Real Life of a Private Lender

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Real Life of a Private Lender

Wendell De Guzman
Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes

Real Life of a Private Lender - Business Update Week #1

Alright BP Nation, as promised, I am giving you guys a peek into what happens in the week of a private lender. By doing this, my hope is that:

1. You will understand the psychology or what goes in the mind of a private lender (e.g., how they look at risks)
2. You will see what DEALS get funded and why
3. You will see the BORROWER profile that gets funded and why; NO personal info will be shared of course; and finally
4. You will learn how private lenders RAISE CAPITAL (and what you can and cannot do when raising money)

With these goals in mind, here's week #1:

MAKING GOOD LOANS

We have been approached by 2 borrowers regarding 2 deals:

1) A temple worth $250K and loan required is $60K. The borrower promised to pay $1,000/month.
2) A 3-unit property in a good part of Chicago; borrower claims ARV is $145K and total cost of the project is $92K. Borrower can put down 10%.

Here's our decision regarding these 2 loan applications:

1) Temple - NO DEAL. Who really knows the value of a temple? It's tempting but we have to stick with our underwriting guidelines of funding 1-4 units only. Why? Because 1-4 units are familiar to us (I have 11 years experience in buying, selling, leasing & rehabbing houses), and they're easy to sell and finance with a conventional loan in case the borrower fails to sell.
Next step: we will look for a commercial lender that can help this borrower.

2) 3-units - DEAL. The total loan required is $82,800 and if the ARV is correct, our Loan to Value is only 57% (this fits in nicely with our max LTV of 65%)
Next step: since the borrower is a beginner, we require him to prequalify first with our portfolio lender so our exit strategy is assured. Once he is prequalified and his numbers have been verified, we will definitely fund his deal.

Do our decisions make sense? Any comment or feedback specially from experienced lenders will be appreciated.

ORGANIZING FOR SUCCESS

My partner and I talked last Friday and finalized our Underwriting Guidelines (these help us decide whether or not we'll fund a deal), our Loan Application Form and our Loan Application Process. In the latter, we decided on who will do what so there will be no finger-pointing down the road as to who should have done what tasks - who is responsible is clear from the very beginning. We've also finalized our Loan Products and the interest rates and points we'll charge for each loan type.

RAISING CAPITAL

We don't need additional capital right now as we have plenty. However, as a wise investor pointed out: You have to dig the well way before you are thirsty. So, we are always raising capital. How do we do this? Networking with other real estate investors.
In raising money, I don't go in front of a room full of people and ask for money (nor do I pass out flyers saying I need money). That's asking for trouble with the SEC because you might be deemed as selling a security. Instead, I talk to people one-on-one and get to know them first. I find out what their goals and dreams are. I find out what help they need and I genuinely help them. I sometimes find resources for people and I refer them my dream team of real estate attorneys, title companies, investor-friendly real estate agents, contractors, lenders, etc. I don't even talk about my lending business or my real estate business. When I network with people, it's not about me - it's about the person I am talking with.
Then I follow up and build the relationship through constant communication. Coffee meetings, phone calls, etc. I am willing to be patient and invest the time. Months...even years of building relationships are all worth the investment. When you have a pre-existing relationship with someone and that someone invested money with you or lent you money, the SEC does not frown upon that.
I am willing to plant the seed of goodwill (through networking as I described above) and water it (through follow up and building the relationship). I might do this with 100 people and only 1 will invest with me eventually but if I've helped all 100, it's ALL worthwhile. Real estate investing and lending money is fun but what makes it even more fun and worthwhile is if you work with people you trust and like. In the end, real estate investing, lending or any business is about relationships.
So dig a lot of wells NOW and if you do it right, you will not be thirsty of capital :)

Do you have any questions or comments? Write them below.

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Ramon Jenkins
Real Estate Agent · Milwaukee County, WI · Member since 2009 · 3k+ posts · 525 votes
11y

" We got a referral about a company that handles the searching and application for business credit cards with 0% promotional interest rate. I am very interested because we can get between $50K to $100K in extra capital at 0% interest on year 1. "

Keep us posted on this process.

