All Forum Posts by: Beth Johnson

@Edwin Bethune

This text string makes me nervous. Definitely not a lender in this situation. More private equity where you likely have very little control and very little security but front all the capital contributions.

@Alexis Gonzalez

Never work with a private lender who asks for money upfront and doesn't work through a title and escrow or attorney for signing, recording and funding the loan. This is for both party's protection.

Most PML won't ask for an appraisal on a bridge /short term loan and if they do, you could always pay for it directly which is normal.

@Brett Miller

There's no dollar threshold per se, if that's what you are asking about. There are federal regulations for private debt (hard money and private money fall into this category) and private equity (think syndications where you will hold real estate in the fund) that means if you aggregate capital into a fund then it's considered a security.

On the debt side, this can also be called a pooled mortgage fund or something similar. Just know that the concept of using multiple people or entities to fund a loan is considered a security. There are other ways to lend out private capital such as fractionalized loans where multiple people/entities are named on the loan together - such as you as a lender at 40% and me as a lender at 60%. If we don't know each other and a broker/originator pulled this deal together offering each of us an interest income, then it's likely a security but that is determined at the state level, not federal. For example, in my state of WA, a private debt fund is deemed a security and so are fractionalized loans/notes. But individuals lending our their own money is not.

Hope this helps! Happy to answer other questions if u have any!

@Kristi Tietz

I'd be very careful using this tactic to get started, especially if you plan to use borrowed money to lend out such as HELOC or credit cards. While this is being promoted as a safe way to get into real estate by some experts or gurus, there is no way to secure your loan with real estate when the money is used as a deposit before the purchase is closed. And there is zero equity buffer to protect your loan either, meaning the loan to value (LTV) is 100% which is super risky.

I'm sure there are some that are confident in going this route because they know and trust the borrowers they gator lend to but people fail people they know and trust all the time -think divorce rates are low? So it's pretty risky to put loans out solely on relationship with no skin in the game. Sometimes this failure isn't the borrower's fault - like market fluctuations, seller remorse, or flaky GC who isn't showing up on the job site. The reality is these things happen often to no fault of the borrower so relationships should not be the sole way to secure your loan.

Some folks will say they do it and it works great but one can say that only up until it doesn't work great and with zero security and no equity buffer protection, you're bound to lose eventually.

BiggerPockets has a book coming out next week on how to safely do private lending as the lender. You should check it out - I Co-wrote it so happy to help answer any questions you might have!

@Jay Hinrichs - Risk was high in the sense that it was a grow operation that could potentially have been subject to a federal seizure (Controlled Substance Act) that was an exclusion on the lender's title policy that I took out on the loan. But the combined LTV was in the 35% range so my equity buffer protection was outstanding. Just another way individual lenders can weigh the risks of the loan and make rates and terms commensurate with likelihood of those perceived risks actually occurring. I have some lenders who won't get out of bed for anything less than 13% so they take on high risk deals and others who prefer sub 60% LTV and will go into single digits to lock in these no-brainer loans. It's just a matter of identifying personal risk tolerance and deal criteria and preferences before proceeding. Everyone will do it slightly differently based on what lets them sleep at night. My default rate in 8 years is well below 4% with no principal losses so I like to think of myself as striking a good balance between returns and risk over the years. I love the counterpoints, though. I think this is great banter for new private lenders to hear and read so they can determine for themselves where they might fit in.

@Nicholas L. - I don't disagree with you - I don't personally recommend anyone become a private lender but plenty come to me seeking support because they've chosen that as their entry point into real estate WHILE managing their day job. Middle-aged investors who have families and W2 income but have money sitting in legacy 401K from past employers are wanting to invest it in safe ways while still tending to their day-to-day life. So it's not entirely out of range for some folks to start in private lending. That said, doing so requires a lot of knowledge to keep capital investments safe and to do transactions that aren't prohibited. So yes, there's a lot to consider and manage. 

My very first loan made was through a legacy 401K and it was for 62K on a commercial building in Seattle. I was a newly single mom with a background in real estate through my family. So the leap to do PML wasn't hard since I knew more about RE than stocks and bonds. I lent it out at 12% in 2nd position at a very conservative loan-to-value. It was renewed a few times and at some point it also defaulted, earning me default interest. The property was a legal 502 (marijuana grow facility) so they had a difficult time refinancing out of it. Eventually it paid off and I had enough to use as my portion of the downpayment on a rental. To @Jay Hinrichs's point, I had to have significant equity to get a non-recourse loan and I have to file taxes on this property each year because of the leverage but it still was a solid option for me, at the time. You just gotta know the in's and out's and the risks and rewards associated with these types of deals. 

@Jay Hinrichs

Oh and I'm also not a fan of fractionalize notes either. Way too complicated and considered a security in my state, so far as I know, particularly when individuals do not know each other and have no other relationship to each other.

@Jay Hinrichs

Totally agree with the SD IRA and holding real estate and the low leverage needed to really make it work. When we first started, it was actually the a Solo 401k, now that I think about it, but we had to convert after hiring on a few employees. At any rate, getting a 50% LTV loan was all we could get but that works out fine do that we don't have to pay huge taxes on the levered money.

That's crazy you got dinged for posting about NV. I knew there was a no advertising issue in that state but you never really think they are cracking down on that kind of stuff.

To your point, most people think wholesaling takes no money, which technically it may not for a single deal or two but at scans definitely requires some amount of money, and that money could also be lent out for EMD, down payment or rehab costs so that is why I wondered what makes people choose one over the other.

Check out Cody Davis' episode # 621 on BiggerPockets.com. He's a seller financing superstar! 

How Cody Davis Acquired 81 Units By The Time He Turned 21 (biggerpockets.com)

A lot of aspiring investors who may not have enough capital to do a project by themselves (or simply don't want to dive into investing without the partnership of someone with more experience and knowledge) seem to take the path of getting started through wholesaling which can be daunting, to say the least. But have any of you chose to get started in real estate by acting as the private money lender on projects instead? 

I'm curious about the rationale between starting in wholesaling versus lending out your funds to more experienced flippers or investors so that you can learn the ropes and make some passive income along the way. I started out by lending money from my self-directed IRA, which was less work than wholesaling. It also helped me build up my capital to the point where I had enough funds for down payment to then purchase a rental property in my retirement plan and still be able to do private money lending out of it.

What are some pros and cons to either approach, in your opinion?