{"id":3528,"date":"2022-08-22T05:51:53","date_gmt":"2022-08-22T05:51:53","guid":{"rendered":"https:\/\/imsfund.com\/?p=3528"},"modified":"2022-08-22T05:51:53","modified_gmt":"2022-08-22T05:51:53","slug":"the-best-alternative-investment-no-one-knows-about","status":"publish","type":"post","link":"https:\/\/imsfund.com\/index.php\/2022\/08\/22\/the-best-alternative-investment-no-one-knows-about\/","title":{"rendered":"The Best Alternative Investment No One Knows About"},"content":{"rendered":"


\n<\/p>\n

For average investors, private money lending<\/strong> has been mentally squared away as \u201csomething mega-wealthy people do.\u201d Most investors will write off lending money because they think they lack the experience or funds to do a successful deal. But what if we told you private money lending requires less money than you thought<\/strong>, that it\u2019s almost completely passive, <\/strong>and that today\u2019s high-interest-rate environment may be the perfect time to start<\/strong>?<\/p>\n

Alex Breshears<\/strong> and Beth Johnson<\/strong> are graciously coming in as our private money messiahs, teaching us all how easy (and lucrative) it is to be a <\/strong>private money lender<\/strong><\/a>. They\u2019ve been lending for years, not only to supplement their real estate portfolios but often to outright replace them. Private money is far more passive and flexible<\/strong> than performing a flip or BRRRR<\/a> yourself, and almost anyone (and yes, we mean anyone) can do it in one way or another. It\u2019s such a good way to make more money that Alex and Beth wrote the new BiggerPockets book, <\/strong>Lend to Live<\/em><\/strong><\/a>,<\/em><\/strong> on this exact subject.<\/p>\n

But before you print off business cards that say \u201cprivate money expert\u201d under your name, listen to what Alex and Beth have to say. They drop some valuable gems on who should (and shouldn\u2019t) be a private money lender<\/strong>, how to protect yourself when you lend<\/strong>, points, rates, and fees you can charge<\/strong>, and building a pool of borrowers<\/strong> you can trust. If you\u2019re anything like Scott and Mindy, then there\u2019s a good chance you\u2019ll walk away from this episode far more interested in private money than before!<\/p>\n

\n

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.<\/p>\n

Alex:
Because when most people talk about they want that financial independence, they want that financial freedom, what they\u2019re 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\u2019s why I would rather do lending, and I don\u2019t 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.<\/p>\n

Mindy:
Hello. Hello. Hello. My name is Mindy Jensen and with me as always is my critical thinking cohost Scott Trench.<\/p>\n

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\u2019s continue.<\/p>\n

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.<\/p>\n

Scott:
That\u2019s 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\u2019ll help you reach your financial goals and get money out of the way, so you can launch yourself towards those dreams.<\/p>\n

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\u2019s called Lend to Live: Earn Hassle-Free, hassle-free, Passive Income in Real Estate with Private Money Lending. And it is fantastic.<\/p>\n

Scott:
Yeah. I think that when you hear the word private lending, you tend to poo poo it or [inaudible 00:02:27], \u201cI\u2019m a real estate,\u201d and all that, \u201cPrivate lending sounds like a hassle. There\u2019s a lot of paperwork.\u201d All that kind of stuff. Sure. There\u2019s some paperwork. There\u2019s 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\u2019s all dried up. There\u2019s a big opportunity right now to be a lender. And I think after you listen to this episode, you\u2019re 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\u2019t been in 10 years. And I think it\u2019s 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\u2019m really interested in this and I\u2019m 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.<\/p>\n

Mindy:
I am only going to disagree with one thing, Scott. I think that there might be people who are listening, who are like, \u201cI don\u2019t want to get involved in real estate at all.\u201d This is a great way to make money in real estate without owning real estate.<\/p>\n

Scott:
Love it. Let\u2019s bring them in.<\/p>\n

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\u2019m 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\u2019re footing the entire bill. So it\u2019s even more important to get somebody that you trust to have your back because you\u2019re 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.<\/p>\n

Alex:
Thank you for having us.<\/p>\n

Mindy:
I\u2019m so excited to talk to you ladies today. I have done some private lending. I think it\u2019s 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\u2019t do it right, you can lose every single penny that you have ever put in there. So that\u2019s where it starts to feel a little scammy.
You have to do the homework. You have to do the research. This is not a, \u201cOh, I\u2019ve got a lot of money. I\u2019m just going to lend it to somebody who wants it,\u201d and everything\u2019s going to come up roses. I mean, that would be really nice, but that\u2019s 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\u2019s like, \u201cNah, that sounds like a scam. I\u2019m not going to listen.\u201d It\u2019s a totally legit\u2026 What kind of returns are we talking about?<\/p>\n

Alex:
I would say on an annualized basis, depending on whether you\u2019re in first lien or second lien, anywhere between 8% annualized, and maybe realistically up to 14 or 16% annualized.<\/p>\n

Mindy:
That kind of return sounds almost fake. But it\u2019s 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\u2019s jump right into this. How do you get started? I have a pile of\u2026 Well, okay, let\u2019s actually\u2026 Who\u2019s qualified to be a private lender. Beth.<\/p>\n

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\u2019t lending out every penny you have. Anybody can become a private money lender. And that\u2019s what Alex and I are trying to communicate to the broader masses.<\/p>\n

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\u2019s how much a property costs at my local area. How do you get over that for\u2026 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.<\/p>\n

Beth:
Well, I started with\u2026 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\u2019ll let Alex tell her story too, because hers is quite similar and even involved less capital.<\/p>\n

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\u2019re 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\u2019re like, \u201cI just can\u2019t get over that hump,\u201d 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\u2019ll still be able to be in a first lien position with less capital.<\/p>\n

Scott:
One question I\u2019d 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?<\/p>\n

Alex:
It really depends on your goal, your personality traits and basically your lifestyle. So for example, both of us have done\u2026 we\u2019ve been landlords or are landlords. We\u2019ve done fix and flips. And for whatever reason, yes, while we\u2019ve done them, that wasn\u2019t something we wholeheartedly enjoyed. From my standpoint, I\u2019m a military spouse, I\u2019ve 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\u2026 I hate being a landlord. I hated it. It did not fit my skill set.
It turns out it didn\u2019t actually fit my goals either, because when most people talk about they want that financial independence, they want that financial freedom, what they\u2019re 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\u2019s why I would rather do lending and I don\u2019t 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.<\/p>\n

