Wholesaling vs Private Money Lending When Starting Out
Beth JohnsonPro Member
Lender · Renton, WA · Member since 2018 · 227 posts · 216 votesWholesaling vs Private Money Lending When Starting Out
Most Popular Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votesQuote from @Beth Johnson:
@Jay Hinrichs In all cases where I've done 2nd lien positions, the CLTV was below 65-70% and 99% of them were behind conventional 30-year mortgages with banks/financial institutions that work A LOT slower than we can. There are a few advantages to doing it this way - 1) the bank doesn't actually figure out the default before we can so we can file a notice first before they have ever done, 2) the bank doesn't charge exorbitant default interest and penalties as a hard money lender might do, 3) the loan is 30-year so there is less risk of balloon payment penalties, 4) banks typically won't call the note due, or they haven't done so in the few instances we've had to foreclose, so we've never been required to pay off the existing 1st lien. Instead, the bank continues to accrue late fees and interest and we completed the foreclosure which can take anywhere from 5 months (best case scenario) to up to 18 months if a bankruptcy proceeding is involved. In the few that had a BK filing, none of the borrowers followed through with the required paperwork filings and the request for BK was dropped. So while it frustrated the process and made timelines longer, it didn't actually result in a trustee taking over the property and liquidating assets to pay off creditors. In WA state, not sure how it is in OR or if it's different, but secured creditors get paid before the debtor or unsecured creditors. So even if a BK were to come through to fruition, we would have been paid out AFTER the 1st lienholder.
I absolutely do not disagree with you that 1st liens are a more simplified way to start out in private lending. But I do want to point out the misconceptions people often have with 2nd liens, when done correctly.
@Nicholas L. - I'm curious where you think a solid starting point is for newbies in real estate investing. Even if neither of these are good entry points to you, both are contemplated by new and aspiring investors all the time which is what prompted this post in the first place. I am always surprised how many WANT to start in wholesaling because I think they romanticize how easy it might be and would infuse quick hits of cash to get them started. But it's definitely not that easy. But private money lending - typically with small amounts of money - people call me all the time because they tried to gap fund a deal on their own and got screwed because their was no equity buffer or no personal guaranty or worse off, not secured by real estate at all. I get calls like this weekly, unfortunately. Some recover their capital, many have not. Those that do end up working through us for a little bit to learn the ropes and have our due diligence done on the deals. Not totally sure what the answer is on this - it definitely depends on the individual investor's goals and capital available to them.
Beth , while I know you can spin these anyway you want.. fact remains junior position lending is far more risky than lending in first position that's why banks rarely do it. . Also I disagree with you on your point number 1. Generally, in a default situation the borrower pays the second since the payment is lower and stops paying on the first. There is no way for you to know if the first is not getting paid unless your borrower just tells you which would be EXTREMLY rare. The first time you realize the first is in default is when you get noticed of the foreclosure. And by then the first has grown substantially eroding your equity. Unless of course your borrower stops paying you first which can happen then I agree with you but it normally the exact opposite of what your describing in the real world. on your point 2 the bank will start a foreclosure if they are not paid so you if your allowed to as a junoir you will be advancing payments to avoid being wiped out. . some lenders will allow this some wont. This puts the second position lender into having to pay payments on the first and foreclosure costs , And if lender did this in their IRA and cost exceeded what they have in their IRA it can create a problem with your IRA big time . On your thoughts of BK that is not true second position does not always get paid ahead of unsecured. unfortunately, I have been through this personally which is why i say second position is VERY risky and is to be avoided unless the lender has LOTS of cash to bail themselves out which most beginner note investors either dont have or this is going to stress them out quite a bit..
34 Replies
- 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
I would say that 95%of those that start their RE venture in wholesaling have very little capital certainly not enough to be a lender on a whole note.
the idea and you see it time and again on BP from those wishing to wholesale the whole reason they want to do it is they are drinking the guru cool aid that you can do this
with little or no money make big bucks and then you can move to being a buy and hold investor.. you will see it verbatim on this site.
I agree with you though Lending is much easier to do than wholesaling. Although lending has its own set of skills one needs to make sure they dont take loss's anyone who has been lending and doing deals for any amount of time will take a loss in the lending game its all about mitigating that..