Thank You

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  • Manny Rodriguez
    Real Estate Investor · Florissant, MO · Member since 2014 · 53 posts · 23 votes
    11y
    Originally posted by @Wendell De Guzman:

    Real Life of a Private Lender - Business Update Week #1

    RAISING CAPITAL

    We don't need additional capital right now as we have plenty. However, as a wise investor pointed out: You have to dig the well way before you are thirsty. So, we are always raising capital. How do we do this? Networking with other real estate investors.
    In raising money, I don't go in front of a room full of people and ask for money (nor do I pass out flyers saying I need money). That's asking for trouble with the SEC because you might be deemed as selling a security. Instead, I talk to people one-on-one and get to know them first. I find out what their goals and dreams are. I find out what help they need and I genuinely help them. I sometimes find resources for people and I refer them my dream team of real estate attorneys, title companies, investor-friendly real estate agents, contractors, lenders, etc. I don't even talk about my lending business or my real estate business. When I network with people, it's not about me - it's about the person I am talking with.
    Then I follow up and build the relationship through constant communication. Coffee meetings, phone calls, etc. I am willing to be patient and invest the time. Months...even years of building relationships are all worth the investment. When you have a pre-existing relationship with someone and that someone invested money with you or lent you money, the SEC does not frown upon that.
    I am willing to plant the seed of goodwill (through networking as I described above) and water it (through follow up and building the relationship). I might do this with 100 people and only 1 will invest with me eventually but if I've helped all 100, it's ALL worthwhile. Real estate investing and lending money is fun but what makes it even more fun and worthwhile is if you work with people you trust and like. In the end, real estate investing, lending or any business is about relationships.
    So dig a lot of wells NOW and if you do it right, you will not be thirsty of capital :)

    Do you have any questions or comments? Write them below.

    As a newbie in Real Estate Investing this is some GREAT advice! I'm all about building relationships first and foremost. Since I will be attending some networking meetings soon you have helped me stay away from red flags on how to approach raising capital. 

    Still not sure how I will raise capital in my situation but you have helped me learn some NOT TO's. 

    Thank you!!!!

    Manny 

    2Reply
  • Manny Rodriguez
    Real Estate Investor · Florissant, MO · Member since 2014 · 53 posts · 23 votes
    11y
    Originally posted by @Wendell De Guzman:

    Real Life of a Private Lender - Business Update Week #2

    MAKING GOOD LOANS
    We have been approached by a borrower from Cincinnati, Ohio about this deal:
    Property is worth $250K
    Acquisition: $145K  (this is the loan amount needed)
    The borrower has a buyer lined up for $168K but his buyer needs a bank loan. The borrower needs the $145K at the most for 60 days or while his buyer is getting qualified for financing. The buyer's bank requires the seller to have the deed to the property before they will lend money to the buyer. Hence, the borrower needs to borrow $145K. Here's our decision regarding this loan application:

    YES IT'S A DEAL - Lenders always take risk into account and we want to mitigage the risk as much as possible. This loan is worth doing because the LTV is good ($145K/$250K = 0.58). There's a buyer lined up so we have an exit strategy that is well defined. So, the only risk is if the buyer does not get qualified. Hence, in addition to ordering an appraisal to verify the market value of the property, we'll talk to the underwriter of the bank of the buyer to be sure that he will be able to get financing. If there's a higher than 75% chance that the buyer will get approved, we'll likely fund the loan.

     Do you take the borrower's credit and asset value into consideration? 

    Thank you in advance,

    Manny Rodriguez

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    11y
    Originally posted by @Wendell De Guzman:
    Originally posted by @Scott Graves:

    @Wendell De Guzman I appreciate your posts. I have been considering raising some capital to do some lending on fix and flip projects in Wisconsin. From the limited research I have done, based on lending to non owner occupants, it appears that there is little licensing requirements. I certainly need to research more and talk with some legal professionals, but was wondering what types of licensing requirements, or otherwise, you need for HML in Illinois.

     Scott, we are private lenders not HMLs.

    Clearly disagree Wendell, you're making it very well known you lend, to the point of advertising that you do loan in 3 cities, while explaining your methods, it's under the radar advertising, but solicitations just the same.

    You are a HML to your borrowers, picking up a solicited loan is not a private lender by definition.

