All Forum Posts by: Alex Breshears

Hi Curtis!

My take is going to be a bit different from others that have commented. First, there are a lot more ways to be involved in real estate without owning the property. For example, you could do STR arbitrage where you rent a property with the understanding you will be running it as a short term rental. That could potentially be very little out of pocket for you (basically security deposit, and first/last months rent) and then you could put the furnishings etc on a credit card or line of credit with a furniture store etc. Is that potentially the most prudent thing to do, maybe not, but it is an example of thinking out of the box. You can also potentially look at trying to round up some subject-to deals where an owner just wants to walk away from the home and the problems associated with it and you take over the payments. You could become a loan broker and learn the lending side of the house with little financial output as well. You could broker other people's capital for private loans. Like I said, the options are endless. It is a matter of not keeping that limiting belief that investing in real estate is solely about ownership, it is about the control of the cash flow! Learn that lesson early and repeat it often. Look for situations you can control the cash flow. Maybe you start out as a real estate agent, work towards managing properties as long term rentals. That will give you a TON of insight into the rental market in your area, in addition to the best practices and laws, and then possibly open your own management company.

Now as far as the lending piece goes, I will agree with a lot of the other commenters here. Finding an institutional lender to fund 100% of everything is not likely going to happen. Even if they did, they will also likely employ a refund draw model, so you would need to pay for at least some portion of the renovations first and then submit documentation and proof those renovations were completed and the contractor has been fully paid. You would need some measure of capital to get that process going. In addition, let's ignore the fact about purchasing the property and the capital required, but what happens when you own it? There are going to be holding costs involved (the payment on the loan you are seeking). And that's just for starters! You will need money for closing costs and insurance for the property. So even if the lender is providing 100% of purchase price plus rehab, AND giving you money upfront for the renovations, how are you paying the monthly interest payment?  I'm just sharing how a lender would view this situation.  Assess what your strengths are, what skills do you have, where do you want to go, and then start looking for people to help you get there. For example if you know you are great at hustling and finding a deal, then team up with someone who has capital or credit.

Hi Eric!

First there are a few considerations you need to acknowledge BEFORE you start diving into take other people's capital for lending activities. First, if you have been lending "informally" in the past, I would say get real formal real quick. Once you start accepting capital that isn't your own, you now have a fiduciary responsibility to uphold. Informal goes right out the window. You will also need a good idea of WHAT, WHERE, and WHO you would want to lend to, and HOW you want those deals structured. Are you going to invest in your local market where you live? Do you know the lending laws in that state? What about the foreclosure process? Do you have any key vendors in place that will help with increased deal flow? (think attorney to draw up docs, attorney to handle foreclosure/default situations, vendors to establish a value or do background checks on potential borrowers, a system to securely transmit sensitive information from borrower to lender, the appropriate disclosures in place, an application, etc etc). What market advantage do you have in your area for lending? Are you faster? Go to higher LTV? Lower fees and points? Do atypical construction like container homes for example. These are all things you need to have in place BEFORE you think about scaling up and taking on investor capital.

Now- the other part of your question about the fund model versus assignment process.  I would only venture into the fund realm after you have been doing this for awhile or have someone you can partner up with that has been lending for awhile and has a following. The process for a Reg D fund will likely cost about $20k to set up with legal fees for the documents, investor portal set up, if you are going to have a fund admin company that even more than the $20k start up.  There will also be ongoing monthly fees associated with the fund, so if you are going to go that route, be well capitalized to get it off the ground, so don't count on the income from the asset management fee to actually be income for awhile.  There are a ton of considerations for this option that are beyond the scope of a simple online post, but I will say tread lightly and really think about this option.  The fiduciary responsibility it HUGE here.

The assignment agreement can work, especially when you are newer to lending and won't have a ton of deal flow. There are a variety of ways to do this, and if your state allows it you may even be able to fund the loan and then sell the loan to another investor as well.  

Another consideration in all of this is not only the capital involved, but the time involved. Scaling up is not always the answer. More of something doesn't mean it is better. The thing I enjoy about private lending for me is that it is a business in a backpack. I can go anywhere in the world and work on this stuff with minimal input from me and it keeps going. I wasn't trying to work myself into another W2 job. As a military spouse I needed geographical and time freedom, so if I can make the passive income number I want doing what I am doing, then why keep going and take away more time from my family and my hobbies? Part of your initial consideration needs to be what do you want your lifestyle to look like? What amount of money are you shooting for monthly? Why is it that number? 

Depending on the state, there may actually be some regulations around the use of the cash out funds, which is why the lender is iffy about doing this type of loan. If the settlement was for a personal reason, not related to the business/LLC the property is in, the lender may have a problem showing that this was a business purpose loan, which is where a lot of non-QM lenders want to be due to lack of regulation compared to owner occupied homes. Some states do not allow cash out refinances to go towards personal debt (or up to a certain percentage can only go towards personal debt), and still be considered a "business purpose loan". The best shot might be talking with an attorney familiar with lending in your state and see if there is potentially a limitation on this due to regulations, and then once you know that you can resume looking for a lender that will allow cash out refi's to pay off personal debts.