Most folks dont buy rentals in the IRA as there is no tax benefits on depreciation . its good it it appreciates a ton but if its just a slowly appreciating market U dont want to hold rentals in your IRA you want to lend money in the IRA and buy rentals where you can take full tax advantage. At least thats kind of how I see it.. Plus getting loans in your IRA have to be non recourse and those are very tough to get.. WE have done a ton of IRA non recourse lending over the years for investors but it was their choice how to do it and just came to us for loans. You normally have to put about 50% down to get a non recourse loan as well.
so thats my personal pro's con's and opinions on the matter looking forward to seeing what others think..
Oh and also keep in mind license issue for private money lending of course in your state WA no license needed for 1 to 4 units which is the vast majority of loans most folks can swing. There are 12 states that require NMLS registration and state license or like CA. you can be a RE Broker like me and or CF license or mortgage lending license.. IN Oregon just south of you you need state license and NMLS there are carve outs that will work for the very small investor its something like you can do no more than a few a year and have no more than 4 loans in your portfolio and you cannot hold yourself out as a lender.. Posting on BP that your a lender would / is a violation and let me tell you they follow up. Same with NV.. I made one comment about looking at a loan in Vegas and promptly got a nasty gram from the state mortgage regulator stating they saw i was licensed in Oregon but not NV. A lot of times many fraudulent lenders will use a NV mailing address and for sure if no license not legal.. As a lender if you make a loan in Oregon with no license / and it was deemed required you will get a fine and a cease and desist and the borrow can sue you and usually ends up only having to pay the principal back there was a large Seattle based HML that did a bunch of bizz in PDX and got caught in this major egg on their face.
I know how it happens you work in a state were no license is required and boom you just figure every state is the same..
The same thing goes for fractionalized Deeds of Trust which are perfectly legal in many states CA specifically thats how we did all our loans.. but in Oregon NO way.. I got nailed for it personally even though I was licensed but I fell back to my CA HML broker days of doing hundreds of fractionalized loans and well I was wrong ..
- Lender · Renton, WA · Member since 2018 · 227 posts · 216 votes4y
@Jay Hinrichs
Totally agree with the SD IRA and holding real estate and the low leverage needed to really make it work. When we first started, it was actually the a Solo 401k, now that I think about it, but we had to convert after hiring on a few employees. At any rate, getting a 50% LTV loan was all we could get but that works out fine do that we don't have to pay huge taxes on the levered money.
That's crazy you got dinged for posting about NV. I knew there was a no advertising issue in that state but you never really think they are cracking down on that kind of stuff.
To your point, most people think wholesaling takes no money, which technically it may not for a single deal or two but at scans definitely requires some amount of money, and that money could also be lent out for EMD, down payment or rehab costs so that is why I wondered what makes people choose one over the other.
- Lender · Renton, WA · Member since 2018 · 227 posts · 216 votes4y
@Jay Hinrichs
Oh and I'm also not a fan of fractionalize notes either. Way too complicated and considered a security in my state, so far as I know, particularly when individuals do not know each other and have no other relationship to each other.
- 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Beth Johnson:
@Jay Hinrichs
Oh and I'm also not a fan of fractionalize notes either. Way too complicated and considered a security in my state, so far as I know, particularly when individuals do not know each other and have no other relationship to each other.
that's why CA came out with a DRE form for fractionalized notes and a requirement to have a broker do them so there was a single point of contact in the event of a default. it is truly a cluster if they are not organized. When I had my HML shop in the Bay Area fractionlized were basically mandatory to do any volume of business, loans were already in the 350 to 750k range in the late 80s.. and it was far and few between investors with enough cash to do a whole loan .. but finding investors with 50 to 100k that was not problem. We usually had about 50 million of them on the books and an investor base of 250 active investors. IN CA 10 participants in a loan is the threshold for securities offerings over 10 and you needed to think of a securities offering. This is where I was reprimanded from the state of Oregon I had to do a security offering when I fouled up and did fractionlized deals not knowing the law . We all live and learn that's for sure .
- 4yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
@Beth Johnson I'm curious - can you say about how much you made? I would never recommend that a new investor become a private money lender. Say you have $25K, and you somehow find someone trustworthy and get a 10% return - now after 6 months you have $26,250. OK... that doesn't seem like a game changer to me.
Fortunately or unfortunately, the best way for new investors to save up money for real estate is... a job.
- 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Nicholas L.:
@Beth Johnson I'm curious - can you say about how much you made? I would never recommend that a new investor become a private money lender. Say you have $25K, and you somehow find someone trustworthy and get a 10% return - now after 6 months you have $26,250. OK... that doesn't seem like a game changer to me.
