\n<\/p>\n
Need flexible funding<\/strong> for your deals? Private money<\/strong><\/a> could be the answer. Whether you\u2019re looking to dodge the bank<\/strong> or want greater control over the terms of your deal, that\u2019s exactly<\/em> what this creative finance<\/strong> option can provide. Our hosts can vouch for it!<\/p>\n Welcome back to the Real Estate Rookie<\/em> podcast<\/strong>! Today, we\u2019re taking a deep dive into private money<\/strong>\u2014the creative finance solution that allows you to fund more deals without huge <\/strong>down payments<\/strong><\/a> or stellar credit<\/strong>. Tony and Ashley share how they discovered private money and why it\u2019s their go-to financing option today<\/strong>. If you\u2019re looking to borrow funds<\/strong>, our hosts will show you how to find private money lenders<\/strong><\/a>, how to <\/strong>structure your private loans<\/strong><\/a> to benefit both parties, and why this financing solution is the PERFECT stepping stone for a future investing<\/strong> partnership<\/strong><\/a>.<\/p>\n In this episode, you\u2019ll also learn about the three essential documents<\/strong> for all private money loans, as well as how to approach your lender about structuring a deal<\/strong>. But that\u2019s not all\u2014this masterclass is for the private money<\/strong> lenders<\/strong>, too! Tony and Ashley discuss ways to protect yourself<\/strong> in a deal and how to ensure that you get your money back<\/strong>. Finally, you\u2019ll learn when not<\/em> to lend private money!<\/p>\n Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Speaker 4: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
This is Real Estate Rookie Episode 342. My name is Ashley Kehr, and I am here with my co-host Tony J. Robinson.<\/p>\n
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we\u2019re bringing you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today we\u2019re switching it up just a little bit. You guys don\u2019t get a bunch of questions from the Rookie audience today, but you get to hear from me from my experience. And Ashley\u2019s going to interview me today to talk all about private money lending.<\/p>\n
Yeah, we\u2019re going to do a deep dive into everything and anything you need to know about being a private moneylender or getting money from a private moneylender. We\u2019re going to talk about putting together the contract, the amortization schedule, what kind of document you need to file with the county clerk to make it official. We\u2019re going to go through those documents that you need. We\u2019ll give a little tax advice as to things you should consider for your taxes.
And then Tony also tells us how much money he had to pay out of pocket to a private moneylender when his flip didn\u2019t sell. So it\u2019s a jaw dropping amount of money, Tony, so make sure you listen for that. And I think it\u2019s a great example as to the kind of character and trait that you should look for when you are investing with somebody too. And we definitely talk about scenarios where you can protect yourself and also what kind of standards you should have for the person you\u2019re investing with and also as the private moneylender.<\/p>\n
So today we\u2019re going to dive into one of my secret weapons in my real estate business, and that is private money, raising private money from other people, using that money to fund your deals. It\u2019s been an absolute game changer for my ability to transact on deals and I\u2019m able to scale at a rate that I wouldn\u2019t have been able to if I was just using my own capital. So today we\u2019re going to talk a little bit about what a private moneylender is, how to set those relationships up, how to navigate the water to private money lending, and hopefully give you a roadmap for doing this in your own business as well.<\/p>\n
Tony has a lot more experience with private moneylenders, so we\u2019re going to be focused mostly on Tony\u2019s story today to kind of guide you guys and give you an all-inclusive kind of guidebook as to what private money is and how to actually get a private moneylender. So I\u2019m going to be leading the questions today, Tony will be my lovely guest on the show.
First off, I want to start with who was your first private moneylender? When did you take that leap? Because you have talked about your first properties a lot. You went to that bank in Louisiana, they funded the purchase price, the rehab. What kind of made that transition from using bank financing to private money?<\/p>\n
Yeah, that\u2019s a great question, Ashley. Maybe we should even start just with what the differences are between traditional bank financing, hard money loans, and then private money. Traditional bank financing is what most people think of when they think of going to get a loan. You\u2019re going to your local credit union, your local regional bank, your big national bank, and you are applying for a mortgage with that institution. So that\u2019s traditional banking.