    I'm betting unregistered, but, I'm not finding any fault really, just pointing it out for those interested in lending. Being in a lending business will be defined by SEC as well as IRS Code, if you're in the business then you are not a private lender.

    I understand that there is an organization in Cali of HMLs using the term private lender, we've been over that, how one may market themselves is one thing, how regulators will view you may be very different.

    BTW, there are many attorneys out there who don't know the difference, you really need to see an attorney who deals and specializes in finance law, such as those who represent banks and do compliance work, just any attorney usually won't cut it. We had an attorney here who use to lend, after being informed he curbed his practices.

    Additionally, getting other people's money is a brokerage operation, even if you form partnerships, as your business becomes lending. State laws vary, look to the SEC and IRS as well as federal law definitions as to who a "lender" is.

    Not picking on Wendell, but others have shown an interest in lending.

    In the life of a lender, I made church loans, they are much different as to assessing the ability to pay, often it boils down to personal guarantees beyond the non-profit entity. I'd say Wendell made a wise choice in not getting involved, there are jokes about having ministers as borrowers, the PR can put a lender in a bad light as well. :)   

    0Reply
  • Wendell De Guzman
    OP
    Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    11y

    Private lender is principal in the transaction, meaning, he is the lender on the Promissory Note.

    Hard money lender is usually a broker.

    1Reply
  • Wendell De Guzman
    OP
    Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    11y
    Originally posted by @Jay Hinrichs:

    Keep us posted.. and careful of the refi exits.. that was the single most damaging thing to the HML in the day...

     Thanks for pointing it out Jay. If I have a mortgage broker working with me to prequalify the borrower (if he can refi in 6 months), what other things should I be consider? 

    0Reply
  • Wendell De Guzman
    OP
    Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    11y
    Originally posted by @Manny Rodriguez:

    Thank you in advance,

    Manny Rodriguez

    Manny, it depends. Private lenders and HMLs usually consider the ASSET VALUE first. Actually, to be more precise, we look at the LOAN TO VALUE first. Example: asset value (after repair) is $150K. The most money I will lend is $100K (65% LTV).

    The credit matters more if the borrower has no experience. His credit has to be good enough (plus debt to income) to be sure he can also refinance out of the loan (out of hard money and into conventional loan) in case he does not sell the property in 6-9 months. By doing so, I am assured of an exit.

    1Reply
  • Wendell De Guzman
    OP
    Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    11y
    Originally posted by @Bill Gulley:

    Clearly disagree Wendell, you're making it very well known you lend, to the point of advertising that you do loan in 3 cities, while explaining your methods, it's under the radar advertising, but solicitations just the same.

    You are a HML to your borrowers, picking up a solicited loan is not a private lender by definition.

    I'm betting unregistered, but, I'm not finding any fault really, just pointing it out for those interested in lending. Being in a lending business will be defined by SEC as well as IRS Code, if you're in the business then you are not a private lender.

    I understand that there is an organization in Cali of HMLs using the term private lender, we've been over that, how one may market themselves is one thing, how regulators will view you may be very different.

    BTW, there are many attorneys out there who don't know the difference, you really need to see an attorney who deals and specializes in finance law, such as those who represent banks and do compliance work, just any attorney usually won't cut it. We had an attorney here who use to lend, after being informed he curbed his practices.

    Additionally, getting other people's money is a brokerage operation, even if you form partnerships, as your business becomes lending. State laws vary, look to the SEC and IRS as well as federal law definitions as to who a "lender" is.

    Not picking on Wendell, but others have shown an interest in lending.

    In the life of a lender, I made church loans, they are much different as to assessing the ability to pay, often it boils down to personal guarantees beyond the non-profit entity. I'd say Wendell made a wise choice in not getting involved, there are jokes about having ministers as borrowers, the PR can put a lender in a bad light as well. :)   

     Thanks Bill for sharing that.

    To me, the private lender is the principal in the transaction - he is the lender on the Promissory Note. The hard money lender as you correctly pointed out is a hard money BROKER. He is not the lender on the Promissory Note. Just like a real estate broker, he facilitates the transaction. He is not using his own money to lend out.

    Yes, we do have an attorney who has 30 years experience and have worked with both hard money brokers and actual lenders. He charges an arm and a leg but good advice is rarely cheap (and usually not free). I agree with you on the need to work with an attorney (who specializes in it) in order to do it right.