Fortunately or unfortunately, the best way for new investors to save up money for real estate is... a job.
we do need to keep in mind wholesaling is just being a real estate agent.. exact same function bring two parties together for compensation. Investing in private notes is and investor roll which is rarely done by beginners or those with limited capital as you note 25k does not do much in the lending world.
- Lender · Renton, WA · Member since 2018 · 227 posts · 216 votes4y
@Nicholas L. - I don't disagree with you - I don't personally recommend anyone become a private lender but plenty come to me seeking support because they've chosen that as their entry point into real estate WHILE managing their day job. Middle-aged investors who have families and W2 income but have money sitting in legacy 401K from past employers are wanting to invest it in safe ways while still tending to their day-to-day life. So it's not entirely out of range for some folks to start in private lending. That said, doing so requires a lot of knowledge to keep capital investments safe and to do transactions that aren't prohibited. So yes, there's a lot to consider and manage.
My very first loan made was through a legacy 401K and it was for 62K on a commercial building in Seattle. I was a newly single mom with a background in real estate through my family. So the leap to do PML wasn't hard since I knew more about RE than stocks and bonds. I lent it out at 12% in 2nd position at a very conservative loan-to-value. It was renewed a few times and at some point it also defaulted, earning me default interest. The property was a legal 502 (marijuana grow facility) so they had a difficult time refinancing out of it. Eventually it paid off and I had enough to use as my portion of the downpayment on a rental. To @Jay Hinrichs's point, I had to have significant equity to get a non-recourse loan and I have to file taxes on this property each year because of the leverage but it still was a solid option for me, at the time. You just gotta know the in's and out's and the risks and rewards associated with these types of deals.
Quote from @Beth Johnson:
@Nicholas L. - I don't disagree with you - I don't personally recommend anyone become a private lender but plenty come to me seeking support because they've chosen that as their entry point into real estate WHILE managing their day job. Middle-aged investors who have families and W2 income but have money sitting in legacy 401K from past employers are wanting to invest it in safe ways while still tending to their day-to-day life. So it's not entirely out of range for some folks to start in private lending. That said, doing so requires a lot of knowledge to keep capital investments safe and to do transactions that aren't prohibited. So yes, there's a lot to consider and manage.
My very first loan made was through a legacy 401K and it was for 62K on a commercial building in Seattle. I was a newly single mom with a background in real estate through my family. So the leap to do PML wasn't hard since I knew more about RE than stocks and bonds. I lent it out at 12% in 2nd position at a very conservative loan-to-value. It was renewed a few times and at some point it also defaulted, earning me default interest. The property was a legal 502 (marijuana grow facility) so they had a difficult time refinancing out of it. Eventually it paid off and I had enough to use as my portion of the downpayment on a rental. To @Jay Hinrichs's point, I had to have significant equity to get a non-recourse loan and I have to file taxes on this property each year because of the leverage but it still was a solid option for me, at the time. You just gotta know the in's and out's and the risks and rewards associated with these types of deals.
I personally think ANYTHING would be easier to do than wholesaling. As someone who has worked in private credit, I understand that originating loans is a very complex process and one can lose their shirts if not done properly. But at the same time, I still say getting your lender's licence, figuring out the contracts, regulatory compliance and gaining a basic understanding of finance in areas such as LTV, interest payments, payments in kind, origination/ticking fees, etc....all that stuff is still 100x easier than wholesaling. I also think it's 100x more sustainable and with the right approach, anyone can be successful. Can't even come close to saying the same thing about wholesaling. I think @Jay Hinrichspretty much nailed it. A lot of newbies that are influenced by social media clips talking about anyone can get into wholesaling with little to no money. Of course, you and I both know that isn't true.
- 4yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
@Beth Johnson OK - fair enough, I agree if you're a HNWI looking to diversify this could be an option. But... most RE beginners (not all, but most) are not middle-aged HNWIs looking to diversify.
- 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Tony Kim:
Quote from @Beth Johnson:
@Nicholas L. - I don't disagree with you - I don't personally recommend anyone become a private lender but plenty come to me seeking support because they've chosen that as their entry point into real estate WHILE managing their day job. Middle-aged investors who have families and W2 income but have money sitting in legacy 401K from past employers are wanting to invest it in safe ways while still tending to their day-to-day life. So it's not entirely out of range for some folks to start in private lending. That said, doing so requires a lot of knowledge to keep capital investments safe and to do transactions that aren't prohibited. So yes, there's a lot to consider and manage.