And then you have hard moneylenders which focus more so on the real estate investor, and that\u2019s where a lot of people who are doing the fix and flips or BRRRs are going with the hard moneylender. Hard moneylenders are typically also institutions, significantly smaller than some of the big banks that you\u2019re going to be working with. But typically, these are businesses, right? These are people who make a living, right? These are businesses who generate revenue and profits by lending money out to investors. And hard money\u2019s a good in-between because you\u2019re going to be able to get debt on properties you definitely wouldn\u2019t be able to get a loan on from Bank of America, but it\u2019s typically a little bit more expensive as well. You\u2019re going to pay a higher interest rate, you\u2019re going to pay more fees. And typically hard moneylenders are a bit more rigid in what they want from a borrower and from a property, but it\u2019s a good stepping stone, right? But as a rookie, honestly, sometimes hard moneylenders are tough to get into. They\u2019re going to want more capital down, higher interest rates, and things of that nature.
And then the third type is the private moneylender, and to me this is like the holy grail of getting your deals funded because there\u2019s significantly more flexibility when you\u2019re working with the private moneylender. Typically, when we say private money, we\u2019re talking about an individual or maybe one or two people that are working together. But the benefit of going with private money versus hard money is you get to really kind of have a say in what those terms look like. So how much down payment, if any, the interest rate, the term, all of that is negotiable when you\u2019re talking with a person as opposed to doing it with a business. So at a high level, that\u2019s kind of the differences there.
Ash, I\u2019ve never used hard money. Have you used hard money for any of your projects before?<\/p>\n
Yeah, I\u2019ve used one hard moneylender, and I actually did a line of credit with them where I was able to get up to I think it was $1.5 million line of credit. So I was already basically approved to borrow that amount from them. I still had to bring each property to them. They would vet the property and then loan me the money, and it was the max $1.5 million. I couldn\u2019t have more money out than that with them. So I actually did it for three properties, and honestly it was a nightmare. I hated it compared to private money or even bank financing.<\/p>\n
Was that the hard moneylender that you had recommended to me, the one that \u2026 I think I remember this, and yeah, if I recall the person, I remember some headaches with that one. But to go back to answer your other question, Ash, about what caused the transition. As we were building out the business, we realized that we needed to go after properties that needed some work and the ability to get turnkey deals, it was drying up a little bit. We couldn\u2019t find as many good deals just sitting on the MLS that were turnkey, ready to go. So we were kind of forced into rehabbing properties.
So once we made that decision to start going down that route, I definitely didn\u2019t want to go the hard money routes. I said, \u201cHey, let me tap into my network and see if I can find some folks that might be willing to fund these deals for us.\u201d And luckily, I already had some folks that I knew that were successfully leveraging private money. So you ask a few questions, kind of understand how to set things up. And I had a really, really good escrow officer that I work with here in Southern California, and she honestly educated me quite a bit on the process as well. So it was really just out of necessity that we needed to go down the route for private money.<\/p>\n
Yeah. For me starting with private money, it was working for another investor and I managed a lot of his companies. And one of the companies was kind of at a stalemate where it wasn\u2019t really doing anything, and it was collecting interest from loans on vehicles. So this company had created with another business partner actually almost like a loan shark on vehicles. So if you couldn\u2019t get a loan on your car, you could come to them and they would charge you 15 to 20% interest on your car loan and you would pay them. And there was no activity anymore. They had maybe four loans that were still being paid over the amortization, and there was a line of credit with this company.
So I approached him and said, \u201cWhat if I paid you more interest then your line of credit and I this money to purchase this property?\u201d And so that was my first private moneylender and still one of my private moneylenders today. But very, very casual as in the agreement of that private money. As far as the documentation and stuff like that, there was no actual lien on the property. It was just we had a note payable and a contract between the two of us for that. And that was just because of the trust we have built up. If I was to do it with anybody else, we would do it the property way that Tony is going to explain today, the proper way to do it and not this way.