Beth:
Yeah. And I think it\u2019s important to note that it doesn\u2019t have to be mutually exclusive. I am like Alex also where I prefer private lending because it\u2019s a lot more passive, but I do have an active lending business too, and I\u2019m 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\u2019s 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\u2019m going to a private lend that money out because it\u2019s much more passive for me and it\u2019s not an additional toilet or a roof that I have to take care of.<\/p>\n

Scott:
Love it. And let me give you another answer or reason why I\u2019m so interested in private lending today, is because I think that in 2022, at this point in time, it\u2019s hard to believe that we\u2019re going to see the same levels of appreciation we saw in recent years on rental property investing. And another interesting dynamic that\u2019s going on right now, is because interest rates have risen so much, if I\u2019m 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\u2019s what I\u2019m thinking about here. An all cash investment option, if I think I\u2019m going to get 3% appreciation on a five cap property, that\u2019s an 8% return.
And I\u2019m 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\u2019s a really compelling\u2026 And there\u2019s a lot there. I just went through that. It was very fast. So rewind if that didn\u2019t make sense and try out the analysis for yourself, and the calculators, but that\u2019s 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\u2026 Well, your worst case is you\u2019re tied up in foreclosure court for several years and you can\u2019t 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.<\/p>\n

Alex:
Well, I\u2019m also glad you brought that up because it\u2019s kind of timely right now because we\u2019re on, what, our second or third fed rate hike. And I hear a lot, and talking to active investors like, \u201cOh, I\u2019m pausing on buying because I don\u2019t want to deal with these high rates,\u201d so they\u2019re just letting money sit on the sidelines. And I\u2019m like, \u201cWhy don\u2019t you just pivot and use the higher rates potentially to your benefit?\u201d You\u2019re like, \u201cOkay, great. Everybody\u2019s borrowing at a higher interest rate. That\u2019s good for a lender. Let\u2019s go do that.\u201d<\/p>\n

Scott:
I think it\u2019s a fascinating concept. Quick question though. One of the things that is advantageous about investing in real estate, if I\u2019m 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\u2019t 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?<\/p>\n

Alex:
So the interest component is going to be ordinary income and that, or not ordinary income, interest income, so you\u2019ll 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.<\/p>\n

Beth:
Well, that still would count as ordinary business income. There aren\u2019t really any tax advantages you would get, perhaps if you invested in a syndication or if you bought real estate. And that\u2019s why I mentioned earlier that this doesn\u2019t 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\u2019t want to actively manage real estate or not grow their portfolio. So it\u2019s 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\u2019s some older investors who are liquidating their real estate portfolio. They\u2019re getting older, they want to retire, and actually, they\u2019re looking to simplify their estate planning as well. They don\u2019t want their children to have to inherit these properties and squabble over them. Maybe some of them haven\u2019t really expressed a whole lot of interest in being a landlord, and so this is a simplification of their estate. And then there\u2019s 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\u2019t 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.<\/p>\n

Mindy:
I was able to invest through my self-directed solo 401(k). I do have some self-employment income. I\u2019m 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\u2019s how I have invested in the past. But I also have other income that I\u2019m already paying taxes on. I\u2019m not looking to increase that income right now. I\u2019m looking to increase my other investment opportunities income at that time. And the way that it works for me, Scott, if you\u2019re not familiar, is that that\u2019s just a regular investment.
I\u2019m not paying it because it\u2019s a 401(k), not a IRA. And here\u2019s where I get super squidgy, if you\u2019re interested, talk to somebody who really knows what they\u2019re talking about, but I don\u2019t pay UBIT or\u2026 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\u2019re investing in is a good idea, or if there\u2019s tax advantageous ways to invest in different\u2026<\/p>\n

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\u2026 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\u2019s no tax implications. But if you were to, say, buy a property that\u2019s 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\u2019t get that when you do private money lending.<\/p>\n

Mindy:
Oh, that\u2019s good to know. Okay. And I don\u2019t have a self-directorate.<\/p>\n

Beth:
Yeah. So you can\u2019t flip a property in there. I mean you can, but you\u2019re going to pay taxes on it within your self-directed IRA. Private money lending does not have that sort of tax implication in there.<\/p>\n

Mindy:
Oh, that\u2019s good to know. Okay. I\u2019m glad I brought that up.<\/p>\n

Beth:
Yeah. I\u2019m going to say that I\u2019m not a CPA, so I\u2019m 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\u2019s to my knowledge, and that\u2019s how we\u2019ve handled our retirement accounts. And that\u2019s where my first loan was through, was from my solo 401(k), lending out 65 grand out of there.<\/p>\n

Mindy:
Let\u2019s see, let\u2019s look at a typical loan, a common loan. What is the length of time that you\u2019re going to be in, what are you lending to? Yeah, let\u2019s just start with that because I\u2019ll 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?<\/p>\n

Scott:
I think you call them the Noah of loans in your book?<\/p>\n

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\u2019s going. And so, it\u2019s 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\u2019s just a nice sweet spot for a fix and flip, I\u2019m not going to shortchange them on time in case maybe their windows are delayed by a month or so, but it\u2019s 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\u2019ll pun it over to Alex to tell you a little about how she frames her loans.<\/p>\n

Alex:
So normally, I\u2019m in about the six month timeframe, and obviously they have an extension that they can add to it that\u2019s 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, \u201cHey, look, I ordered these today. We closed on this. I knew it was going to be a problem. I\u2019m still waiting on windows.\u201d 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\u2019t any big deal when we got to the end of that loan term and he is like, \u201cHey, the windows still haven\u2019t come in,\u201d because it was a problem I knew from the very get go. So we didn\u2019t 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.<\/p>\n

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?<\/p>\n

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\u2019t have any prepayment penalties, which is what it\u2019s called. But plenty of private lenders can. And some of my private lenders that lend out the retirement plan, for example, they don\u2019t 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\u2019s really not uncommon. But in my world, if we do 10 months and they pay off early, that\u2019s just great for us because I can redeploy my capital.<\/p>\n

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.<\/p>\n

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\u2019re 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\u2019ve 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\u2019t 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.<\/p>\n

