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The Rookie’s Guide to Finding Private Money for Your Next Property

Real Estate Rookie Podcast
36 min read
The Rookie’s Guide to Finding Private Money for Your Next Property

The term other people’s money is common in the rental property industry. You may hear successful investors use it all the time—but what does it mean? Who are these “other people,” and why are they giving out money so freely? Don’t worry—rich relatives are not necessary for this episode of the Real Estate Rookie Podcast. We’re not talking about taking money from your Grandma. We’re talking about private money lending.

Who better to bring on to the show than Alex Breshears and Beth Johnson, authors of the new BiggerPockets book, Lend to Live: Earn Hassle-Free Passive Income in Real Estate with Private Money Lending? Although tailored towards would-be passive private money lenders, Lend to Live drops some serious knowledge that the everyday investor can use. If you’ve ever wanted to know where to find private money, how it works, and how you can use it to grow your real estate portfolio, this episode is a great place to start.

Alex and Beth break down the fundamentals behind private money lending, what makes a great private money lender, and how to vet yours when accepting money. Private money can create phenomenal opportunities for active investors, but it comes with legal landmines that are easily activated if you don’t know what to look for. So, before you start accepting money from a local lender, be sure you read Lend to Live first!

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Read the Transcript Here

Ashley:
This is Real Estate Rookie, Episode 210.

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

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

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

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

Tony:
I just kind of spitball it every time.

Ashley:
I know you do.

Tony:
It just kind of rolls off.

Ashley:
You do such a great job. Yeah.

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

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

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

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

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

Ashley:
Thank you, thank you.

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

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

Tony:
We do a whole Saturday episode about this.

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

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

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

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

Ashley:
Is there any left to fall out?

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

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

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

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

Tony:
You’re excited about.

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

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

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

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

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

Tony:
There you go. You’re on a roll.

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

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

Ashley:
Yeah.

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

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

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

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

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

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

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

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

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

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

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

Tony:
Beth, what about you?

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

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

Alex:
All the time.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Beth:
No.

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

Alex:
No.

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

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

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

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

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

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

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

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

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

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

Ashley:
And Alex?

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

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

Watch the Podcast Here

In This Episode We Cover

  • What makes a great private money lender and the qualifications they should possess
  • Why become a private money lender and who private lending is best suited for
  • How to find private money even if you’re just starting to grow your network
  • Structuring a private money loan and keeping yourself legally protected
  • Private money red flags and what investors and lenders should look out for
  • Points, rates, and other lending lingo you need to know before taking a loan
  • And So Much More!

Links from the Show

Book Mentioned in this Show:

  • Lend to Live by Alexandria Breshears and Beth Pinkley Johnson

Connect with Alex and Beth:

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.