Getting started in private money lending

30 Replies

I've been investing in real estate for over 20 years, mostly buy and hold condos and a few flips. I've been saving money to buy a multifamily property but it's been two years, a few close calls but I have not been able to find a property with a decent return. I have about 300k in cash sitting around that I was planning to use for my down payment and I was thinking of using those funds to provide private money to flippers. I don't have any hard money lending experience and I never used a hard money lender. However, I have a banking finance background and I don't think the underwriting for HML is complicated. I don't think 300k is enough to fund multiple project in the area I live so I was thinking of perhaps starting to get into this business by providing funding to flippers for the down payment normally required by HMLs. This is very risky as HMLs do not like 2nd liens to be put on the property.

Wanted feedback from the you guys on what's the best way to secure my investment and if any of you have done this what advice can you provide?

Thanks.

@Tito Burgos in our market 300k can easily buy 5 decent homes. Your money will go far in other markets and there is a high demand for money to borrow. The key is not only have the security in place like the note, mortgage and personal guarantee but the biggest risk is who you are lending to. I would prefer to lend at a slightly lower rate to an experienced and successful flipper with strong financials verses someone who just started out in real estate.

@Alex Deacon I would need to partner up with someone outside my area.  I need to be able to drive to the property and in my area the purchase price alone for a property could be 200k or more.   With 300k I might be able to fund one deal and that's putting all my money into that deal.  

what you talking abut has been coined these days as " gap funding" and many of the fix and flip guru's preach it. 

you can set it up many ways..  however the main point is if for some reason your borrower has a hiccup do you have the funds to step in and cure their first loan.  finish the project etc.

I use a step in agreement when I do these.. I also put the first lender on notice and get a written confirmation if my borrower is in the process of a water landing I can step in and take over the project.  Attorney can help you with this.

This should only be done with top flight operators. 

Also second position gap funding is generally done in a profit share plus rate.. don't get fooled into only taking mortgage rate interest .. as the risk position is far higher.

@Tito Burgos I would agree that your money would go so much further in other markets vs the very expensive Northeast. I live in CT and we had to go off the beaten path a bit to find buy and hold that makes sense. It’s out there if you look hard enough. Good for you for having $300K in cash. That’s outstanding! But sitting in a bank account, I assume, and you’re denying yourself and your future income you could be making. Finding investors you trust to lend to is no doubt a giant leap of faith but maybe instead partner up with a group of friends on a multi and at least put some of that $300K to work for you. Good luck!

yes …. you can do it that way you can do a participation note... secured or unsecured.. the main thing is to have a conversation with the first lender let them know our a principal in the transaction and if anything happens you have the right to cure and take over...  

what happens is folks will do this.. an event of default happens.. the first lender since your not the borrower wont talk to you and there only answer is cut me a check for the entire amount of the first.. 

so if you have a first of 400k and you gap fund 100k and the first has a problem you need to have the 400k liquid and ready to step in and take over.. or you have a step in agreement you step in make payments finish the house and sell.

it is quite customary to get 50% of the net profits in a gap funding scenario .  do do this for 10 % or 12% is just some flipper talking a newbie into it who simply does not know what they do not know..

Originally posted by @Tito Burgos :

@Jay Hinrichs thanks for the information, you've giving me some areas I need to research.  Never heard of a participation note.

@Jeff Piscioniere I tried seeking partners for a multifamily purchase, join some REI groups, even posted in the marketplace here but couldn't find anyone in my area.

 I have been doing participation notes for years.. keep in mind BP is mainly a landlord site.. not a lot of sophisticated money lenders on this site... there are a lot of sophisticated landlords though no doubt.. 

I did these were I was funding small builders projects.. and small communities.. its a great arrow to have in your quiver.. but again it was my business.. 

@Tito Burgos How far from home would you need to go to feel both comfortable with that distance and to also purchase something worth investing some or all of your capital into? I’m sure you’ll agree that you live in one of the most expense real estate markets on the planet, but outside the city there will always be those blue collar communities that are home to mainly service professional types. We invested in what we’d define as an old mill old railroad type town of which there are countless in our part of the country. I’m not for putting all of one’s eggs in one basket, but $300K could get you a significant property perhaps size enough where property management made sense. That would alleviate much of your fears I’m sure. Again, with that in mind, partnering with just a couple other like minded individuals with similar investment amounts and you’re talking a significant type of a property that could easily justify sufficient cash flow to take a more hands off/pressure off approach.
@Tito Burgos I would argue if you use the money on a buy and hold, and buy right, you will be about refinance into long term money with a bank and take your Monday to many more deals.. it seems like that’s called BRRR on this site. This will leave you with your original cash and an asset that is producing cash flow every month.

@Tito Burgos I live in NJ in WNY to be more specific. I linked with a group of successful investors, and if you want we can meet up with them in their office and they can explain their business model and how much Interest will they paid you to lend the money.  if you are interested, send me a message and we can set up a meeting with no obligations. 

@Tito Burgos may I suggest to keep looking for multi family properties!! Using majority of the $300k, say $250k toward a down payment could buy you a $1m property. With $50k in reserves. I wouldn’t give up on trying to find Multis! The good deals are out there, just harder to find! Good luck

Wouldn’t advise about applicable law in your area but with a banking background you’ll get what I’m about to tell you.  The $300k can be leveraged at a multiple with co-investors.  For example, you loan $500,000 @ 10%  with 2 points up front (perfectly normal hard money rates) for one year.  You put in $250k and get investors to put in $250k.  You give the investor 8%.  