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?<\/p>\n

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\u2019s a deed of trust. And in other states it\u2019s considered a mortgage. They\u2019re 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\u2019s say with a bank, and when you buy your house, that\u2019s a first lien mortgage.
And when you place a HELOC on it, for example, because I think that\u2019s probably more common, behind that mortgage, then that\u2019s what\u2019s called second lien position or junior lien. And when a property is sold, the liens are what\u2026 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\u2019re 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.<\/p>\n

Mindy:
Okay. And then can you define usury laws?<\/p>\n

Beth:
I\u2019m going to pass that one over to Alex because she\u2019s good with that.<\/p>\n

Alex:
That one\u2019s fun. So something that most people don\u2019t 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\u2019s licensing at the federal level. There\u2019s consumer laws that have to be abided by. Disclosures, all these other things. So when we\u2019re talking about non-owner occupied property, we\u2019re actually talking about it on a state level.
So that\u2019s a big reason why when so many people will ask, \u201cHey, does anybody have a template for a promissory note or a mortgage?\u201d And it\u2019s like, \u201cPlease don\u2019t do that,\u201d because what\u2019s 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\u2026<\/p>\n

Alex:
\u2026 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\u2019re talking about 50 different states, have 50 different versions of these things.<\/p>\n

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.<\/p>\n

Mindy:
I got it, Scott.<\/p>\n

Scott:
Moving\u2026 But, on that note, with usury, you\u2019ve 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?<\/p>\n

Alex:
It\u2019s 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\u2019re trying to stay in, and it could be a reflection of the type of property they\u2019re 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.<\/p>\n

Beth:
Yeah, and I think it\u2019s important to say that even if you lend to a business specifically, it doesn\u2019t 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.<\/p>\n

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\u2019re lending in, not the state that you live in?<\/p>\n

Alex:
That\u2019s 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\u2019re in a situation where it\u2019s potentially multiple states, you really unfortunately have to research both states to see which one will use the other\u2019s laws.<\/p>\n

Mindy:
Well, and that\u2019s fair. This is a great return and great returns don\u2019t come with no work at all. We\u2019ve called this passive income, I believe it very close to as passive as you can get, but there\u2019s 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\u2019s not going to see the best returns.<\/p>\n

Beth:
It isn\u2019t. 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\u2019ve known them since I was a child, and so inherently, there\u2019s 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\u2019ve 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\u2019s 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.<\/p>\n

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\u2019s 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\u2019d you kind of guess is the similar investment for a private lender, here?<\/p>\n

Alex:
I think it really matters on where you\u2019re starting, because if you\u2019ve done a couple rental properties, for example, you\u2019ve 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, \u201cOkay, I agree with that aspect,\u201d or, if you\u2019ve 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\u2019re looking for. They\u2019re looking for credit worthiness, they\u2019re looking for a certain amount of capital, they\u2019re looking at the property itself, and making sure the loan to values are all there.
So, if you\u2019re someone who\u2019s already an active investor, it\u2019s actually relatively small, because you\u2019ve been teaching yourself how to underwrite a deal, and that\u2019s what you\u2019re doing in private lending. And, the portion that you don\u2019t know in private lending, guess what? You can hire it out because you\u2019re 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\u2019s a gap in knowledge in private lending, it\u2019s very collaborative and you can bring those people onto your virtual team and fill in that gap for knowledge.<\/p>\n

Mindy:
Who do you need to have on your virtual team? You\u2019ve mentioned attorneys, you\u2019ve mentioned title people, you\u2019ve mentioned the insurance broker, who else should be on your team?<\/p>\n

Beth:
A good escrow closing agent\u2019s 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\u2019t 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\u2019s 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\u2019s 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\u2019ll also, typically, the contract service here provides you with a 1099 INT, at the end of the year, as well.<\/p>\n

Scott:
Awesome. And then, attorney, of course, right?<\/p>\n

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\u2019re a great resource.<\/p>\n

Scott:
Where can people find that resource?<\/p>\n

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?<\/p>\n

Alex:
It is.<\/p>\n

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?<\/p>\n

Alex:
So, I do it a little bit differently, which is why we work so well together. I actually, I\u2019ve really laughing inside that you asked this question, because so many active investors, that\u2019s 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\u2019ll 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\u2019s going to be one interest rate. We\u2019ll just say 10%. But, if they don\u2019t want to make that monthly interest payment and roll it all in to the very end, when they go to sell the property, it\u2019s 12%.
I have yet to have a borrower turn down, paying two extra percentage points to not make interest only payments, while the property\u2019s being renovated, because for anybody who\u2019s 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\u2019re going to take. So again, it\u2019s just a different way of looking at it and I\u2019m 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\u2019re 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\u2019re just wasting your time renegotiating to lower the interest rate annualized down one point.<\/p>\n

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\u2019re talking about, to get on the high end of that, with the structure that Beth outlined, it\u2019s really the fast people pay off the first note and the faster you can, as quickly as you can redeploy the second. Now, you\u2019re getting points multiple times per year, in addition to your rate. Whenever that money\u2019s sitting idle, you\u2019re obviously getting 0%, so that you\u2019re losing against that, to a certain extent. And, in your case, Alex, it\u2019s really just about how much of the year can you keep that money deployed, with flippers, because you\u2019re not making money on points. You\u2019re just making 10 or 12%. Essentially, always 12%, as you just said on the interest only, or the no interest only payments. What\u2019s the term for accruing the interest, until the very end?<\/p>\n

Alex:
It just becomes part of the balloon payment at the end, so if I\u2026 Because I fund fix and flips, so basically it\u2019s ultimately their retail buyer, is the one paying their interest payment for them, when we go sell at the closing company.<\/p>\n

Beth:
It\u2019s called deferred interest.<\/p>\n

Mindy:
You\u2019ve mentioned Alex you\u2019ve mentioned flips multiple times. Do you only lend on flipping?<\/p>\n

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\u2019d 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\u2019m in Hampton Roads, we have a very transient population due to the military\u2026 Housing was very, very short. They had a very minimal supply.
So, in my eyes, if we have owner occupied underwriting guidelines that weren\u2019t changing as much as non-owner occupied underwriting guidelines and we had a massive housing shortage, I\u2019m 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\u2019s 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\u2019s trying to do a DSCR loan to refinance or trying to get their local community bank to agree to refinance when the viral count\u2019s 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.<\/p>\n