So Tony, let\u2019s start off with what are some of the documentation that you should actually use when you\u2019re putting together private money?<\/p>\n
Also, you said something important Ashley I just want to circle back to, but the trust piece. And I definitely do think that that plays a role in how this relationship looks. If you\u2019re lending from someone that you\u2019ve worked with a dozen times, maybe you don\u2019t need to go through all the hoops that I\u2019m going to talk through today. We have a mutual friend Cam and Lexi who flip out in the Midwest, and I know that they typically, their step is a little bit different than mine, and I think a little bit more lax. Amy Maggiore, who\u2019s been on a few episodes of the Real Estate Podcast, I think it was like 636 was her first episode, but if you go back and listen to Amy\u2019s episode, I\u2019ve spoken with her and a lot of times she\u2019ll take the money directly from the private moneylender. So everyone kind of does it differently. So as long as you\u2019re not breaking laws in your state, don\u2019t feel like you have to do it my way. My way is just one approach. It\u2019s worked well for me, that helps me sleep better at night with the way that I have it structured.
But one other thing that makes me think about too Ash is that the trust thing is important because the private money relationship is a partnership. It is a form of a real estate partnership, which if you haven\u2019t picked up the Real Estate Partnerships book, hit over to biggerpockets.com\/partnerships. And we actually do have a chapter in the book where we break down the differences between a private money partnership and an equity partnership. So if you want to understand what more of those nuances are, you can jump into the book. We just know there are differences.
But anyway, going back to your question Ass, Ash, about \u2026 Sorry, did I just call you [inaudible 00:10:14]?<\/p>\n
If you did, I didn\u2019t notice.<\/p>\n
You guys can cut that or just leave it in.<\/p>\n
Or leave it.<\/p>\n
Yeah, and just bleep it out. But going back to your question, Ash, so there\u2019s I guess really three main documents that I create whenever I\u2019m entering into a private money partnership. We have the promissory notes, we have the deed of trust, and then we have the amortization schedule. And I\u2019ll break down each of those in a little bit more detail.
So first is the promissory note. This is basically the outline of what this loan looks like. So myself and the private moneylender are entering into an agreement about the amount of money they\u2019re going to give me. How long are they going to lend that money out? What\u2019s the term of that note? What is it going to cost me to borrow that money, so what\u2019s the interest rate? What happens if I need to extend? What happens if I\u2019m \u2026 Whatever rules you want to put into your note with that person, that\u2019s what goes into the promissory note.
So for us, like I said, typically we\u2019ll have the actual loan amount, so someone might loan us 350,000 bucks, so that\u2019s the note amount. Then we\u2019ll have the actual terms. So how long can I hold this money from this person? How long are they loaning it out to me? We typically set our terms to be about 12 months, not about, to be exactly 12 months. And then we usually have an option to extend, and if we have to extend, there are some incentives for the lender. We always have the interest rate, and that\u2019s an annual interest rate. So say that someone lends us \u2026 I\u2019ll use round numbers here. Say that someone lends us $120,000 and they\u2019re doing that at a 10% interest rate. That means over the course of an entire 12 months, they\u2019re going to get back 10% or 12,000 bucks, which would be 1,000 bucks per month in interest that they\u2019re accruing. So that\u2019s how we set up our notes is that it\u2019s an annual interest rate that they\u2019re getting.
And then we also have the terms of repayment. So we typically set our notes up so that we\u2019re not making any monthly payments during the life of the loan. We pay the private moneylender back at the end of the project, that\u2019s either when we sell or refinance the property. But during the actual rehab itself, we\u2019re not making any payments. And again, that\u2019s something that we\u2019re able to negotiate with the private moneylenders. If it was a hard moneylender, it might be different, but private moneylenders, we have that flexibility.