    Lastly, some of the money I lent out is not "hard money rates" - it's only 8%. Hard money brokers don't lend out money that cheaply (usually).

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    11y

    Sorry, I wasn't speaking of brokers, anyone, personally in trust or any corporate name that solicits loans and funds or facilitates such a loan is not a "private" lender. The spin is saying one is a principal, as a private person, not if they advertise for loans. Private lenders have a prior personal or business relationship, partners, family, known from some social aspect. :) 

    0Reply
  • Wendell De Guzman
    OP
    Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    11y

    Real Life of a Private Lender - Business Update Week #4

    Alright BP Nation, as promised, I am giving you guys a peek into what happens in the week of a private lender. By doing this, my hope is that:
    1. You will understand the psychology or what goes in the mind of a private lender (e.g., how they look at risks)
    2. You will see what DEALS get funded and why
    3. You will see the BORROWER profile that gets funded and why; NO personal info will be shared of course; and finally
    4. You will learn how private lenders RAISE CAPITAL (and what you can and cannot do when raising money)

    With these goals in mind, here's week #4: (to be honest, due to the holidays, I have nothing much to update)

    MAKING GOOD LOANS
    No Loan applications received this week.

    ORGANIZING FOR SUCCESS
    I took advantage of this lull in activity in designing how our website will look like. I like the website of Brian Burke so I am using it as a template (but obviously I am not copying it). Below is the home page mock up design. What do you guys think of the website? Do you like the color scheme (blue indicates credibility)? Any inputs or comments will be appreciated.

    RAISING CAPITAL
    Again, not much activity here. I received a message from a BP member (@Matt Taylor), who is also a private lender and he posted a very useful forum post. This is a COOL way for you to borrow money from credit cards at little to no cash advance fee and use that as your "skin in the game" when borrowing money from a private lender or hard money lender. (I don't require as much downpayment or skin in the game though but still...I will feel more comfortable lending you money if you have cash invested in the deal)

    Here's his forum post:

    Folks,

    I am a private lender, mainly for residential flips, and it kills me to turn away the vast majority of my applicants because they don't have the upfront cash to qualify for my loans. I require them to have substantial skin in the game because I don't want to assume all the risk in THEIR project.

    I require a 35% (that's 35% of the purchase price) down payment and I also require that the borrower have enough cash reserves to get them through the project. I give 3 or 4 construction draws for 100% of the estimated rehab cost, but I give them in arrears of each stage of the construction, so the borrower must also have 25 - 33% of the cost of the rehab in reserves, as well as reserves to cover carrying costs.

    But there is an easy solution to the upfront cash problem if you have a good credit rating. I know that your mama told you never to finance anything with credit cards, and to never use credit card cash advances because they kill you on the cash advance fee and the super high interest rate. But I personally have 5 credit cards ($90K in available cash that I treat as a line of credit), all of which have NO CASH ADVANCE FEE! The best one has a cash advance interest rate of only 8% and the worst 10%. That's better than most private lenders offer (including me)! My credit limits on these cards range from $10K to $25K.

    4 of these 5 credit cards come from credit unions. There must be many, many more of these no-cash-advance-fee credit cards available, because I found 5 or 6 and I haven't even looked that hard. If you can find a list of credit unions online, you could go to the website of each and look up their credit card terms.

    There is one no-cash-advance-fee credit card that I found that is not from a credit union. It's called the Barclay Card Ring, interest rate for cash advances at 8%. Apply here: https://www.barclaycardus.com/apply/Landing.action...

    There are different requirements for becoming a member of each credit union, but they usually leave you an easy way to qualify to join. So for instance, the Pentagon Federal Credit Union was set up for employees of the Pentagon, but if you join the "Voices for Troops" organization (it'll cost you $15 the first year and you don't have to renew after that) they'll let you join PFCU and get their awesome Pentagon Promise Visa card: www.penfed.org/Penfed-Promise/

    You do have to be careful when planning out your cash flow, though. Most of these cards require monthly payments of something like 2 or 2.5% of the outstanding balance.