Mindy:
Okay. Beth, do you do mainly flipping loans, or is that-<\/p>\n

Beth:
No. I\u2019m 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\u2019ve 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\u2019t 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\u2019t really a standard requirement for refinancing prior.<\/p>\n

Mindy:
Oh, I wasn\u2019t aware that wasn\u2019t a standard requirement, prior to COVID. You should certainly have reserves.<\/p>\n

Beth:
Yeah, it wasn\u2019t 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\u2019m trying to do a cash out refi, you\u2019re asking me to show 12 months of reserves, I don\u2019t have it, I\u2019m asking for a cash out refi. But, when us, as the private lender, are creating that extra 5% equity buffer and they\u2019re 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.<\/p>\n

Mindy:
Well, let\u2019s 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?<\/p>\n

Alex:
Oh, you just stepped into it now, maybe.<\/p>\n

Mindy:
Okay, Alex. Please tell me, which would I vet first, the borrower or the deal?<\/p>\n

Alex:
You\u2019re going to get two different answers out of us.<\/p>\n

Mindy:
Good.<\/p>\n

Alex:
We have this debate of the jockey versus the horse, and I am on team jockey. I\u2019m fully looking at the individual, because my general investing philosophy is that I\u2019m 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\u2019m 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.<\/p>\n

Scott:
Before Beth goes, Alex, do you require recourse loans, in that case?<\/p>\n

Alex:
Yes. And, the other kind of quirky thing I do is, I-<\/p>\n

Scott:
Can you explain what a recourse loan is, and then-<\/p>\n

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\u2019t 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\u2019t care if it\u2019s a broker you bought a property from, listed a property from, I\u2019m going to call those people and I\u2019m going to talk to those people, and then I\u2019m going to call, and then when I\u2019m talking to those people, I\u2019m actually going to ask them for another professional reference.
I\u2019m going to say, \u201cHey, do you know about anybody else that\u2019s done deals with borrower, Bob?\u201d And they\u2019re go, \u201cYeah. You know what? Sam did a deal with him two years ago,\u201d and then I\u2019m going to call Sam. And what I call that secondary ring, that secondary ring is where you get the real information, because that\u2019s not the borrower supplied references, if you get what I\u2019m saying. So, I\u2019m going to dive in that way, more than I\u2019m going to dive in towards a property. It\u2019s not to say I\u2019m ignoring the property, but most of my focus is going to be on the individual, and do I have faith that they\u2019re going to take accountability and do everything they can in their power to make me whole.<\/p>\n

Scott:
Sounds like very similar to good tenant screening.<\/p>\n

Alex:
Absolutely. Very similar.<\/p>\n

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\u2019re like, \u201cThey\u2019re great,\u201d and they call the next reference. They\u2019re like, \u201cI 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,\u201d and I was like, \u201cOh, well, I\u2019m sure glad they put you on the reference list.\u201d Call all the references. You\u2019re probably not ever going to find the guy I talked to, but you might.<\/p>\n

Scott:
Alex, last question before we hear Beth\u2019s typical deal. What is the typical volume that you do for a load? How big are these projects?<\/p>\n

Alex:
Most of them, what I do is going to be in the second lien position, so they\u2019re 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\u2019re in the military, as well, so they have moved on to other markets that I do not want to lend in.<\/p>\n

Scott:
Beth, can we hear about vanilla deal for Beth, and your philosophy? It sounds like you\u2019re a horse better. You bet on horses.<\/p>\n

Beth:
I bet on the horse, because people disappoint me, properties don\u2019t. 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\u2019s circumstances and variables that are outside of their control. I don\u2019t think anybody real holding a property or a project, in the middle of March 2020, really expected a shelter in place. I certainly didn\u2019t. 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\u2019re not working with a bad player. That\u2019s 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\u2019s 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\u2019re going to place a heavier emphasis, and that\u2019s not to say that we don\u2019t 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.<\/p>\n

Mindy:
Okay. You have both said that you lend in second position, as well as first position. I\u2019ve 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\u2026 I want our listeners to know that the second position is a bit more risky, so you need more of a buffer. If there\u2019s no equity in there or there\u2019s barely any equity, you should not be in the second position. In my opinion, I\u2019m not a risk taker.<\/p>\n

Beth:
Well, absolutely. I think second position\u2019s got a really bad rap in 2008, because there was a lot of mortgage fraud going on. And so, second lien holders weren\u2019t 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\u2019re 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\u2019re 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\u2019m 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\u2019s done behind a conventional loan like we do, because we don\u2019t want some borrowers to have to rewrite their conventional 30 year fixed first position loan at 2%, two and a half percent, I don\u2019t blame him. As an investor, I wouldn\u2019t 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\u2019t have quite the default penalties associated with a hard money loan, that\u2019s 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.<\/p>\n

Scott:
I love that. You\u2019re saying, I\u2019m going to be second position, and the reason why that\u2019s such a good move in today\u2019s market, is because I don\u2019t 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.<\/p>\n

Beth:
Oh, it\u2019s created a great amount of deal flow for us, because I\u2019ve got a lot of buy and hold investors who are sitting on a ton of equity, but maybe they\u2019re a self-employed investor and they can\u2019t obtain a HELOC. And so, what\u2019s the next best option? Well, I\u2019m going to be a private money loan for them in second position, they\u2019ve got several hundred thousand dollars in equity in there, and I\u2019ll 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\u2019ve 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\u2019re not actually pulling cash out.
So, for us, it\u2019s been an extremely effective strategy as a lender, but it\u2019s 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.<\/p>\n

Scott:
Okay. We\u2019ve just created it, we just solved a trillion dollar problem here. That\u2019s fantastic. I love that. That\u2019s it, right? I mean, right now it is 2022, and traditional investment property lines of credit have just dried up. You ain\u2019t getting a line of credit at 2, 3, 4 or 5% anymore on your investment properties. There\u2019s 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\u2019s a good solution on both sides of that. If you\u2019re 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\u2019s something that you\u2019re interested in doing. So, there\u2019s a huge solution here, that\u2019s been a missing link for me, for a long time, in this space. I honestly don\u2019t know which side of that I\u2019d rather be on. The\u2026<\/p>\n

Scott:
I honestly don\u2019t know which side of that I\u2019d rather be on, the lending or getting that line of credit on my properties.<\/p>\n