And then we also talk about the \u2026 I guess I\u2019ll get into this later with the amortization schedule, but it\u2019s also like how is this loan being amortized or how is this loan being structured from a principal versus interest? Our loans are always \u2026 we\u2019re not paying down any of the principal balance during the life of the loan, so that interest is just accruing. So if someone gives us money, their principal balance remains the same, and then we\u2019re just adding interest on top of that every single month. So that\u2019s kind of how we set it up from the note perspective.<\/p>\n
Yeah. So with the note, is this something your attorney is drawing up? And what is your recommendation for should you get a sample from somebody else? Should it be specific to your state, the private moneylender\u2019s state, the state the property is in, or does it not matter?<\/p>\n
Good question. So I had my attorney draft up the note for me. Typically, she\u2019s the one that does it. Actually on a refinance we just did, my escrow company did it for me. So I\u2019d say go to an attorney in the tenure 10-year state or maybe in the state where the property\u2019s at. That probably maybe makes more sense. I don\u2019t know. I don\u2019t know which one is more important, either your residence or the property\u2019s residence. But my attorney is the one that usually drafts it up for me, and I actually have just a template that\u2019s like fill in the blank. So every time I have a new deal, instead of me going back to my attorney, I\u2019m just filling in the specifics of that deal. What\u2019s the amount, what\u2019s the term, what\u2019s the interest rate? That\u2019s typically all the information I need to update. And then that person\u2019s name. So the attorney\u2019s the one that usually drafts it for me.<\/p>\n
And what about your name? Are you putting your personal name? Are you putting the LLC of the property? Do you have another company that\u2019s going on the document?<\/p>\n
Yeah, so we usually put the name of the LLC on the note and usually because it\u2019s our LLC that owns the property as well. So yeah, but we put our LLC on the note. I\u2019ve only had one instance where a lender asked for a personal guarantee where if for whatever reason the entity itself wasn\u2019t able to pay the loan, that I would then become personally liable. But outside of that, typically it\u2019s just our LLCs that are signing for the property.<\/p>\n
So you want to move into that amortization piece as to how you\u2019re defining the terms of it. Are you making monthly payments? Are you paying at the end? Is it interest only? What are some of the options you can do as far as that repayment term and how are you putting that into the contract?<\/p>\n
So I\u2019ll go into the amortization schedule and I\u2019ll finish off with the deed afterwards because the deed kind of ties it all together. But we always create an amortization schedule. So if you\u2019ve ever purchased a home, in your loan, that big loan packet they made you sign, somewhere in that loan packet is an amortization schedule. And that schedule basically says over the term of your loans, say you typically have a 30-year fixed mortgage, you\u2019re going to see monthly payments stretch out over 30 years. And then every single one of those lines for every single month will show the payment amount that you\u2019re making and then of that payment amount, what amount is going towards your principal pay down and what amount is going towards your interest payments. And you guys can just Google like amortization schedule, you\u2019ll see an example of this. But with a usual mortgage, with a traditional mortgage, when you make a payment, that payment every month again goes towards both your principal and a portion goes towards your interest.