    On that topic, you really should plan out your cash flow for every month of your flip project. For example, let's say that you're doing a flip in which the rehab is planned to take 2-3 months, then it will take 2 months to sell it and another month to close, so that you're holding the property for 6 months. You should have your cash flow all planned out month by month so that you make sure to have enough reserves. And don't forget the carrying costs - insurance, loan payments, property taxes, water, sewer, electricity, etc. Then make sure to add in a buffer as well because you will undoubtedly exceed your rehab budget, unless you've got years of experience.

    3Reply
  • Wendell De Guzman
    OP
    Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    11y
    Originally posted by @Jerry Padilla:

    Great posts! If you don't mind me asking who do you use as a portfolio lender and are they national as I see you focus on three different cities? What do they lend up to for LTV? Thank you Wendall! I sometimes need to refer clients to a portfolio lender and I currently only know of one national portfolio lender. If I am unable to assist my clients, I like to try and refer them to someone who can assist them.

     Jerry, I will send you a PM. 

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Wendell De Guzman 

      I believe in Florida you need an NMLS license to lend on any 1 to 4 unit regardless of owner occ or not.. Same with state of Oregon... In IL I know commercial purpose loans on 1 to 4 an NMLS license is not required.  Does not matter if its your own money or someone else's. Same with State of WA.

    So the difference like Here in Oregon were I am a NMLS licensed mortgage banker ( retired and in active currently) is we lend our own money... My HML company in the day had about 40 million out and it was all our own money no investors.. So you can't make a blanket statement that HML are only brokering for private folks.. Yes that is the vast majority but not the bigger players. and or the bigger players will have a combination of brokered funds and their own funds.

    Bill brings up a lot of other issues that one should look at.. Those that he brings up though are not germaine if you have the NMLS licnese or like he states in CA. you can lend money thorugh your RE brokers license and you can put multiple beneficiaries on single loans all without selling a security, again only CA. In Oregon that is prohibited.. But I checked in IL and you can do multi bene there as well.

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  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    11y

    @Wendell De Guzman - ARV of under $150k in a "good" part of Chicago. Seems too low for a good part of Chicago. Where in Chicago are we?

    0Reply
  • Sam C.
    Property Manager · Chicago, IL · Member since 2014 · 72 posts · 22 votes
    11y
    Awesome points here. Thank you, Wendell.
    0Reply
  • Wendell De Guzman
    OP
    Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    11y

    Real Life of a Private Lender - Business Update Week #5

    Alright BP Nation, as promised, I am giving you guys a peek into what happens in the week of a private lender. By doing this, my hope is that:
    1. You will understand the psychology or what goes in the mind of a private lender (e.g., how they look at risks)
    2. You will see what DEALS get funded and why
    3. You will see the BORROWER profile that gets funded and why; NO personal info will be shared of course; and finally
    4. You will learn how private lenders RAISE CAPITAL (and what you can and cannot do when raising money)

    With these goals in mind, here's week #5: (to be honest, due to the holidays, I have nothing much to update)

    MAKING GOOD LOANS
    I received a loan request for $70K from a borrower in Louisiana. However, I only lend money in 3 cities (see Business Update Week #4) so I said NO. My reasoning is simple: I need to KNOW THE MARKET in the cities where I am lending money in. As a private lender, I always think of WORST CASE SCENARIOS.

    For example, if the buyer DEFAULTS on the loan, will I be able to sell the property and get my money back plus interests? How will I know that if I don't know or I am not familiar with the market?

    ORGANIZING FOR SUCCESS
    Thanks to Jay Hinrichs, I found out I need to get a mortgage license to lend in Ft Myers FL. BP is powered by good people like Jay who are willing to share their experiences and know-how freely. Thanks @Jay Hinrichs  for pointing this out.

    Talking about evaluating risks and thinking of worst case scenarios, one tool I use is the RISK-MITIGATION-CONTINGENCY plans. Here's how it works:

    1) Think of a risk in lending money to rehabbers. One of the main risks is DEFAULT (meaning, the borrower cannot pay you back).

