Well, that question is what I have spent the last week and half - UNLEARNING.  You see, I am a real estate investor and I, like many other investors, am always working on raising private money to use to close my deals fast (or, in this hellacious market - to close them at all!)  That is the Buzz word - or rather Buzz Phrase these days…. Raising Private Money! 

Now I thought I knew a good amount about raising private money… But what I learned this past week has given my pretty little head a brain hemmorage.  (And for all the old timers and way smarter investors than me out there - you will probably be like “ah duh - we know that”, but for me - it’s a whole new world and it is very exciting to learn, so please bare with me.)  This week, I have been learning all about  Real Estate Trust Deed Investing…  Hhhhmm isn’t that the same as private lending the way I have been doing it?  Nope it isn’t. There is so much more opportunity in Investing in Real Estate Trust Deeds

In my case, Real Estate Trust Deed Investing means that instead of  “raising private money” from someone to use on a specific property that I am buying, I can raise money that will have ANY viable Trust Deed attached to it - whether it is the subject property or not!  Wowee.  I did not know that!

For Example:  Borrower (me) wants to buy Property-A and it will be at about 75% of value.   Now this is an OK deal for an private money lender - but it’s just not quite good enough to close the deal - especiallly in today’s market right?  But wait there’s more!  I also have another Property-B that has a lot of equity in it, let’s say 65% equity.  Now what I can do is attach a Trust Deed to Property B in order to secure the loan. 

The coolest thing about this is that I don’t have to pull my equity out of Propery B to use to buy Property A.  I simply use funds from a Private Lender - all the while attaching the TD to that Property.  Equity stays in the propery!  This is way cool. There are so many ways that you can use this strategy.  You can do anything you want with the money really. Hey - I can use it instead of a business line of credit! It doesn’t matter because you are using the property as the asset/collateral for the TD.  It’s real estate financing without ever using conventional banks and my equity stays in tact!

As we investors all know, This is a great oportunity for many regular folks to earn substantial interest on their money.  Private Money lenders (who for me, are all individual people), are earning 8-9-12% on their money, rather than the 1-3% they might be getting.  What I know is that there are still so many people out there who don’t understand how being a Private Money Lender works and how it can benefit them.   Here are a few points that I am including in my Private Lending Report that I will give to potential Private Lenders:

1.  What is Private Real Estate Lending?

Private Lending or rather what we are talking about now  is Investing in Real Estate Trust Deeds is when regular people like you and me can invest our money in Real Estate Trust Deeds secured by real property and insured by a Title Insurance Company. 

Basically, Private Lending is your opportunity to become the bank and earn a much higher interest rate than a conventional bank is paying you on your money when you own a CD or have funds in a Money Market account. It’s your opportunity to eliminate the “middle man” (the bank) and make more money than the conventional bank is making for you.

2. What is a Trust Deed?
A Trust Deed (sometimes referred to as a Deed of Trust) is a document recorded with a County recorder’s office creating a secured lien on real property to provide collateral for lenders and Trust Deed Holders.

3. How does it work?
A borrower who owns or who is in the process of buying real estate property usually needs a loan. The borrower signs a Promissory Note wherein the borrower promises to repay the Lender a certain amount of money. The recorded Trust Deed creates the security interest attached to the borrower’s real property.  

4. What are the benefits of Trust Deed Investing?
Investors enjoy monthly interest payments on their invested capital. Returns are considerably higher compared to other fixed income investments. Real estate collateral is often viewed as more secure than stocks and equity investments, because its value can never diminish to zero.

5. What Kind of Interest Do People Earn as Private Lenders?

At this time Private Lender/Investors are generally paid anywhere between 8% and 12% interest per annum for the money that they lend and they can receive their payments monthly, quarterly or at the end of the deal. 

6.  What is the average time frame that an investor would use the private lenders funds?

Typically the time frame is anywhere from 6 months to 1 year.  However it is strictly between the lender and the investor.  Some deals can go past a year depending on your agreement.  I’ve even seen funds needed just for “bridge financing” and those last not more than 3 months.  The interest rate can vary depending on the time frame as well.  You might pay a lender a higher interest rate if you need the funds very quickly and for just a few months.

6. What are the Advantages of owning Trust  Deeds?

     a. Trust deeds establish a monthly income through interest payments.
     b. The interest rate paid is generally higher than rates paid by banks or other institutions.
     c. They are liquid and may sell relatively easy to another investor.
     d.  An investor may borrow against them by using them as security. 
     e. The lender is not responsible for the payment of property taxes, maintenance, gardening, repairs or any other expenses connected to the property.