My very first loan made was through a legacy 401K and it was for 62K on a commercial building in Seattle. I was a newly single mom with a background in real estate through my family. So the leap to do PML wasn't hard since I knew more about RE than stocks and bonds. I lent it out at 12% in 2nd position at a very conservative loan-to-value. It was renewed a few times and at some point it also defaulted, earning me default interest. The property was a legal 502 (marijuana grow facility) so they had a difficult time refinancing out of it. Eventually it paid off and I had enough to use as my portion of the downpayment on a rental. To @Jay Hinrichs's point, I had to have significant equity to get a non-recourse loan and I have to file taxes on this property each year because of the leverage but it still was a solid option for me, at the time. You just gotta know the in's and out's and the risks and rewards associated with these types of deals.
I personally think ANYTHING would be easier to do than wholesaling. As someone who has worked in private credit, I understand that originating loans is a very complex process and one can lose their shirts if not done properly. But at the same time, I still say getting your lender's licence, figuring out the contracts, regulatory compliance and gaining a basic understanding of finance in areas such as LTV, interest payments, payments in kind, origination/ticking fees, etc....all that stuff is still 100x easier than wholesaling. I also think it's 100x more sustainable and with the right approach, anyone can be successful. Can't even come close to saying the same thing about wholesaling. I think @Jay Hinrichspretty much nailed it. A lot of newbies that are influenced by social media clips talking about anyone can get into wholesaling with little to no money. Of course, you and I both know that isn't true.
exactly the example Beth made of the 62k second on a weed grow operation is a perfect of example of a very high risk scenario that could have just as easily ended up as a complete loss.. Weed grows cant get normal banking so your take outs are very limited I get approached on these all the time here in Oregon and no way would i touch one .. many of those folks are cratering ..
- Lender · Renton, WA · Member since 2018 · 227 posts · 216 votes4y
@Jay Hinrichs - Risk was high in the sense that it was a grow operation that could potentially have been subject to a federal seizure (Controlled Substance Act) that was an exclusion on the lender's title policy that I took out on the loan. But the combined LTV was in the 35% range so my equity buffer protection was outstanding. Just another way individual lenders can weigh the risks of the loan and make rates and terms commensurate with likelihood of those perceived risks actually occurring. I have some lenders who won't get out of bed for anything less than 13% so they take on high risk deals and others who prefer sub 60% LTV and will go into single digits to lock in these no-brainer loans. It's just a matter of identifying personal risk tolerance and deal criteria and preferences before proceeding. Everyone will do it slightly differently based on what lets them sleep at night. My default rate in 8 years is well below 4% with no principal losses so I like to think of myself as striking a good balance between returns and risk over the years. I love the counterpoints, though. I think this is great banter for new private lenders to hear and read so they can determine for themselves where they might fit in.
- 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Beth Johnson:
@Jay Hinrichs - Risk was high in the sense that it was a grow operation that could potentially have been subject to a federal seizure (Controlled Substance Act) that was an exclusion on the lender's title policy that I took out on the loan. But the combined LTV was in the 35% range so my equity buffer protection was outstanding. Just another way individual lenders can weigh the risks of the loan and make rates and terms commensurate with likelihood of those perceived risks actually occurring. I have some lenders who won't get out of bed for anything less than 13% so they take on high risk deals and others who prefer sub 60% LTV and will go into single digits to lock in these no-brainer loans. It's just a matter of identifying personal risk tolerance and deal criteria and preferences before proceeding. Everyone will do it slightly differently based on what lets them sleep at night. My default rate in 8 years is well below 4% with no principal losses so I like to think of myself as striking a good balance between returns and risk over the years. I love the counterpoints, though. I think this is great banter for new private lenders to hear and read so they can determine for themselves where they might fit in.
since this is an educational thread on lending.. I think its good to explain to beginners why making a second behind a first can be so risky .. its not risky if you have the cash to pay the first off in case of foreclosure. Most lenders wont have that.
They will also not understand that the first does not need to talk to you nor give you any information on their loan.. Since your not the borrower. ( their are work arounds for that of course but beginners wont know until its to late. )
again just addressing the scenario you mentioned first position is where most want to or should be.. but seconds are at dollar amounts smaller investors can handle therefor they take on undo risk that they are not even aware of.