Beth:
Well, it doesn\u2019t have to be a choice. We do both. My husband and I do the same thing. Sometimes we\u2019ll cross collateralize our investment properties to take down new rentals. And it\u2019s very strategic in nature. There\u2019s 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\u2019m going to refinance out after I have done my value add, then it\u2019s going to be less expensive for me, and I can actually refinance it at a higher loan to value. Well, that\u2019s kind of worth it right there. And then I also don\u2019t have to get an appraisal the first time around with my private money loan. I can defer that and do my appraisal when I\u2019m doing my takeout financing. And so that\u2019s really meant for conventional commercial, doesn\u2019t really have those kind of stipulations. But there is a big, significant difference when you\u2019re 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.<\/p>\n

Scott:
Okay. So before we get into\u2026 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?<\/p>\n

Alex:
So in that case, it\u2019s going to be the perpetual, it depends. Because this is very popular in real estate. There are note buyers. There\u2019s even people in bigger pockets that talk about note buying and they potentially would be someone interested in buying the note. But what you\u2019re going to run into is they\u2019re 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\u2019s traditionally very conforming. They\u2019re going to want a full appraisal. They\u2019re going to want a credit check. They\u2019re going to want to see the entire underwriting file. So if you are someone that you think like, \u201cOh, I can lend this out for six months, but I\u2019m going to actually need it back in two or three. And I can just sell the loan and get recapitalized.\u201d That is true, but you might not get the entire principle amount back.<\/p>\n

Scott:
Okay. I lied. I have one more question on this then. And this is kind of separate. States. I imagine that, Alex, you\u2019re in Virginia, is that correct?<\/p>\n

Alex:
Yes.<\/p>\n

Scott:
And Beth you\u2019re in Washington state, right? I\u2019d imagine that there\u2019s a significant difference in foreclosure potential between those two states and that there\u2019s 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.<\/p>\n

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\u2019re trying to price in, \u201cHey, if this goes to foreclosure, it\u2019s going to be about $2,400 in legal fees. It\u2019s going to be maybe six months of waiting until I can get through the court system.\u201d And again, everybody kind of goes for that default nuclear option first, when in actuality, there\u2019s lots of little stages you can potentially help along, modify a loan, open communication. So it\u2019s 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\u2019s 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?<\/p>\n

Mindy:
Okay, Alex, let\u2019s 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?<\/p>\n

Alex:
This is probably the easiest part. And it\u2019s probably one of the reasons why I love lending. It\u2019s everybody\u2019s first question is, \u201cHow am I going to find potential borrowers?\u201d And I\u2019m like, \u201cAll you got to do is stand in the middle of a REA meeting and say, you have capital.\u201d That\u2019s 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\u2019re willing to lend under what conditions. So, for example, if you stand up in the middle of this REA meeting, it\u2019s 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\u2019s very hard to fit and parcel out, which one\u2019s the best deal for me to fund because they\u2019re all so different. Versus if you stand up and say, \u201cHey, I\u2019m going to lend on single family fix and flips, three bedrooms, two bathrooms. They\u2019re going to be within about 10% of the median home price for my area. I want them roughly between this age and this age.\u201d And it sounds kind of weird to kind of narrow it down that much, because they\u2019re going to be like, \u201cNobody\u2019s going to bring me a deal.\u201d I guarantee you as long as it\u2019s appropriate for the area, somebody\u2019s going to bring that deal to you. So as long as you have a pretty good picture, and that\u2019s even something for the active investors. If you find a private lender in your network, don\u2019t ask them about the rate and terms, please don\u2019t 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, \u201cHey, do you want to invest in real estate with me?\u201d Well, that could be an elephant farm in Texas or that could be a condominium complex in Florida. Versus the conversation of, \u201cHey, I\u2019m buying three-twos in this particular city in this particular state, and I\u2019m going to turn around, fix them up and then sell them to families. Is that something you\u2019d be interested in lending on?\u201d And that\u2019s two completely, totally different conversations. So that\u2019s 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.<\/p>\n

Scott:
But let\u2019s pretend that we\u2019re a complete novice in this. And I hear you. I go to the REA meeting and say, \u201cI have capital.\u201d And then I\u2019m flooded with people who I can\u2019t, I cannot\u2026 Are there other tips or tactics from a literal sourcing of that? Cause I\u2019m 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?<\/p>\n

Alex:
I would say, realistically, it\u2019s going to sound kind of strange, figure out what the lending criteria are for maybe some hard money lenders in your area. And there\u2019s a reason they have those criteria. And there\u2019s a reason it\u2019s pretty uniform across the entire country, X up to 60, 65% loan to value. They\u2019re 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, \u201cLook, I will go a little bit above that, but under this guideline. I will do a second in a very specific box.\u201d 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\u2019re very well known or they\u2019re a landlord that has lots and lots of units. Even if you\u2019re a brand new lender, they will at least should be partaking some of their knowledge and experience and saying, \u201cLook, I\u2019ve done a hundred of these properties.\u201d They can have some sort of sleep at night saying their borrower\u2019s very, very well connected in the real estate community, their borrower\u2019s 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\u2019re a brand new lender, look for a more experienced borrower. Yeah, you might get lower rates, but you\u2019re not going to be two new people doing this transaction together, and nobody knows what\u2019s going on.<\/p>\n

Mindy:
I\u2019m 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\u2019s your money and you have the opportunity to lose all of it. I mean don\u2019t 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.<\/p>\n

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\u2019t really understand the distinctions?<\/p>\n

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\u2019s 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\u2019re 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\u2019t talk to you because their capital that they\u2019re 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\u2019re 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\u2019re 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\u2019s a win-win. Because we are pretty much, we\u2019re reliant on each other. The reason I didn\u2019t go out and buy this three-two ranch is because I don\u2019t want to go out and buy this three-two ranch. I would rather remain passive. So it\u2019s in my best interest to make sure that my borrower performs and it\u2019s in their best interest to perform because they want keep their property.
So you\u2019re forming this kind of symbiotic relationship, whereas anybody who\u2019s tried to get a hard money loan. I\u2019m not trying to be besmirch them. They have a place in the market, but it\u2019s just a very different experience from a borrower\u2019s perspective where it\u2019s very transactional in the hard money loan sense. And it\u2019s very relationship based in the private lending sense.<\/p>\n