    2) Think of ways to reduce or mitigate that risk. This is your MITIGATION PLAN.
    For the risk of buyer-default, several ways to mitigate that risk are:
    a) Only lend money to experienced rehabbers. By doing so, the risk of default is lower because the rehabber knows how to exit profitably from the property.
    b) Only lend money at 65% LTV (loan to value) and have the loan as a first mortgage lien on the property. By doing this, in case of buyer default, we will still get our money back when we foreclose and resell the property.
    c) Only lend money if rehabber-borrower has at least 10% skin in the game (downpayment) + points upfront or 6-months prepaid interests. By doing this, if the borrower has skin in the game or his own money to lose if he defaults, the chance of him defaulting is lower. Think of 2007 when borrowers can get no-doc loans with no money down - since they have no skin in the game, they easily defaulted on their home mortgages.
    d) if the borrower is a newbie, lend to him if he has more skin in the game (20-30% down) and he is prequalified for a mortgage in 6 months (meaning he has good credit and good debt to income ratio). By doing this, if he cannot sell the property, he always refinance or get a conventional loan so I can get my money back
    e) Only lend money in areas that have low days on the market (90 days or less) - meaning the properties sell quickly in that market. By doing so, my exit is quicker and the chance of buyer default is lower.

    3) You don't stop at minimizing risks, you have to prepare and decide what you're going to do if the risk happens anyway. For example, if the buyer defaults, below is the CONTINGENCY plan:
    a) Foreclose on the property and cash out. At 65% LTV, there's ample of room in case of default. Properties at auction sell for 75-80% of its market value (or better) so I will get my 65% loan plus some profit.
    b) Or Do a deed in lieu to minimize foreclosure costs and then sell the property to get my money back.
    c) get a judgment against the borrower if he is uncooperative to garnish his wages or put a lien on his other assets if possible (this is the last resort). This is why lenders want to know how much you make (income - wages) and what you own (assets) when you submit a loan application.

    By having a RISK-MITIGATION-CONTINGENCY plans, we minimize the risk and maximize the chance of getting our money back plus our profits.

    RAISING CAPITAL
    Not much activity here due to the holidays.

    Do you have any questions or comments? Write them below.

    0Reply
  • William Johnson
    Real Estate Broker · Laval, Québec · Member since 2014 · 183 posts · 59 votes
    11y

    @Wendell De Guzman  What would you do if  somebody came to you with a great deal that met all your criteria but they didn't have a much experience as you would want? 

    0Reply
  • Nick Versetto
    Investor · Frankfort, IL · Member since 2015 · 206 posts · 55 votes
    11y

    I would've stayed away from the temple regardless.  

    Would you want to be the bank that foreclosed on a church?

    0Reply
  • Wendell De Guzman
    OP
    Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    11y
    Originally posted by @William Johnson:

    @Wendell De Guzman  What would you do if  somebody came to you with a great deal that met all your criteria but they didn't have a much experience as you would want? 

    William, I will do a JV with that investor instead of me acting as a lender...I will be a partner. The deed will be in my company's name and I will have a say on how to rehab and how to market the property - meaning I will have CONTROL. If the deal and location makes sense, I will still do the deal even with a newbie. Also, if it's here in Chicago, I will have my GC and my real estate agent rehab and market the property respectively - again, I want to be in control when dealing with a newbie. Makes sense?

    0Reply
  • Wendell De Guzman
    OP
    Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    11y

    Real Life of a Private Lender - Business Update Week #6

    Alright BP Nation, as promised, I am giving you guys a peek into what happens in the week of a private lender. By doing this, my hope is that:
    1. You will understand the psychology or what goes in the mind of a private lender (e.g., how they look at risks)
    2. You will see what DEALS get funded and why
    3. You will see the BORROWER profile that gets funded and why; NO personal info will be shared of course; and finally
    4. You will learn how private lenders RAISE CAPITAL (and what you can and cannot do when raising money)

    With these goals in mind, here's week #6:

    MAKING GOOD LOANS
    We receive a request to do a Joint Venture with a buyer of mine for one of my properties. Instead of lending him money, I will do a JV with him. What's the difference and why did I decide to JV instead of being a lender? Before I answer that, let me describe the deal:

    ARV - $260,000
    Repairs - $40,000
    Acquisition - $150,000

    Here's the Rehab Profit Analysis:

    As you can see from the spreadsheet above, this buyer is already getting a hard money loan on the property. All he needed now is the downpayment plus money for holding or carrying costs (property taxes, insurance, utilities, hard money monthly payment). Even after paying for all those, there's enough profit in the deal. I offered to provide him GAP funding (funding all the cash he needed) and in exchange, I get 50% of the profit. If I put myself in 2nd mortgage/lien position, I will have very little control and besides, the hard money lender in first lien position will not allow having a second anyway. So I've decided JV is the right approach for this.