Quote from @Beth Johnson:
@Jay Hinrichs - Risk was high in the sense that it was a grow operation that could potentially have been subject to a federal seizure (Controlled Substance Act) that was an exclusion on the lender's title policy that I took out on the loan. But the combined LTV was in the 35% range so my equity buffer protection was outstanding. Just another way individual lenders can weigh the risks of the loan and make rates and terms commensurate with likelihood of those perceived risks actually occurring. I have some lenders who won't get out of bed for anything less than 13% so they take on high risk deals and others who prefer sub 60% LTV and will go into single digits to lock in these no-brainer loans. It's just a matter of identifying personal risk tolerance and deal criteria and preferences before proceeding. Everyone will do it slightly differently based on what lets them sleep at night. My default rate in 8 years is well below 4% with no principal losses so I like to think of myself as striking a good balance between returns and risk over the years. I love the counterpoints, though. I think this is great banter for new private lenders to hear and read so they can determine for themselves where they might fit in.
But quite frankly, risk really would not have been that high if you were 1st lien and also maintained a reasonable LTV. Most banks don't like to deal with auction or REO's, but for someone just starting out, I think it would be pretty cool to come into possession of a commercial property at a large discount...assuming things were underwritten properly. Of course, I'm simplifying things because the process is complex and drawn out. But the great thing about real estate as collateral is that it's probably the best collateral out there. So as long as the property is properly underwritten and all contracts are solid, a lender that knows what they're doing is well covered. For the asset manager I used to worked for, our collateral when lending to middle market companies was equity in the company. Excuse me, but what good are equity shares in a company that just defaulted on their loan? Real estate on the other hand, is not affected by the company's performance. When you're the 2nd position lender however, these benefits shrink significantly and 12% is a bargain. But the great thing is this loan turned out to be a great move and jump started your RE career, with default PIK to boot!
- 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Tony Kim:
Quote from @Beth Johnson:
@Jay Hinrichs - Risk was high in the sense that it was a grow operation that could potentially have been subject to a federal seizure (Controlled Substance Act) that was an exclusion on the lender's title policy that I took out on the loan. But the combined LTV was in the 35% range so my equity buffer protection was outstanding. Just another way individual lenders can weigh the risks of the loan and make rates and terms commensurate with likelihood of those perceived risks actually occurring. I have some lenders who won't get out of bed for anything less than 13% so they take on high risk deals and others who prefer sub 60% LTV and will go into single digits to lock in these no-brainer loans. It's just a matter of identifying personal risk tolerance and deal criteria and preferences before proceeding. Everyone will do it slightly differently based on what lets them sleep at night. My default rate in 8 years is well below 4% with no principal losses so I like to think of myself as striking a good balance between returns and risk over the years. I love the counterpoints, though. I think this is great banter for new private lenders to hear and read so they can determine for themselves where they might fit in.
But quite frankly, risk really would not have been that high if you were 1st lien and also maintained a reasonable LTV. Most banks don't like to deal with auction or REO's, but for someone just starting out, I think it would be pretty cool to come into possession of a commercial property at a large discount...assuming things were underwritten properly. Of course, I'm simplifying things because the process is complex and drawn out. But the great thing about real estate as collateral is that it's probably the best collateral out there. So as long as the property is properly underwritten and all contracts are solid, a lender that knows what they're doing is well covered. For the asset manager I used to worked for, our collateral when lending to middle market companies was equity in the company. Excuse me, but what good are equity shares in a company that just defaulted on their loan? Real estate on the other hand, is not affected by the company's performance. When you're the 2nd position lender however, these benefits shrink significantly and 12% is a bargain. But the great thing is this loan turned out to be a great move and jump started your RE career, with default PIK to boot!
Well since we are doing a deep dive. here are the other considerations a lender must know in advance. if you have a low LTV on a business property and if you're in second position. Its Highly likely the borrower will go into bankruptcy prior to letting the property go. so, what does this do. the first keep accruing default interest and expenses that comes in front of you. you have to hire an attorney more money out of pocket and if your IRA just happens to not have enough money in it for expenses this jeopardizes your IRA. Then you get to the end of it a few years later now your equity you thought you had you don't have. the first is in the driver's seat will normally get most of what their owed... the second though can and does often get crammed down with the stroke of a BK judge pen. you may get your principal back if you're lucky you may have to sit and wait while the debtor goes through their repayment plan only to end up in BK court again when they fail at that. you may get wiped out any number of scenarios. And seconds universally are much smaller than firsts usually something like this first 500k second 50k or some ratio like that. do we think the beginner note investors has an extra 500k to protect their second position if push comes to shove. ???? In this learning exercise let's all stick to first deeds of trust much better all around
- 4yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
And just a reminder that the title of this post includes "when starting out."