Real Estate Trust Deeds are one of the safest investments available because the investment is not only secured by real property: land, homes and buildings but is insured by a Title Insurance Company.   Private Lending is a win/win for all.  The Private Lender is earning substantial interest on their money and the real estate investor has a source where they can get their money fast to close the deal without the hassels of conventional financing!  Hallelujah!

If you're new here, you may want to subscribe to our RSS feed or sign up for our real estate social network. Thanks for visiting!

Tags: borrowing, lending, private lenders, promissory note, real estate investing, trust deed

If I could just take a few moments and vent about my frustrations with real estate investors who do not follow formulas and do not stick with systems. Sheesh! If it isn’t one bad deal working it’s three bad deals working. Are times that bad that you have to reach for a good deal? NO! Are times that bad that you need to cut corners to make the deal favorable? It is never that bad. Have real estate investors forgotten their original high standards? Maybe so. I know one thing though, Investorino has lost its mind this month.

For those that don’t know me very well, I like free and clear investment structuring. My mentor has given me more than enough incite on how to creatively purchase free and clear real estate. So I have a very hard time seeing and believing the types of deals that are pieced together as though no rod of measurement is being used at all. Well, the name of the game in free and clear is that if the seller has time you have money and if the seller doesn’t have any time you don’t have any money (or much even) to give them. You can certainly pay upwards of 100% of a property’s value today, but the only catch is that price is going to be paid in one lump sum way later or paid over the course of time with agreeable terms.

So Investorino is strapped for cash. NO PROBLEM, because he’s got a great relationships with private lenders. He sees a killer free and clear property that is worth maybe $145,000.00, and it is time to do something a little creative. The subject property needed about $30,000.00 in repairs, so Investorino came up with a special big money down, monthly payment, schematic that the seller seemed to be fond of. The terms of the purchase were $40,000.00 to the seller at the transfer of title and 95 monthly payments of $1000.00. Target rent on houses within the subdivision with the same specs was approximately $1400.00 per month.

Does everyone see the cash flow?
Yes. Now let me show you a magic trick. I can show you how to make cash flow disappear (not that you really wanted to learn anyway). Investorino is going to solicit private funds for $85,000.00 to be disbursed as follows: $55,000.00 is to be made available for the jumbo pay at the title transfer for $40,000.00, to take care of any of the closing costs, and undoubtedly put some aside as a small reserve for the $1000.00 per month payments. $30,000.00 was to be used for the repairs.

Now if you think the bank was tough; check out these terms.
12% interest only on a year term with 5 points upfront and a 2 point renewal after each 365 days. Because Investorino didn’t want guarantee the deal with a partner or personally, the private lender decided that he wouldn’t provide the $30,000.00 in cash for the repairs and would like to see the finished project prior to submitting those additional monies. Uh-oh.

So now Investorino has to pay an additional $550.00 per month on a non-occupied property that needs $30,000.00 in work. Did you see it disappear…the cash flow? I did. Oh wait! Where is the $30,000.00 going to come from? Remember the property was free and clear of all mortgages and liens. The sellers will be in first position with the outstanding balance of $95,000.00, the private lender will then be in 2nd position with the $55,000.00 loan, and now there may be a 3rd mortgage needed to see this deal to the end. So this transaction is yielding about $5,700.00 to Investorino at the transfer of title. That amount is certainly not enough to get the ball rolling a the repairs.

Ending A: $30,000.00 magically appears in his account from an anonymous donor and the work is completed. Now the private lender will pay $30,000.00 to Investorino on which he will then pay an additional $300.00 per month for the adjustment in the loan amount. BOO! So now we are at $1850.00 in outward payments. Keep in mind that the market rent is based on those properties in rental condition and we can assume that this one is not. So now instead of losing $150.00 if he would have put a person in the property in its condition, he loses $450.00 per month because of the post-rehab disbursement. I told you it was magic.

Please be careful. This is about staying on the course and sticking to the formulas. Private lenders throw the formulas off all day long. Account for it and make a true adjustment in your purchase activity.

Blessings to your Real Estate Investing Success,

Milton B. Yates

Tags: creative real estate, hard money, learn real estate investing, private lenders, private money, real estate, real estate investing, real-estate-deals