All Forum Posts by: Alex Breshears

Hi Daniel!

This is a common question, so I'm glad you brought it up. As a private lender that lends out my own funds, I will say that it would be difficult to find a lender that would fund the downpayment, renovation costs and closing costs. Think of it from the lender's perspective.  If you have a first lien (the first mortgage) on the property, and they come in with a second lien for the downpayment, closing costs, and renovations - they are already likely underwater. That means there is MORE owed on the property than it is worth. If the market bobbles a little, you run out of capital or desire to finish the project, or something happens with the first lien, that second lien holder is wiped out by default interest or devaluation in the market.  There is ZERO incentive for a lender to do this type of loan, it's all risk with very little chance of reward.

Now to answer what you CAN do - you could partner with someone who would be a capital partner, and they would also be on title. I will say if you haven't already I would find a mentor for STR's. They are a totally different animal with a lot of nuanced decisions to make for success. Many metro areas are outright banning them or making the regulations so cumbersome that it deters new units from coming online. In addition, there are some serious headwinds in some markets with saturation of units, the demand for travel slowing as people struggle to pay for things such as housing, healthcare, food, etc. Whatever you are using to do your underwriting make sure you bake into the calculations a slowing market, ie lower occupancy and potentially lower nightly rate. Also make sure the area is relatively "pro" short term rentals, or has rules in place you are comfortable with. Potentially finding a mentor to help you with your first deal can really give you a headstart in that project. I own them, I've managed them, they are not a passive thing and the stand up process is the hardest. After the closing is when the real work begins and when everything seems to go wrong! Also - since you brought up the need for capital, remember if pursuing an STR you are furnishing an entirely new space. I often use $10k per bedroom as underwriting criteria for furnishings, decor and technology to monitor the property. So a 3/2 would be about $30k for everything inside the home. This does not take into account if you have outdoor spaces, such as building/redoing a deck, patio furniture, hot tubs, pools etc.

Hello there! That's wonderful you have interest from your network for lending. I actually have a book coming out by BiggerPockets, you can check the coming soon page. It is available for pre-order now and will be live on the 28th.  That will give you a ton of information on how to structure something like this.

First, I'm going to suggest getting an attorney familiar in real estate to draw up to lien instrument in PA (mortgage vs deed of trust), and also the promissory note.  The note will outline all the parameters of the loan including potential extensions and default interest if it is to be paid.  The attorney you used to close your real estate deals may not be the best source for lending, as most real estate attorneys have the documents emailed to them by the lender and they just point where to sign.  So the lending part is crucial.  It will help cover everyone in the event something does go wrong. Do not rely on the strength of the relationship between you and your lender to iron everything out.  The fastest way to ruin a friendship is with money.

Second - I would advocate your lender get a lender's title policy, and their lien would hopefully be the first lien against the property. You can also buy a owner's title policy at the same time if you would like the coverage for yourself.

Third - There should be adequate hazard insurance and the lender will be named as a loss payee/mortgagee on the insurance.  The insurance should be the appropriate type of policy (builders risk for example if the property is undergoing renovations) and an amount to adequately cover the loss to the property once finished.

Fourth - no money will exchange hands outside of closing. The lender will wire funds to the title company, and the funds will be dispersed according to the HUD-1. Any fees the lender may have you pay (such as a doc prep fee to cover the attorney costs of generating the documents) or origination points should be on the HUD-1.

That's the very basic necessities I have in place as a private lender using her own capital.  AGain there is a lot more to it, and it is very state specific, so reach out to a lending attorney in PA to make sure everything is covered correctly.

Hi Nicholas! There are a few things to consider right now with the way the market is moving on the lending side of things. Lenders across the board are raising underwriting standards, and one of them is to lower the LTV on cash out refi's or making the rate higher (or both!). If you have any sort of lien on the property, you can have an easier time finding that follow on permanent financing versus trying to pull all your cash back out yourself if there is no lien on the property. Now underwriting standards may change and you may come across a unique lender that doesn't care about the fact the property currently doesn't have a lien, but that is becoming more of a concern as lenders try to tighten up their balance sheets for a potential recession and devaluation coming in certain markets. You could do a low LTV loan for your acquisition and then refinance out into more permanent financing, so the low LTV loan will be better terms than someone who wants 75% LTV etc.

@Joseph Coleman _ I have not heard of this. I will check this out.

I'm going to stop you for a second and say the worry should be focused around the return OF capital and then the return ON capital. You need to have certain safeguards in place and price the loan according to the risk involved. For example, a borrower that only needs 50% of the ARV on a cosmetic rehab in my market is far less of a risk in the loan that someone who wants 75% and is then bringing in more of their own capital for the rehab, so maybe make $5k off the deal, if everything goes smoothly. So I would price the first loan lower (given all the other parameters of the loan are same) than I would the second one.

Things to do to mitigate your risk on LOSS of capital (hence return OF capital ) would be:

1) All money flows through the closing agent/attorney. The borrower signs docs there, they record them, you get some originals back after recording and some after closing, and the funds provided get wired directly to the closing agent, NOT THE BORROWER.

