned and I\u2019m surprised actually how many deals occur without any legal documentation or promissory note, and then it\u2019s 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\u2019ll 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\u2019re 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\u2019s too easy. There\u2019s 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\u2019s worth. So, if you have a $100,000 loan on a property that\u2019s only worth 75,000 because you gave $25,000 for a cosmetic rehab also, as a lender, you\u2019re 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\u2019s in the form of a down payment, sometimes they\u2019ll 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.<\/p>\n
Beth, in that scenario, do you allow them to go to another private lender to make up maybe another 20%. Say you\u2019re lending them 60 and then they bring an additional 20 of their own. Do you allow that, or is it just, you\u2019re bringing 60, and then they have to bring the 40 on their own, as in their own funds as you\u2019ll look for proof of funds?<\/p>\n
Sure. Yes, we have. I will say it\u2019s very circumstantial. There have been a few cases where the seller was willing to carry back some money in second position, meaning if we\u2019re going to fund 600,000 out of a million-dollar deal, the seller says, \u201cI will carry back that $400,000 behind your loan for a five-year term at 5%.\u201d And if they\u2019re willing to do so, on occasion, we\u2019ve let that happen for experienced borrowers. I wouldn\u2019t say that\u2019s something that I would recommend for a lot of lenders. And one thing I don\u2019t really like and allow is to have private lending fund that remaining balance, the down payment, also known as gap funding. Whether that\u2019s secured or not, it\u2019s just, again, they don\u2019t 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\u2019s coming from, and I\u2019ll let Alex chime in on this because I know that she has a little bit more personal experience with these types of scenarios.<\/p>\n
Yeah, we often see new real estate investors working with, again, people in their networks who are new lenders and they say, \u201cOh, I have $20,000. I want to be a lender on this deal, and I\u2019m going to do gap funding.\u201d 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, \u201cHey, here you go. This is the 20% down that you needed for that $100,000 house,\u201d and while we might have been in a fantastic bull market for the last 18 years, however long it\u2019s been since 2008, now that we\u2019re kind of in a place in the market, in the economic cycle where that just rampant appreciation asset value, that\u2019s going to be potentially a source that\u2019s 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\u2019re now at 90% or maybe you end up at 100%, and if you are someone that\u2019s willing to take on that second lien, if you even put a lien on the property for that extra 20,000, you\u2019re very easily going to be underwater. If anything goes wrong with that property, the tenants damage it, it\u2019s has a fire and burns down and they don\u2019t have adequate insurance, the market gets soft, there\u2019s things that can happen that are outside the borrower\u2019s control where if you\u2019re providing that gap funding, you\u2019re 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.<\/p>\n
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?<\/p>\n
They can find the book on the BiggerPockets bookstore. It\u2019s 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\u2019re driving around town, you can get the Audible version in a couple weeks.<\/p>\n
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?<\/p>\n
Well, I\u2019m on BiggerPockets so they can reach out to me there and message me there. I also have a website, flynnfamilylending.com. That\u2019s my private lending matchmaking business, and so, I can be reached there as well.<\/p>\n
And Alex?<\/p>\n
You can reach me at our email address. It\u2019s [email\u00a0protected]<\/a>, and the two is the number two. That\u2019ll reach either one of us. Please feel free to reach out and I\u2019m 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.<\/p>\n
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\u2019m Ashley, @wealthfromrentals, and he\u2019s Tony, @tonyjrobinson on Instagram, and we\u2019ll see you guys back on Wednesday for another episode of Real Estate Rookie.<\/p>\n<\/div>\n