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?<\/p>\n

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\u2019m placing capital directly into private money loans. Again, we don\u2019t, to what Alex said, I don\u2019t have any institutional capital requirements. And so we have a lot of leeway and some flexibility that a lot of hard money lenders don\u2019t. But yes, I place some of my own capital, but a fair amount of my business is placing other people\u2019s capital.
But beyond being just a broker, we take care of our clients beyond the loan just originating. Which most brokers, they\u2019ll 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\u2019s within my circle because it\u2019s all been strictly word of mouth for them coming into our group. So I don\u2019t just lose professional reputation if something goes sideways, I lose the seat at the [inaudible 01:05:15] table and I don\u2019t want that to happen. So yes, I\u2019m considered a broker, but really for all intents and purposes, I\u2019d 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.<\/p>\n

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?<\/p>\n

Beth:
Well, for starters, you\u2019re 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\u2019re 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\u2019re trying to acquire. And that way I get a better sense of what they\u2019re 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\u2019re 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\u2019re going to go and vet out a lot of the information that you guys talked about previously. So I\u2019d want to look at documentation like a purchase and sale agreement. I\u2019d 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\u2019re an experienced flipper. And maybe I\u2019ll take those addresses, and I\u2019ll punch them into a web search, and just validate that they\u2019re actually the vested owner of that property, or that they were the vested owner and the seller of a property they flipped.
So there\u2019s going to be a lot of validation of some of these conversations that you have in place. And so there\u2019s a fair amount of legwork that\u2019s done before the loan gets funded. So it\u2019s not a hundred percent passive at the onset, but once you\u2019re able to get to funding, that\u2019s when it becomes mailbox money for you.<\/p>\n

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\u2019re taking time to get to know them, which I\u2019m advocating for. I\u2019m not trying to say rush through that part, but if somebody comes up to you and they\u2019re like, \u201cHey, I need money tomorrow.\u201d When you\u2019re a landlord and somebody\u2019s like, \u201cI need to move in tomorrow.\u201d That\u2019s a super red flag. Why do you need to move in tomorrow? Why didn\u2019t you make plans ahead of time? When somebody needs funding right away, I would think that\u2019s a red flag. Why? What happened to their other funding?<\/p>\n

Scott:
I had a tenant come in and say, \u201cI\u2019m being evicted. And so I to will need to move in immediately.\u201d In one of the applications.<\/p>\n

Beth:
Oh, we get those too, Scott. It\u2019s like, \u201cMy loan is in default. I need to refinance immediately.\u201d And you\u2019re like, \u201cOkay, thanks for telling me that.\u201d But to answer your question, Mindy, there\u2019s 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\u2019m 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\u2019t necessarily fund a deal tomorrow because I\u2019m still required to go\u2026 Well in my world I\u2019m 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\u2019s 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.<\/p>\n

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?<\/p>\n

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\u2019re a private lender, you basically do everything yourself with the help of a virtual team. So we created it in a step that\u2019s called, I think it\u2019s collecting condition. So that you\u2019re collecting all of the documents that you need, both some from the borrower, some from the title company. Maybe you\u2019re 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\u2019re collecting.
So I\u2019m 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\u2019t necessarily prescribe getting a credit report, but other lenders may choose to collect that. And they understand what they\u2019re evaluating because they\u2019re maybe a landlord and they\u2019re used to doing those kind of credit and background checks. So we do list out a number of different documents that you\u2019d 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\u2019s really some critical thinking around what it is that you\u2019re collecting, and how you\u2019re actually going to evaluate that, and how that might impact your overall approval or denial of a loan.<\/p>\n

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?<\/p>\n

Beth:
I think for Alex, for both of us, it is. Yes.<\/p>\n

Alex:
Yes. I mean, it\u2019s really funny that people that are wanting to lend, it seems like their big hangup is I don\u2019t want to pay a thousand dollars to an attorney to drop documents. And I\u2019m like, but you\u2019re willing to give someone a hundred thousand dollars, and the only thing you\u2019re getting back from that transaction is legal documents, and you\u2019re okay with a free template you found online. That\u2019s where your line is? When they don\u2019t even realize that is a cost that you can very easily pass on to the borrower. So you\u2019re not even paying for it.
Private lending\u2019s one of the few ways that I\u2019ve 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\u2019s title policy, the borrower\u2019s paying for hazard insurance, the borrower\u2019s paying for flood insurance if required, and the borrowers paying for my legal docs to be prepared. I don\u2019t, it just really boggles my mind, whenever new lenders come to it, and they\u2019re like, \u201cWhy can\u2019t I just use a template online and get it free and get it done?\u201d I\u2019m like, \u201cWell, here\u2019s why.\u201d You don\u2019t want to do that. And it\u2019s not a cost to you as a lender.<\/p>\n

Scott:
Okay. So this is awesome. So the process seems, you go in the middle of the REA, and you say, \u201cI\u2019ve got money.\u201d 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\u2019ve got first or second position notes there. That\u2019s all great. What happens if things go south and they stop making payments? How does that work?<\/p>\n

Alex:
That can depend on, yeah, I was going to say, Beth\u2019s 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.<\/p>\n

Beth:
It absolutely is. I mean, to Alex\u2019s point, I mean the nuclear option really is the last resort. So when a loan goes into default, there\u2019s 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\u2026 By nonpayment, I should say, right, because there\u2019s 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\u2019t 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\u2019s all fine.
If they don\u2019t cure it, then you can move on to the next stage, which is called filing a notice of trustee sale. That\u2019s 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\u2019re looking, at best, about a five month process. Things never go smoothly, as you know. And so I\u2019ve 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\u2019ve actually had to take a loan all the way to auction. But to Alex\u2019s 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\u2019s 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\u2019t 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\u2019t, that\u2019s the first time that\u2019s 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\u2019s retired. He achieved fire quite early. He\u2019s in mid fifties. He was bored. He\u2019s like, \u201cI could only play so much tennis. So I\u2019m actually going to flip this property myself and I\u2019m going to make some money, more money on it.\u201d 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.<\/p>\n

Beth:
He put it on the market, it went pending within\u2026 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.<\/p>\n

Scott:
Betting on the horse.<\/p>\n

Beth:
Betting on a horse, always.<\/p>\n

Scott:
All right. So I think that\u2019s super helpful, and I think that example is super powerful because Washington State is clearly one of these states that it\u2019s going to be harder to foreclose in a property and slower than many other states in the South and Southeast, for example you\u2019d imagine. Is that right? I\u2019m guessing, I\u2019m making an assumption there.<\/p>\n