2) Make sure there is adequate insurance on the property. You want replacement cost value (RCV) policies as opposed to ACV policies. RCV will give today's dollars in replacement cost, versus the other option which takes into account depreciation of the assets being replaced (so hence lower payout if something happens).  You are lending on the structure AND the land, but you can only get insurance for the structure. Make sure that structure coverage is enough to at least cover your loan, preferably more. Get added as a mortgagee/loss payee to the insurance so if it lapses or there is a claim, you are notified. In the case of it lapsing you can then force place insurance to protect the asset.

3) Get lenders title insurance (the borrower pays for this as well).  Read the policy, make sure you understand are comfortable with the exclusions. IF you don't understand it, ask your title rep or attorney familiar with lending.

4) Get loan docs professionally drawn up by someone familiar with lending in your market. DO NOT use templates you found off the internet. Most states have bare minimum information and language that has to be included in lien documents in order to be enforceable, so you don't want to lose all your capital just because you didn't feel like paying an attorney $1000 to draw up documents protecting 100k+ plus in capital. PS. This can also be added on to the borrower to pay.

5) Know the USURY limits in your market. There are many states that have upper limits on the amount of interest and fees. You again don't want to be over that and have your loan declared illegal. You could lose your capital or have to pay back all the interest the borrower paid you over the course of the loan. Do not mess with the usury laws!

6) Get scope of work for the project, have them supply live video walk throughs if you are not local to the property. You can google walk the neighborhood as well to get a feel for the area if you aren't local. Make sure that scope of work makes sense for the property and the area. Over improvement is a real thing! THe last thing you want is a borrower that spends too much on a property, and now they have no reserves to do a refinance into conventional financing or the market softens and they have to sell at a loss (and hopefully not your loss because you aren't lending all the way up to 100% LTV).

7) NOW you can think about interest rates. Again, this is going to be widely different from market to market, and potentially loan to loan because no two loans are the same. First lien mortgages are usually 8% to 14% from most private lenders I know personally.  For those that do 2nd lien loans, those are costlier (because of the higher risk) and they are generally starting at around 14% and just go up from there. Again, private lending if very flexible so don't take these ranges as gospel. Protect yourself first, and then worry about the return. 

Hi Dorian!

As a private lender that lends out my own capital, I have the ability to be flexible on loan terms. For example, I can do a cross collateralization to the property you have free and clear (as long as it isn't your primary residence) or you could take out a short term private loan on that property and then refinance in a year when you've had another tax return. There's a couple different ways to structure something like this. I personally don't lend in Ohio, but just as an example of something that could be done with an individual private lender. 

I'm seeing some cracks in markets across the country where days on MLS are increasing, showings are decreasing, and the ratio of asking price to list price is finally not +10% over asking. I personally don't think we headed for a major correction, but some markets I think might see some of it. As a lender, we are always trying to mitigate risk for the capital we lend out (because my definition of private lender is someone who is lending out their own capital, not selling it to the secondary market or using a line of credit for the business to fund loans). My definition of lender means we are in it for the full cycle of the loan, which could be 4 to 24 months! With all this uncertainty, I'd love to hear from other people who are lending their own capital to see what you may be doing in these changing times. Are you even changing anything? What risk are you trying to mitigate with those changes?

Hi George! There are a few ways you can "vet" a lender to make sure they are a legitimate lender.  Unfortunately, this process won't give you any clues into the smoothness of their loan process from origination to closing, but at least would let you weed out a scam or a company that may pull a bait and switch on you a few days before closing.

First, you can ask what name they close loans under, and then do a public records search in your market (if they have closed any in your market) online.  This will show you what their lien instrument encompasses and under what terms. If they close loans in a name other than Spectrum Global Financial, you can ask the reason. Are they a broker? Are they doing some sort of table funding? There should be a reasonable answer to this question if they don't close in that name.

Another option is to check for their NMLS number. While not every state or everything situation requires NMLS (licensing) registry, if they display an NMLS number in emails or ads, you can check that the number actually goes to the company it claims to belong to.

Lastly, you can also look them up at a private lender association like the American Association of Private Lenders. While this doesn't mean they aren't scammers, it does show that they took the extra steps to become members of a community that want to keep ethics and best practices in the forefront of their business model.

Whatever you do, do not give this person/company money outside of the closing table. ZERO. If they need something like an appraisal or a survey paid before closing, ask to pay the vendor directly, not them. Even then, it should only be at most several hundred dollars.  All too often the scammers will offer very attractive rates because they just want to get you on the hook. They then ask to send them several thousand dollars as a funding fee or some other made up fee, and then they are gone.l

Hi Nick!

This is a really common question, so I am happy you asked. 