99% of investors starting out should not pursue either of these strategies =-)
- PA · Member since 2010 · 339 posts · 168 votes4y
I like this post
I think I missed the main point, though. Why are you choosing between wholesaling and lending. I can imagine wholesaling vs flipping or lending vs syndications, but who would be deciding between lending and wholesaling? They seem to different to compare.
I am easing into retirement and may be moving from east to west (Seattle). If I do, I’ll sell my commercial properties and am trying to decide what to do next. I will probably not get back into the hands-on stuff I’ve been doing and lending is one thing I’m considering. Another would be private equity investing. They seem like two shades of gray to me, with the latter less riskier and giving much higher returns. Do you guys have any thoughts or opinions on the pros and cons of these two approaches?
- 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Account Closed:
I like this post
I think I missed the main point, though. Why are you choosing between wholesaling and lending. I can imagine wholesaling vs flipping or lending vs syndications, but who would be deciding between lending and wholesaling? They seem to different to compare.
I am easing into retirement and may be moving from east to west (Seattle). If I do, I’ll sell my commercial properties and am trying to decide what to do next. I will probably not get back into the hands-on stuff I’ve been doing and lending is one thing I’m considering. Another would be private equity investing. They seem like two shades of gray to me, with the latter less riskier and giving much higher returns. Do you guys have any thoughts or opinions on the pros and cons of these two approaches?
totally agree the vast majority probably 95% of the folks that want to get into wholesaling are doing it to earn money they dont already have with the idea of earning fast cash so they can then buy rentals or other investments or just increase their annual income.
Note investors are totally different than this.. Note investors generally are high net worth individuals who have been successful in a career or business. Or and this is a big one Burnt out landlords that sell out and go to being the bank as they tire of the day to day of working with a PM or tenants.
- PA · Member since 2010 · 339 posts · 168 votes4y
Quote from @Jay Hinrichs:
Quote from @Account Closed:
I like this post
I think I missed the main point, though. Why are you choosing between wholesaling and lending. I can imagine wholesaling vs flipping or lending vs syndications, but who would be deciding between lending and wholesaling? They seem to different to compare.
I am easing into retirement and may be moving from east to west (Seattle). If I do, I’ll sell my commercial properties and am trying to decide what to do next. I will probably not get back into the hands-on stuff I’ve been doing and lending is one thing I’m considering. Another would be private equity investing. They seem like two shades of gray to me, with the latter less riskier and giving much higher returns. Do you guys have any thoughts or opinions on the pros and cons of these two approaches?
totally agree the vast majority probably 95% of the folks that want to get into wholesaling are doing it to earn money they dont already have with the idea of earning fast cash so they can then buy rentals or other investments or just increase their annual income.
Note investors are totally different than this.. Note investors generally are high net worth individuals who have been successful in a career or business. Or and this is a big one Burnt out landlords that sell out and go to being the bank as they tire of the day to day of working with a PM or tenants.
I confess: I am a little burnt out. - 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Account Closed:
Quote from @Jay Hinrichs:
Quote from @Account Closed:
I like this post
I think I missed the main point, though. Why are you choosing between wholesaling and lending. I can imagine wholesaling vs flipping or lending vs syndications, but who would be deciding between lending and wholesaling? They seem to different to compare.
I am easing into retirement and may be moving from east to west (Seattle). If I do, I’ll sell my commercial properties and am trying to decide what to do next. I will probably not get back into the hands-on stuff I’ve been doing and lending is one thing I’m considering. Another would be private equity investing. They seem like two shades of gray to me, with the latter less riskier and giving much higher returns. Do you guys have any thoughts or opinions on the pros and cons of these two approaches?
totally agree the vast majority probably 95% of the folks that want to get into wholesaling are doing it to earn money they dont already have with the idea of earning fast cash so they can then buy rentals or other investments or just increase their annual income.
Note investors are totally different than this.. Note investors generally are high net worth individuals who have been successful in a career or business. Or and this is a big one Burnt out landlords that sell out and go to being the bank as they tire of the day to day of working with a PM or tenants.
I confess: I am a little burnt out.your not alone.. when I Took over Langer Mortgage in 88 in Oakland I had 250 investors that Mr. Langer had groomed since the mid 50s I would say a majority of them owned rentals and were slowly liquidating and becoming private lenders.. Not all of course and some of them owned substantial RE portfolios of commerical downtown oakland assets but it was a nice way to diversify for sure.