Beth:
Well, I would say that we\u2019re probably better than California, but we\u2019re 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\u2019s why it\u2019s important to consult with the real estate attorney that deals both in private money as well as foreclosure. You\u2019re probably going to have to hit up a couple of different attorneys for that because most of the time they don\u2019t practice in both.<\/p>\n

Mindy:
Okay. So we talked about red flags\u2026 Alex, since you\u2019re lending to the person as much as the deal, \u201cI need money right away,\u201d as a red flag. What are some other red flags to watch out for? I mean, besides the, \u201cOh, I\u2019m in default,\u201d the obvious.<\/p>\n

Scott:
Things didn\u2019t work out with my last lender so-<\/p>\n

Mindy:
Yeah [inaudible 01:19:49].<\/p>\n

Beth:
Well, even in default they said, \u201cI\u2019m in the middle of negotiating a reduction of principle with my second HELOC. So it\u2019s actually going to be this kind of payoff when we go to fund my loan,\u201d and you\u2019re just laughing and you\u2019re like, \u201cOkay, so you short changed your creditor, but you want me to fund a deal for you?\u201d<\/p>\n

Mindy:
Yeah. So there\u2019s one red flag when they don\u2019t have enough money to pay their current creditors. What are some others we could talk about?<\/p>\n

Alex:
I would say for me, I\u2019m very much about accountability, so if I\u2019m listening to some of the conversations, I\u2019ll ask very open ended questions, \u201cSo tell me about the last couple of deals you\u2019ve done. How did they go? What happened?\u201d And if I constantly hear, \u201cThe contractor ran off with half the deposit, my partner wouldn\u2019t answer my email, so duh, duh.\u201d Everything is someone else\u2019s fault, to me that is not my borrower. I wanted a borrower that\u2019s going to come, instead of saying, \u201cThe contractor ran half off with half my deposit,\u201d they\u2019re going to say, \u201cI hired the wrong contractor,\u201d or \u201cMy partner and I could not agree on this particular aspect of the deal and that\u2019s why we are not moving forward with another property. We just learned we don\u2019t work well together in that capacity.\u201d
I want to hear some self accountability because ultimately that\u2019s what in my mind is very important with executing a business plan for a property because it\u2019s very easy to just stand on the front lawn and point that all the contractor\u2019s doing everything wrong, when the person that made the contractors be there is standing in the front lawn, yelling at the contractors. So I\u2019m very much about self-accountability, so if I see a high degree of that, I\u2019m good, but if I hear a lot of blaming, not so good. Being from Louisiana, there\u2019s a thing called the Cajun underground, and it might feel like everybody\u2019s 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\u2019s going to tell what actually happened, so that\u2019s why I say if you\u2019re a private lender and you\u2019re 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, \u201cHey. Mr. Dude has not been paying me for the last six months,\u201d in the middle of a REIA meeting, I guarantee you, he\u2019s going to find a way to get you paid off real quick because you need to be quiet.<\/p>\n

Scott:
\u2026 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\u2019re out there hundreds of thousands of times, and those people will potentially be at least entry points into that Cajun underground if you\u2019re 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?<\/p>\n

Beth:
Yeah. I mean, aside from some of the common, \u201cOops, I said this too much or whatever,\u201d I would say that there\u2019s a lot of context that\u2019s provided that\u2019s 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, \u201cOkay, we\u2019re sorry about that and this and that,\u201d and they send you maybe a couple of documents and then they go dark again for another week. And you\u2019re trying to understand if they\u2019re really interested, if they\u2019re really engaged. If it\u2019s 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\u2019s 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\u2019re lightening up my phone and my email at 10 o\u2019clock at night and calling the next day and asking, there\u2019s a certain level of responsiveness that almost reeks of desperation, meaning they may be in some really turbulent times or they\u2019re desperate for that money because they\u2019re in hot water. And so that\u2019s another sign that we typically tend to look for. You want someone that\u2019s really communicative, but you don\u2019t want them dipping out all the time and just excusing it because they\u2019re too busy, and you don\u2019t 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\u2019t want to take care of them too. So trying to figure out these issues upfront before you fund is very important because you don\u2019t want to deal with it after it closes.<\/p>\n

Scott:
So these are very qualitative things that you guys are highlighting here. I presume that\u2019s because you\u2019re 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.<\/p>\n

Beth:
Well, absolutely. I mean, to the point that a borrower can actually articulate their project, and then they\u2019re 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\u2019ve done their due diligence is great. I\u2019m going to have had some borrowers where I\u2019ve asked them for a project performer or a rehab budget, and it\u2019s literally written now on the back of a napkin. I mean, it\u2019s happened. I got a business strategy letter scribbled out on a piece of paper and it wasn\u2019t 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\u2019s 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\u2019re good and we can move on from there? I don\u2019t really prefer that.<\/p>\n

Mindy:
They\u2019re going to forget stuff. They\u2019re going to go over their little napkin budget. It sounds like dating almost when you\u2019re vetting people. If you wouldn\u2019t date them, don\u2019t lend them money.<\/p>\n

Alex:
I\u2019m laughing so hard because I\u2019ve had the opposite happen where they might not be getting enough information to Beth. I\u2019ve 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, \u201cWhy would you do this to me?\u201d<\/p>\n

Beth:
And it\u2019s like a sign of trying too hard, right?<\/p>\n

Alex:
Right.<\/p>\n

Beth:
You don\u2019t want a boyfriend that tries too hard and smothers you. You want him to be just right.<\/p>\n

Mindy:
Exactly. Okay, let\u2019s say that I\u2019m interested in being a private money lender, but I am so busy with all the things that life is throwing at me. I don\u2019t have time to do this myself. Beth, you have mentioned a couple of times that you invest other people\u2019s money for them. How do I vet a broker? How do I find a broker? How do I make sure that they\u2019re well respected and they\u2019re going to be the best option for my money? And give me the overview, how I find somebody and what I\u2019m expecting from that relationship.<\/p>\n

Scott:
Mindy, it\u2019s not a broker. It\u2019s a private money matchmaker.<\/p>\n

Mindy:
Private money matchmaker. I\u2019m sorry.<\/p>\n

Beth:
Thank you, Scott.<\/p>\n

Mindy:
Everybody\u2019s a broker. Private money matchmaker, where do I find one?<\/p>\n