I feel a can of worms you opened is the term private money. Sadly, that term takes on many shapes and colors these days because hard money lenders are rebranding themselves to private money. That's another debate I won't get into here, but it is EXTREMELY confusing to borrowers right now, because as we saw in the pandemic, the source of your capital matters... A LOT. Hard money lenders (calling themselves private lenders or otherwise) often rely on the capital markets to sell their loans to be recapitalized, or they have access to a credit line from a bank etc for their liquidity. That business model includes money that has A LOT of strings attached. They are not nearly as flexible as what I would consider private money. They sold the bank/passive investors on their business model - we won't lend over 80% loan to cost, we must have 2 or 3 origination points, we must have a borrower with a 680 or better credit score, 6 months of reserves etc etc. Their terms are not their own to set, it's a matter of the terms their capital came with. Now private lenders how I use the term is an individual (or their business entity) that is lending out capital they directly control. When you are talking to that kind of lender, the flexibility is quite amazing. For example, after I have done a few loans with an investor, the underwriting really becomes just the property to make sure the numbers are fairly solid, and we can close in a few days with minimal paperwork because we have that close working relationship. It isn't transactional. I am the deciding force on what I fund, how I fund it, under what terms I'm willing to work with, etc etc. I could even do unsecured loans if I felt that worked! It's my capital, and as long as I am within the constrains of the usury and licensing laws from my state, I'm free to do whatever I want.

Now back to your question specifically about str's and private money. As a lender myself, the first question I have when I read your statement is how are you coming up with your CoC returns. Many markets are seeing YoY decreases in occupancy, and thus likely nightly rate as well. As an STR owner myself, the metric I use is how many nights does it take for the property to pay for itself. I want properties below 10 nights a month, so even at roughly 33% occupancy, I am still ok. In addition, I have taken out a HELOC on one of them that was my primary residence, and now use that to do yield arbitrage, and the monthly interest payments I get from that actually cover most of the expenses alone on that one, so it can sit empty and I'm ok. I bring this up because the downpayment and closing costs are just the START of the capital you will need. I underwrite for about 10k per bedroom for total furnishings, decor and tech. This does not include anything outside such as building fire pits, hot tub, furniture etc. We have $3,000 just in technology to monitor the property remotely alone! I admire your enthusiasm, so I'm not trying to crush your idea, I'm trying to say right now in the STR market, it is NOT the time to go in marginally capitalized. I think we are going to have some definite headwinds for awhile as regulations go up, travel goes down, and rising interest rates make these properties more expensive to own on a monthly basis due to rising costs.

If you have done your homework and you are sure your process works, you can work with a capital partner, form an LLC together for this project and get going! Private lenders are also not going to be into this property for 100% of the purchase price because if the market bobbles even a little, they are underwater on the home. Not a happy place for a lender.

I hope that gives you some clarity on the field! There is a book coming out in 4 weeks about private lending the way I do it with BiggerPockets. I advocate active investors read this as they can then use that information to start building a network of people (like me!) who are willing to lend on your investments because you can educate them on the right and safe way to do that so their money is protected!

Hi Bianca!  This is a really common question, so I am happy you asked.  First, let me tell you in a raising rate environment, what incentive is there for a lender to lend at ultra low interest rates? I bring this up because as you are contacted by people, if you are able to think through logically about the risk a lender is willing to take on, versus what they are getting in return, you can see scams a mile away.  Now that being said, another can of worms you opened is the term private money.  Sadly, that term takes on many shapes and colors these days because hard money lenders are rebranding themselves to private money. That's another debate I won't get into here, but it is EXTREMELY confusing to borrowers right now, because as we saw in the pandemic, the source of your capital matters... A  LOT.  Hard money lenders (calling themselves private lenders or otherwise) often rely on the capital markets to sell their loans to be recapitalized, or they have access to a credit line from a bank etc for their liquidity. That business model includes money that has  A LOT of strings attached. They are not nearly as flexible as what I would consider private money. They sold the bank/passive investors on their business model - we won't lend over 80% loan to cost, we must have 2 or 3 origination points, we must have a borrower with a680 or better credit score, 6 months of reserves etc etc.  Their terms are not their own to set, it's a matter of the terms their capital came with. Now private lenders how I use the term is an individual (or their business entity) that is lending out capital they directly control.  When you are talking to that kind of lender, the flexibility is quite amazing. For example, after I have done a few loans with an investor, the underwriting really becomes just the property to make sure the numbers are fairly solid, and we can close in a few days with minimal paperwork because we have that close working relationship. It isn't transactional. I am the deciding force on what I fund, how I fund it, under what terms I'm willing to work with, etc etc.  I could even do unsecured loans if I felt that worked! It's my capital, and as long as I am within the constrains of the usury and licensing laws from my state, I'm free to do whatever I want.

Now back to your question specifically about private lenders. There are a few ways to check is a lender has some credibility.  First, as what they close their loans under (what name) and then search public records for that name to see past projects they may have funded. This is a great option if you find an individual like myself who may not be required to be licensed.  Another one is checking on the American Association of Private Lenders website and searching for their business name.  These may be a healthy mix of hard money lenders and a few private lenders like myself in there, but in general if they are going to take the steps to join an industry association, they likely are reputable to a degree. Another option is you can check the NMLS number they may provide. While not every state requires licensing, this number will be specific to them and their company, so if they have one published you can check it out as well.

I hope that gives you some clarity on the field! There is a book coming out in 4 weeks about private lending the way I do it with BiggerPockets. I advocate active investors read this as they can then use that information to start building a network of people (like me!) who are willing to lend on your investments because you can educate them on the right and safe way to do that so their money is protected!