    ORGANIZING FOR SUCCESS
    I met Jay Hinrichs in person last Saturday when he was in Chicago. He is very down-to-earth guy despite making a lot of money as a hard money lender himself over the years. He is decades ahead of me in private lending and he taught me a lot in that 1 hour facce-to-face meeting we had. He related to me a formula for being a successful lender. Here's the formula: I need a business that generates massive amounts of cash which I can then use to lend (on real estate), while leveraging other people's money.

    By doing it this way, 2 things happen:
    1. You get to lend more money and therefore make more money
    2. You can tell your investors you have your own money together with theirs - this makes them feel comfortable that you are going to be very careful lending their money because you will also lose money

    I captured the formula in the diagram below:

    RAISING CAPITAL
    One of my acquisition guys in my real estate business used to be a DJ. One guy he used to work for sold his business and now has at least $1M in the bank that he is already lending out. Next week we will talk to him and explore the possibility of us helping him lend his money out to real estate investors. He is also looking for investment properties for his own portfolio so we can offer our services also of finding good deals or doing JVs with him. How did my acquisition guy found this potential investor? By calling everyone in his cellphone. He was surprised to find out his former boss now has at least $1M in the bank. He would never have found this out had he not called people he already knows.

    You want to raise capital? Start with the people you know. They might know other people who has money or who maybe their situation has changed and they now have money. You'll never know until you call them.

    Do you have any questions or comments? Write them below.

    1Reply
  • William Johnson
    Real Estate Broker · Laval, Québec · Member since 2014 · 183 posts · 59 votes
    11y
    Originally posted by @Wendell De Guzman:
    Originally posted by @William Johnson:

    Account Closed  What would you do if  somebody came to you with a great deal that met all your criteria but they didn't have a much experience as you would want? 

    William, I will do a JV with that investor instead of me acting as a lender...I will be a partner. The deed will be in my company's name and I will have a say on how to rehab and how to market the property - meaning I will have CONTROL. If the deal and location makes sense, I will still do the deal even with a newbie. Also, if it's here in Chicago, I will have my GC and my real estate agent rehab and market the property respectively - again, I want to be in control when dealing with a newbie. Makes sense?

     @Wendell De Guzman: Thank you! That makes absolute sense. As a followup question, if the person didn't have very much skin in the game how would you structure the JV in terms of profit sharing?

    0Reply
  • Wendell De Guzman
    OP
    Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    11y
    Originally posted by @William Johnson:
    Originally posted by @Wendell De Guzman:

     @Wendell De Guzman: Thank you! That makes absolute sense. As a followup question, if the person didn't have very much skin in the game how would you structure the JV in terms of profit sharing?

    If I like and trust the guy I am doing a JV with, if he has less skin in the game, then I will have more ownership/ bigger share of the property or JV. If I don't trust or have not done any business yet with a potential JV partner and he does not much skin in the game, then I will not JV with him.

    0Reply
  • Wendell De Guzman
    OP
    Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    11y

    Real Life of a Private Lender - Business Update Week #7

    Alright BP Nation, as promised, I am giving you guys a peek into what happens in the week of a private lender. By doing this, my hope is that:
    1. You will understand the psychology or what goes in the mind of a private lender (e.g., how they look at risks)
    2. You will see what DEALS get funded and why
    3. You will see the BORROWER profile that gets funded and why; NO personal info will be shared of course; and finally
    4. You will learn how private lenders RAISE CAPITAL (and what you can and cannot do when raising money)

    With these goals in mind, here's week #7:

    MAKING GOOD LOANS
    I received a loan request for the following:

    ARV - $250K, Repairs - $50K, purchase price - $120K.

    I put them into my rehab profit analysis. See below. I don't know all the details yet but with those numbers, I like the deal. Why do I like the deal? Because even with the cost of money, the rehabber-borrower will make over $30K and almost double his money. Of course, I need to verify all the numbers and I have to like the area before I pull the trigger.