Beth:
Well, you can find them in every market. Fortunately for me, we\u2019ve 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-<\/p>\n

Scott:
He didn\u2019t smother you?<\/p>\n

Beth:
\u2026 Oh, my boyfriend didn\u2019t smother me. We started lending out our own money, and that from two of our investors. One was a golf buddy of my husband\u2019s and the other was a school dad, and it just grew from there because once people hear that you\u2019re passively investing and it\u2019s easy and it\u2019s 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\u2019ll find other private money lenders that are experienced in this and might want to actually lend your money. You can Google. I\u2019ve had people locate us through Google and web searches, private money lenders and seeing if they do whole trustees or private mortgages. There\u2019s two schools of thought here.
Some do private individual home notes, that\u2019s what I do where I individually place the lender in a loan. They\u2019re individually named on the promissory note. They\u2019re 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\u2019t transfer any money until they\u2019ve 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\u2019s like a syndication, but it\u2019s not private equity, it\u2019s private debt.
And so you\u2019re taking people\u2019s money and you\u2019re pooling it into this private debt fund, and then you\u2019re 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\u2019ve 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\u2019m doing in my state.<\/p>\n

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

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\u2019s called a management fee.<\/p>\n

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\u2019re redacted so you can\u2019t identify people or properties. So a potential new investor can actually see the legal documentation that\u2019s going to be safeguarding their capital, and they should be able to call up that person and have a conversation say, \u201cHey, I don\u2019t know what this paragraph means. Why is this in the document?\u201d And if they can\u2019t spend the time or accurately explain that, that might be a red flag too if you\u2019re looking for someone to broker your capital.<\/p>\n

Beth:
We have a pretty prescribed onboarding process for investors, so once they come to us, of course, they\u2019ve 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\u2019ll get on a Zoom call. We want to make sure that we\u2019re a right fit for them. As I mentioned, since we\u2019re 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\u2019t take smaller amounts of capital otherwise you\u2019ll 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\u2019t help a Washington based investor in the Seattle market get across the finish line.
And so we\u2019ll make sure that we\u2019re 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\u2019ll 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\u2019ll 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\u2019s 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\u2019re really concerned about their deal after it funds then I\u2019ve 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\u2019ll 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\u2019s fun because they get to come back and say, \u201cWell, I like this deal and I would take this one and here\u2019s why, but I don\u2019t like this one that you gave me because I don\u2019t like the location of the property or I don\u2019t like a commercial mixed use building used as collateral,\u201d something of that nature.
Or, \u201cI like this deal, but I think the terms are too long or the loan amount was too high. Maybe I would\u2019ve wanted it a little lower,\u201d or something like that. And so that\u2019s 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\u2019re really submitting deals to them that are going to be a right fit because we don\u2019t cattle call our loans. That\u2019s a pretty poor customer experience, so we really want to earmark the right kind of loan for that particular individual.<\/p>\n

Scott:
I love this. I think a clear picture is [inaudible 01:34:19] in my head here. If you\u2019re trying to lend 2050, a hundred thousand dollars in that ballpark then really I really like Alex\u2019s 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?<\/p>\n

Beth:
Underground.<\/p>\n

Scott:
The Cajun underground.<\/p>\n

Beth:
The Cajun underground.<\/p>\n

Scott:
In these local markets, and if you have a lot more capital, perhaps, sitting around your 401(k) and you don\u2019t 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\u2019d see as an equity investor in real estate in a lot of cases. But I think it\u2019s 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\u2019re at two hours, but it was all super valuable, and we\u2019re very grateful.<\/p>\n

Mindy:
And if you found this episode valuable, we\u2019ve 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\u2019s a really good exercise to listen to episode 642 of the Real Estate Podcast if you\u2019re considering doing this just from a different standpoint, from the investor standpoint so you know what people are looking for when they\u2019re looking for a private money lender. Also, they\u2019re on the Real Estate Rookie Podcast which airs tomorrow if you\u2019re listening to this episode the day that it comes out. That\u2019s episode 210 of the Real Estate Rookie Podcast.<\/p>\n

Scott:
[inaudible 01:36:18] podcasts.<\/p>\n

Mindy:
We\u2019ve got a lot of podcasts. They\u2019re 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.<\/p>\n

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?<\/p>\n

Alex:
Beth is going to have to tell you the title of the book because it\u2019s 15 words long, but we have an email address that we give out to people. It\u2019s [email\u00a0protected]<\/a>, 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\u2019re happy to chat with people on BiggerPockets as well, and then our website is lend2live.com. And then Beth, I\u2019ll let Beth do her website and her stuff.<\/p>\n

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\u2019m also on Facebook as well. My company is Flynn Family Lending.<\/p>\n

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\u2019s 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\u2019s a whole wrap. That\u2019s the beginning of the rabbit hole, there\u2019s hundreds of hours of more learning there, but also a large amount of wealth to be harvested and made in this space.<\/p>\n

Mindy:
Alex and Beth, thank you so much for your time today. I\u2019m so excited for this episode. I think that people are going to be inundating you, so clear out your inbox.<\/p>\n

Alex:
Thank you.<\/p>\n

Beth:
Thanks for having us.<\/p>\n

Mindy:
We will talk to you soon. Okay. That was Alex and Beth. That was one of my favorite episodes that I think we\u2019ve 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\u2019s 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\u2019m 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.<\/p>\n

Scott:
Yeah. This is, I think, a special set of information. It\u2019s a perspective changer for me. There\u2019s no way that private money investing is not a part of my future unless interest rates drop back down to zero and the market\u2019s flood again with ridiculous amounts of capital in this space, but that\u2019s 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\u2019s a great opportunity and something to seriously consider, and I hope my excitement came through because I\u2019m thrilled.
And I think these two were perfect potential perspectives to do that, the jockey and the horse perspective. If you\u2019re like Mindy or Alex, you have to bet on the jockey, and if you\u2019re like Beth, who is managing larger pools of capital and doing many more loans, she can\u2019t bet on the jockey. She can\u2019t 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.<\/p>\n

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

Scott:
Let\u2019s do it.<\/p>\n

Mindy:
From episode 328 of the BiggerPockets Money Podcast, he is Scott Trench and I am Mindy Jensen saying, let\u2019s make lots of money.<\/p>\n

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