Fascinating thread @Beth Johnson
At first blush I do think that wholeselling and PML are a bit of an apples to oranges comparison, but for a specific subset of ppl getting started in RE this could be a great jumping off point. If they have a sizeable chunk of cash sitting in a retirement account, live in a state with no lending requirements or with carve outs for 1-4 unit, and are willing to invest the time upfront to learn the details of the space, they could take 30-40% of it and over the course of a few years have some above average returns with little effort.
Thanks for starting this great discussion!
- Lender · Renton, WA · Member since 2018 · 227 posts · 216 votes4y
@Jay Hinrichs In all cases where I've done 2nd lien positions, the CLTV was below 65-70% and 99% of them were behind conventional 30-year mortgages with banks/financial institutions that work A LOT slower than we can. There are a few advantages to doing it this way - 1) the bank doesn't actually figure out the default before we can so we can file a notice first before they have ever done, 2) the bank doesn't charge exorbitant default interest and penalties as a hard money lender might do, 3) the loan is 30-year so there is less risk of balloon payment penalties, 4) banks typically won't call the note due, or they haven't done so in the few instances we've had to foreclose, so we've never been required to pay off the existing 1st lien. Instead, the bank continues to accrue late fees and interest and we completed the foreclosure which can take anywhere from 5 months (best case scenario) to up to 18 months if a bankruptcy proceeding is involved. In the few that had a BK filing, none of the borrowers followed through with the required paperwork filings and the request for BK was dropped. So while it frustrated the process and made timelines longer, it didn't actually result in a trustee taking over the property and liquidating assets to pay off creditors. In WA state, not sure how it is in OR or if it's different, but secured creditors get paid before the debtor or unsecured creditors. So even if a BK were to come through to fruition, we would have been paid out AFTER the 1st lienholder.
I absolutely do not disagree with you that 1st liens are a more simplified way to start out in private lending. But I do want to point out the misconceptions people often have with 2nd liens, when done correctly.
@Nicholas L. - I'm curious where you think a solid starting point is for newbies in real estate investing. Even if neither of these are good entry points to you, both are contemplated by new and aspiring investors all the time which is what prompted this post in the first place. I am always surprised how many WANT to start in wholesaling because I think they romanticize how easy it might be and would infuse quick hits of cash to get them started. But it's definitely not that easy. But private money lending - typically with small amounts of money - people call me all the time because they tried to gap fund a deal on their own and got screwed because their was no equity buffer or no personal guaranty or worse off, not secured by real estate at all. I get calls like this weekly, unfortunately. Some recover their capital, many have not. Those that do end up working through us for a little bit to learn the ropes and have our due diligence done on the deals. Not totally sure what the answer is on this - it definitely depends on the individual investor's goals and capital available to them.
- Lender · Renton, WA · Member since 2018 · 227 posts · 216 votes4y
@Account Closed
I didn't include syndications, but you are right, it definitely could have been included. I think the reason I left it out is due to the requirement to be accredited and the length of time your capital would be tied up. With private lending, the lender can make up the rules (within reason) and make the timelines shorter. As individually named on the promissory note, they have more control and autonomy than as a limited partner. But the reality is most newbies who consider wholesaling, gap funding as a lender, or "gator" lending as it's talked about in some circles, wouldn't qualify as accredited status. But if your state doesn't deem indidivual private lending as a security, then you can lend out your own money regardless of being a "sophisticated" investor or "accredited". Another difference between PML and syndications aside from the length of time, I would say is the risk factor. I don't think syndications are less risky. Without thoroughly vetting out a general partner (GP) and most importantly their historical performance, you are placing a huge risk on the project performing to get the returns promised to you. Think of all the private equity deals out there the last year or so that were/are predicated on the same appreciation the market was achieving YOY but may not hit that number in 2022 and beyond, should the markets be affected by an extended recession and not just a temporary market correction. The LP yield is not guaranteed so it's definitely a gamble if you aren't doing your proper due diligence on not just the GP but the project pro forma itself. The benefit of syndications, though, would be the depreciation for tax purposes, that you cannot get with private money lending.