    ORGANIZING FOR SUCCESS
    This Wednesday I am meeting 2 people:
    1. A potential investor - this was the guy who sold a business and has several millions he can invest; and
    2. A broker who knows some high networth individuals and he could work in investor-relations so he can help us raise money for our businesses (real estate and lending).

    I will let you know how these meetings go - next week.

    RAISING CAPITAL
    My business partner who will put up $50K for my JV partner on a property I talked about last week - his money got delayed since it's coming out of his IRA custodian - Equity Trust. So to prevent the closing last Friday in collapsing, I had to make some phone calls last Wednesday to raise $32K (that's the money needed upfront; the rest of the money will be needed for carrying costs) in 2 days. Fortunately, we got an investor from BP, based in California to lend my JV partner that amount, in exchange for $33K one week later ($1K interest in 1 week of $32K is not a bad loan to make).

    Do you have any questions or comments? Write them below.

    0Reply
  • Michael Noto
    Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
    11y

    This is an awesome thread.  I am learning a ton.

    1Reply
  • Wendell De Guzman
    OP
    Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    11y
    Originally posted by @Michael Noto:

    This is an awesome thread.  I am learning a ton.

     Awesome you find it awesome :-)

    Continue learning and apply what you learn and make money from doing so.

    Thanks!

    0Reply
  • Wendell De Guzman
    OP
    Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    11y

    Real Life of a Private Lender - Business Update Week #8

    Alright BP Nation, as promised, I am giving you guys a peek into what happens in the week of a private lender. By doing this, my hope is that:
    1. You will understand the psychology or what goes in the mind of a private lender (e.g., how they look at risks)
    2. You will see what DEALS get funded and why
    3. You will see the BORROWER profile that gets funded and why; NO personal info will be shared of course; and finally
    4. You will learn how private lenders RAISE CAPITAL (and what you can and cannot do when raising money)

    With these goals in mind, here's week #8:

    MAKING GOOD LOANS
    I received a loan request from an experienced rehabber. One of the concerns that my business partner has is the speed with which our money gets returned to us. This rehabber wants a 12-month period to pay back the loan and we said NO. We want the loan to get paid in 6 months and no later than 9 months.

    Today, I received a text message from him saying that he found a buyer that will buy rehabbed properties from him and therefore, he can pay back the loan in 4 months. I still don't feel comfortable lending the money - so I told him I need proof of funds from his buyer. I need to see they the cash to close. He claims this buyer is a hedge fund. I need proof of that.

    As a rehab lender - the exit strategy has to be as close to certain as you can get it. This means I need to be able to exit from the property and get my money back as fast and as surely as possible. Having a buyer lined up is good. Knowing that your buyer can really close - that's even better.

    ORGANIZING FOR SUCCESS
    OK our website is up finally. Check out HHSCapital.com.

    It's functional, not fancy. Any comments on the website - just PM me, OK? Thanks!

    RAISING CAPITAL
    I met a guy this week who actually has $10 Million he can invest. He sold his business recently and he is cash rich. He is very down to earth. You'll never know he is "loaded." He does not have a fancy watch, nor wear fancy clothes. Based on my experience, the people with money looks like they don't have it and the people who are broke or deep in debt, pretend they are "loaded".

    With regard to this investor (Jeff), he already lends his money to rehabbers at 14% interest. Because the interest rate is already high, the only thing we can do is just broker loans for him charging points in the process as our fee. It's good to know that we have access to a lot of capital. We'll probably broker a small deal for him (say $100K loan) with an experienced rehabber for a good area (with low Days On the Market). By doing this, he will like it that his money is returned quickly with good interest and he will likely invest more.

    Do you have any questions or comments? Write them below.

    0Reply
  • Adam Drummond
    Investor · Greenville, SC · Member since 2013 · 252 posts · 92 votes
    11y

    @Wendell De Guzman 

    enjoy reading your posts, and learning as well.  I am out of s. Carolina as you might have noticed.  what is a good rate for 50k give or take for a private loan.  I have flipped several properties in the past with my own money and convent financing, but am looking at considering private funds.  thanks for your insight.

    Adam

    0Reply
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