At the end of one year, the borrower paid total interest of $50,000 + 2 points.  You pay the investor $20,000 and they are happy with 8% and no headaches . You get $40,000 ($30kinterest + 2 points up front). Your return on your $250k? 16%+.I don’t know why you would get involved with gap funding where this risk is incredibly high and the brain damage is greater...this is a fast oversimplification but you get the picture i hope. 

@Eric Jacobs that's exactly my plan.  I was a bit hesitant to take on partners without experience and working out the kinks.  However, in my area, $300k can be used up by one flip deal, this is why I was considering gap funding to spread the risk.  I'm still trying to fully understand the risk of gap funding to see if it's worth the trouble.

@Justin Eaton I've been trying for two years, started in my area, then expanded to Tampa, FL and even looked in some parts of North Carolina.  Had some really close calls in Tampa and got into contract a few times but the deals fell through.  It's a seller market for multi-families and these investment groups that can pay more for properties making it more difficult for the single investor. 

@Tito Burgos . Gap funding is a great return on investment with minimal risk. You are right to spread your investment over multiple deals. I offer gap funding on this level and many deals that you can review if you like... I have more requests than I can handle. The risk is in the contract to be frank as every deal is different and comes with their own individual quirks. I have a submission checklist that deals with the asset, area and re investor... As an underwriter with 20 years of experience I can get pretty strict but if the numbers make sense it's worth it. As it was stated earlier in your thread gap funding only works if its based on joint venture, percentage or participation of some sort. It's a great way to double or even triple your money as buyers are extremely grateful to gap funders. I have a client right now that needs $20,000 for her deal and already has a 1st and ready to Clyde and is willing to pay points and equity since she is getting the property at 55% ARV and has a motivated seller. Reach out anytime and best of luck on your research.
@Tito Burgos   I would pick the Brain of the real lenders on this site. Some times better to jump in with them. As they have proven track record and have vetter the folks they lend. While you learn the process.

@Jay Hinrichs   as usual great advice. I was meeting with our local group of doctor ( lenders) One of the guys is my good friend. So we offered same thought process bit of  profit for them as well as first postion. Excited about your trip to town here in Oct.

Tito I got some folks investors that run multifamily meet up in Nj great group of guys . I dont think they use bigger pockets. More then happy to make that conection.

Sincerely 

Alex Franks

Originally posted by @Jay Hinrichs:

what you talking abut has been coined these days as " gap funding" and many of the fix and flip guru's preach it. 

you can set it up many ways..  however the main point is if for some reason your borrower has a hiccup do you have the funds to step in and cure their first loan.  finish the project etc.

I use a step in agreement when I do these.. I also put the first lender on notice and get a written confirmation if my borrower is in the process of a water landing I can step in and take over the project.  Attorney can help you with this.

This should only be done with top flight operators. 

Also second position gap funding is generally done in a profit share plus rate.. don't get fooled into only taking mortgage rate interest .. as the risk position is far higher. 

@Tirzo Quintero good advice find folks who are successful locally first then branch out. yet alot of successful folks usually right around you. That we seem to over look.

Originally posted by @Tirzo Quintero:

@Tito Burgos I live in NJ in WNY to be more specific. I linked with a group of successful investors, and if you want we can meet up with them in their office and they can explain their business model and how much Interest will they paid you to lend the money.  if you are interested, send me a message and we can set up a meeting with no obligations. 

If you are an accredited investor, there are several real estate lending funds that offer decent returns.  I am not talking about crowdfunding sites, but actual funds that are professionally managed that obtain first lien notes on high-quality real estate.   They often offer monthly interest distributions.  Not for everyone, but a good passive alternative for higher income / higher net worth investors.     

Originally posted by @Eric Jacobs :

Wouldn’t advise about applicable law in your area but with a banking background you’ll get what I’m about to tell you.  The $300k can be leveraged at a multiple with co-investors.  For example, you loan $500,000 @ 10%  with 2 points up front (perfectly normal hard money rates) for one year.  You put in $250k and get investors to put in $250k.  You give the investor 8%.  

At the end of one year, the borrower paid total interest of $50,000 + 2 points.  You pay the investor $20,000 and they are happy with 8% and no headaches . You get $40,000 ($30kinterest + 2 points up front). Your return on your $250k? 16%+.I don’t know why you would get involved with gap funding where this risk is incredibly high and the brain damage is greater...this is a fast oversimplification but you get the picture i hope. 

first position is always best... and fractionalized mortgage interest or DOT interest are legal in many states.. in many states like Oregon for example its not legal to have multiple beneficiaries.. without doing a real estate paper offering ( mini PPM)..

Originally posted by @Tyrone Harris :
@Tito Burgos. Gap funding is a great return on investment with minimal risk. You are right to spread your investment over multiple deals. I offer gap funding on this level and many deals that you can review if you like...

I have more requests than I can handle. The risk is in the contract to be frank as every deal is different and comes with their own individual quirks. I have a submission checklist that deals with the asset, area and re investor... As an underwriter with 20 years of experience I can get pretty strict but if the numbers make sense it's worth it.

As it was stated earlier in your thread gap funding only works if its based on joint venture, percentage or participation of some sort. It's a great way to double or even triple your money as buyers are extremely grateful to gap funders.

I have a client right now that needs $20,000 for her deal and already has a 1st and ready to Clyde and is willing to pay points and equity since she is getting the property at 55% ARV and has a motivated seller.

Reach out anytime and best of luck on your research.

 Tyronne I respectfully disagree with your risk assessment in gap funding deals especially and I mean ESPECIALLY small balance second like that 20k behind a large first.. very easy to get wiped out..  gap funding is by far the most risk in the lending world not minimal. 

@Jay Hinrichs I hear you though I wouldn't do it as fractional. The lender is an LLC and the investors sign something like a participation agreement. This way the Lender controls the process and extraneous issues are less likely to interfere ...