Quote from @Beth Johnson:
@Jay Hinrichs In all cases where I've done 2nd lien positions, the CLTV was below 65-70% and 99% of them were behind conventional 30-year mortgages with banks/financial institutions that work A LOT slower than we can. There are a few advantages to doing it this way - 1) the bank doesn't actually figure out the default before we can so we can file a notice first before they have ever done, 2) the bank doesn't charge exorbitant default interest and penalties as a hard money lender might do, 3) the loan is 30-year so there is less risk of balloon payment penalties, 4) banks typically won't call the note due, or they haven't done so in the few instances we've had to foreclose, so we've never been required to pay off the existing 1st lien. Instead, the bank continues to accrue late fees and interest and we completed the foreclosure which can take anywhere from 5 months (best case scenario) to up to 18 months if a bankruptcy proceeding is involved. In the few that had a BK filing, none of the borrowers followed through with the required paperwork filings and the request for BK was dropped. So while it frustrated the process and made timelines longer, it didn't actually result in a trustee taking over the property and liquidating assets to pay off creditors. In WA state, not sure how it is in OR or if it's different, but secured creditors get paid before the debtor or unsecured creditors. So even if a BK were to come through to fruition, we would have been paid out AFTER the 1st lienholder.
I absolutely do not disagree with you that 1st liens are a more simplified way to start out in private lending. But I do want to point out the misconceptions people often have with 2nd liens, when done correctly.
@Nicholas L. - I'm curious where you think a solid starting point is for newbies in real estate investing. Even if neither of these are good entry points to you, both are contemplated by new and aspiring investors all the time which is what prompted this post in the first place. I am always surprised how many WANT to start in wholesaling because I think they romanticize how easy it might be and would infuse quick hits of cash to get them started. But it's definitely not that easy. But private money lending - typically with small amounts of money - people call me all the time because they tried to gap fund a deal on their own and got screwed because their was no equity buffer or no personal guaranty or worse off, not secured by real estate at all. I get calls like this weekly, unfortunately. Some recover their capital, many have not. Those that do end up working through us for a little bit to learn the ropes and have our due diligence done on the deals. Not totally sure what the answer is on this - it definitely depends on the individual investor's goals and capital available to them.
@Beth Johnson Can you clarify: as a 2nd lien holder initiating a foreclosure, you sometimes don't payoff the 1st lien? How does that work? Thanks.
- Lender · Renton, WA · Member since 2018 · 227 posts · 216 votes4y
@David M. in my state, as long as I file first, then no other legal action can precede it. So if the 2nd lienholder files what is called a Notice of Default (NOD) in my state which is official notice that the loan is in default and provides a 30-day to cure period, then we would file a Notice of Trustee Sale (NTS) afterwards which, by state law, requires a date of sale at auction no sooner than 120 days after the filing is approved by the courts. Generally speaking, action done by the 2nd lienholder would be completed (in theory) faster than a bank or mortgage company or their servicers could respond and legally act. I'm pretty sure most banks would prefer it happen this way as they are in the primary business of depository accounts and not REO.
Doing 2nds, or any private money loan for that matter, should be done within the legal parameters defined by the state (both that the property resides in and where the lender is located, if different) AND federally. Lenders would want to consult attorneys well-versed in private lending law (they do exist) before jumping into loans in junior lien positions or even in 1st. There are too many nuances to this type of lending state by state and federally that make it a challenge to address broadly in a forum like this. But at least you can see how it has been executed in my experience and in my state. Hope this helps.
Quote from @Beth Johnson:
@David M. in my state, as long as I file first, then no other legal action can precede it. So if the 2nd lienholder files what is called a Notice of Default (NOD) in my state which is official notice that the loan is in default and provides a 30-day to cure period, then we would file a Notice of Trustee Sale (NTS) afterwards which, by state law, requires a date of sale at auction no sooner than 120 days after the filing is approved by the courts. Generally speaking, action done by the 2nd lienholder would be completed (in theory) faster than a bank or mortgage company or their servicers could respond and legally act. I'm pretty sure most banks would prefer it happen this way as they are in the primary business of depository accounts and not REO.
Doing 2nds, or any private money loan for that matter, should be done within the legal parameters defined by the state (both that the property resides in and where the lender is located, if different) AND federally. Lenders would want to consult attorneys well-versed in private lending law (they do exist) before jumping into loans in junior lien positions or even in 1st. There are too many nuances to this type of lending state by state and federally that make it a challenge to address broadly in a forum like this. But at least you can see how it has been executed in my experience and in my state. Hope this helps.
Thanks, that helps. Of course, just keep it your State and your business. That's what I was curious about. see ya
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