I see this came up about 10 days ago. This sounds like a total scam to me. Do not send any lender ever any money upfront. Also if they are approving you for $150k at 5%, why are they wanting a property that is $800k?  

With the way rates are right now, 5% is just not a realistic rate for anything legitimate that will be an investment property.  

HI Logan! I actually have a book out with BiggerPockets about this very topic. It is in pre-order right now but will be availably July 28th.

Now to answer some basic questions you had. You can structure this a few different ways. If the people who want to loan the capital are comfortable doing this they could form an LLC together, everyone contributes the capital they want, and then you all agree on how the payments for that loan are divided up. Usually it is done by equity share, so if one person put in 50% of the capital needed, then they get 50% of the interest only payment. The caveat to this is that all the investors need to be "active" in the investment, so they have a say in what gets funded, what amounts, etc. They need to have some participation - even if it's just a member vote.

Another option, which may not be legal in every state because the may view it as a security is called fractionalized notes.  So you would have multiple people on the same note, again by amount contributed usually. This would be Person A has $50,000 in the loan, Person B has $35,000 in the loan and person C has $15,000 in the loan.  It is best to set these types of loans up with a loan servicer who can then send the portion of the payment due to each lender separately. Some states do not allow you to do fractionalized notes as a regular person, you would need to be a broker/dealer because they consider them a security, so ask an attorney familiar with lending in your state what those laws may be.

Lastly, if you have one person who could fund the majority you could have them in the 1st lien position, and then another person comes in with a second lien position. As long as the 2nd lien holder understands the risks associated with a second lien, then you could have multiple lenders that way as well.  There are pros and cons to each of these options, so it really depends on the amount you are looking for, how much each lender has to offer, and what their risk tolerances are and the nature of the relationship between those people.

I would advise AGAINST using friends and family money for the downpayment, especially on something you are buying that may not have a lot of equity in the deal. If the friends and family are coming in as a 2nd lien holder, and you are buying the place pretty much as the current value, if the market bobbles even a little, their lien is underwater, and they now have debt on a property that isn't worth as much as the liens combined. Anything can cause this, broader economic forces, damage to the property, deferred maintenance, tenants trash it and it ends up needed some renovation work not covered by insurance etc. If you explain the risks to them about being at the very bottom of the capital stack (meaning they are last to get paid if something goes wrong) and they still want to do it, just make sure you are okay either losing the relationship with that person if you can't get them all their money back, or you have reserves somewhere to make them whole to salvage the relationship.   

Also - if you are using any sort of hard money loan - I would strongly advise AGAINST trying to do a second lien behind a lender like that. If anything goes wrong with the first loan and it defaults (and you can default for a variety of reasons, not just lack of payment) - this lender will have things written into their notes such as default interest, prepayment penalties, legal fees, and all of those will eat up any equity buffer, which means the 2nd lien gets wiped out.  Also - many do not allow 2nd liens, so making sure whatever lender you choose to work with is aware and ok there is going to be a 2nd lien is paramount as well. 

Hi Travis!

This is a great question and really involves what your long term goals are. For example, HELOC's are usually calculated as simple interest, versus amortized interest, which is what will happen at the 10 year point. The reason I bring this up is because you left out some crucial details about the "big picture" that would influence my answer.

Let me give you a scenario:  You are looking to create some passive income without a lot of time commitments.  There are a ton of ways that can be done. But say you want to own residential rental units to get that done. Here is where the fork in the road happens.  If you want to have just a few properties paid off, thus really increasing your cash flow, then I would say start paying down those amortized loans first. Look at your statement sometime and you will see exactly how much of that payment is going towards the principal balance. Depending on what the rates are and the goals you have in mind, I would direct it at the loan that either has the lowest amount (so fastest to pay off) or if there is a large discrepancy in rate, pay down the higher rate one.  Then once you have one paid off you start working on the next one.  This would allow you to have a few doors completely free and clear of leverage and really make some serious cash flow.  Remember more houses is not always the answer. That's more overhead, more needed in reserves, more tenants to deal with, more maintenance needed. Depending on the type of deals you buy, having 3 paid off could be more cashflow each month than 15 with mortgages.

But if you are at a point where you are investing largely for appreciation, it makes sense to take on leverage to get more properties so you can ride that appreciation wave. Leverage responsibly though. Do not set up a house of cards, where you continually borrower from one to get the next using HELOC's for example. That sets up a situation where even one or two months of missed payments by renters really puts the whole portfolio in jeopardy because you are "robbing Peter to pay Paul" type of situation. I fully get doing it on your primary residence when you are starting out, but after that point the most I personally would do is a cash out refi (as long as it kept the property with a decent cash flow) to use for the next one.

I hope that helps!

Hi Conor!

As a military spouse, I have moved 19 times in 21 years, so I feel your struggle in a very real way.  Growing your professional network in the beginning is going to be a lot of legwork. Going to networking events, maybe through your local chamber of commerce or even just professional meetups where your ideal client might be is a great start.  Go in with offering value. Don't look at everyone with a bullseye for another transaction.  Offer insight from your side of the table, maybe things they haven't thought of yet, be that information source for them. As they come up with more questions, or they also run into someone who asked them about the service, they can reach back into their memory and think "Hey I talked to Conor about this two weeks ago". Read up on being a servant leader.  People want to work with other people they know, like and trust. So if you are going to say you will do something, then actually follow through and do it. If you say you will get them a quote by the end of the day, then make that a priority.

As far as online presence, you can start publishing to your member blog here on BiggerPockets, develop a following on social media by updating a business page regularly, attend some virtual networking events on LinkedIn, or even look on Meetup.com for any local meet ups of interest.  I've met people who were interested in private lending at a Jeep rally. lol. Turns out those are expensive buggers to keep going, so the group as a whole tends to have some money, and I went as a guest to one of my friends with a jeep. We got stuck, the other couple pulled us out, and we got to talking.  He now invests as a private lender like I do! So realistically it doesn't even have to be a professional networking space. Go have fun, embrace the things that interest you and you will meet people organically that way as well. If it feels like a chore, it may be best to hire a social media manager, or an assistant that can field appointments for you to chat with people over Zoom or look for groups of interest to network.  

Lastly, in all these situations, consistency is key. You won't have people flock to you because of one post on one Facebook business page. Showing up consistently to in person events, posting regularly, publishing informational content will definitely reap rewards over time. Just do a little bit every single day, people are noticing whether they contact you or not. Eventually they will see your name enough times that they will reach out when they have a question about it.

And marketing is not just shotgun and see what sticks. Do some analysis on what you bring to the table that others in your field or area won't.  Do you have a fast turn around time, high touch customer service, a different way of structuring things, different connections you can put them into contact with.  Then market the heck out of that. You don't want to be the same as everyone else, establish what you stand for, and then get on your soap box and tell the world! 

I would caveat this statement with you need to have a purpose for joining a meet up or mastermind. While I find them both beneficial, you really need to be in the right room for the right conversations.  I firmly believe everyone can teach you something, but also realize that there are various stages of life or your business.  If you have an established business, joining a new entrepreneurs group might not be as impactful (unless your business has something to do with these new business owners).  Personally, I don't look for masterminds with a super narrow focus usually, as I get ideas from other industries outside of real estate. I would prefer to network with people in the narrow focus, but be around a group that is a bit broader, such as business owners, maybe women investors, mindset coaches etc.  For me the biggest growth happens on myself, so mindset and having a solid foundation is paramount before you start learning all the technical ins and outs of whatever you are going after. You have to believe to achieve!

Hi Gabriel! I agree with what others have commented here, doing a second home loan would require you to actually use it as a second home (so spending at least 14 days a year there) and likely only allowing a SFH. As someone who owns and manages STR's, and you said you have some experience as well, I will say I rarely see situations where you have an LTR in the same building as a STR go well. Even if you have a great long term tenant, they may not appreciate the constant coming and going of short term guests, or even the noise they may cause. Or vice versa. In my experience mixing the two is only going to cause problems, which then show up on reviews for the property, and now you have someone who isn't involved in your business dictating your business because reviews are everything in this industry as I'm sure you know! Another idea might be finding a capital partner or someone who would be willing to private lend the funds until you could refinance out into more long term debt.

Hi Taelonn!

This is a really common question! There is actually book available on BiggerPockets that I co-authored with another private lender. What you may be running into is the ambiguous term hard money lenders have made of the words "private money" lender.  In my world, private lender is an individual or their business entity that lends capital they directly control. We are the ones doing the processing and underwriting and we can give the stamp of approval. 

What you may be experiencing is Hard money lenders calling themselves private lenders. There is a movement in the space to change their title because of the negative connotation with HML and also for regulation avoidance. They will often call themselves Direct Private LEnders or Correspondent Private Lenders. Think of this as a fancy way of saying broker. Now I'm not saying they don't add value to the marketplace. They absolutely do, but they are just a very different business model and tool. FOr example, two major players in the HML space have shut their doors completely, gone out of business, because the secondary market is as thirsty as it once was for these loans or their warehouse lines of credit dry up. Private lenders, in my definition, don't have these issues because our capital is our own and we control it.

Now saying all of that, I do run a large Facebook group about private lending and every friday we offer a place for active investors to post their deals they need funding for. This again isn't going to be a cure-all, because private lending in my world is a relationship based model versus a transactional one. We want to see what you are doing, learn more about your experience, who you are as a person.

As far as locating the lenders, looking up in public records for the mortgage or deed of trust will tell you who the lender is at the time of closing.