When we set up our private money deals, these are typically interest only. So it means we\u2019re not making any payments that go towards principal reduction. So at the end of the term, the 12-month term, we\u2019re paying back the entire initial principle that someone gave us, plus the interest that\u2019s accrued. So it works out well for us because we don\u2019t have to make any payments during the actual loan, but it also works out for the private moneylender because their interest is based off of that principal balance position isn\u2019t getting smaller. So they\u2019re getting a nice big payday back at the end, but that\u2019s typically how we set it up.<\/p>\n
Okay. So then the deed of trust, explain why that\u2019s important and how you include this as part of the documentation.<\/p>\n
Sorry, just actually one other thing on the amortization schedule. I would recommend that everyone include that when they\u2019re talking with their private moneylenders, just for sake of clarity, because it\u2019s very clear both in the notes, but then people can also see it visually in the amortization schedule that they\u2019re not getting any payments during the life of the loan and they can see how much interest is accruing on a monthly basis. So they know, \u201cHey, if this project goes four months, here\u2019s the interest payment that I\u2019m getting back in addition to my principal. If it goes eight months, here\u2019s the interest payment that I\u2019m getting back in addition to my principal.\u201d So it really lays it out clearly upfront for the private moneylender before they make a commitment to investing with you. It just kind of reduces any ambiguity there.<\/p>\n
I do have a couple recommendations. So you mentioned just Googling the amortization. Bankrate.com has a very user-friendly one to generate it, just put in $100,000, 5% amortized over 10 years, and just see what it spits out. There\u2019s also an app, Easy Calculators, which also has the amortization in there for a loan too, or all different types of loan products. You can play with the numbers, even for seller financing, to try to put an offer together. Those are some great resources there.<\/p>\n
And I\u2019d take the easy route. I just made a simple Excel Google sheet template, so every time now I just go in, I update the loan amount, the interest rate, when it starts, and I\u2019m just able to drop that into the note every time.<\/p>\n
So everybody always says to me, \u201cLady in the streets, but a freak in the spreadsheets,\u201d and here\u2019s Tony, \u201cHere\u2019s a spreadsheet I created.\u201d<\/p>\n
But it worked out really well for us, right?<\/p>\n
Yeah, yeah.<\/p>\n
So then the third document is the deed of trust. And if you guys go back and listen to Pace\u2019s episode, he does a really good job of breaking down the difference between the deed, the title, the mortgage, these are all separate things. So when we have a private money relationship, we are on title for the property. My LLC, like Tony Robinson\u2019s home flipping LLC, is listed as the owner of that property. We\u2019re then listed as a person that\u2019s on the note, so we owe the Jane Doe $350,000. But then when you look up the county records, even though we are listed as the owner, the person who has the note has a lien against the property. So their private money note is shown as a lien against the property in the same way a traditional mortgage is listed as a lien against your primary residence.
And the way that that happens is through the deed of trust, and it has a different name in every state. In California, it\u2019s called the deed of trust. I think the general name is a mortgage security document. So every state has some sort of mortgage security document. In California, it\u2019s called a deed of trust. So that deed of trust basically takes the promissory note, the debt that that person is giving us, and it ties it to the property. It ties it to the property. And what happens is that if for whatever reason, some worst case scenario, say that we are unable to complete the rehab or we\u2019re unable to sell the property, we\u2019re unable to refinance, or we\u2019re unable to fulfill our duties to repay that promissory note, that deed of trust then gives the private moneylender the right to foreclose on the property, take it from us, obtain ownership, and then they can go out and fix it themselves, sell it, do whatever they want with it. But the deed of trust is that document that really solidifies everything and gives the private moneylender protection in case we ever stop making payments.<\/p>\n
Okay. So now you have disclosed all of this, you\u2019ve presented it to your private moneylender. Before you\u2019re putting these documents together, to kind of backtrack, are you agreeing on these terms before you actually put the documents together? Or is this part of your presentation as to, \u201cHere\u2019s the terms I\u2019m offering,\u201d and you are giving them everything right there? Or is negotiating taking place beforehand?<\/p>\n
Great question, Ashley, and it is usually the latter where we\u2019ve already kind of set up the terms that we feel will make sense for this deal. And honestly, our terms are pretty much the same always. The only thing that will change is the interest rate kind of given where interest rates rather than general, right? When the market was at a 3% interest rate, I think we\u2019re offering folks 10. Now that we\u2019re at 7, 8%, right, we\u2019re offering a little bit more than that, but we typically present to people, \u201cHey, here\u2019s the amount that we\u2019re looking to raise, here\u2019s the interest rate that we\u2019re offering, and here are the terms of the deal. And if this is something that you\u2019re interested in, reach back out and let us know.\u201d
And what I\u2019ll usually do is when I send out the information, I\u2019ll send basic details of the property itself, and I\u2019ll always include a short Loom video of me walking through both the promissory note and the deed of trust so that way people who maybe haven\u2019t been private moneylenders before have an understanding of what the process looks like. So a lot of the breakdown I just gave right now, I have that in a Loom video. So I\u2019ll send out the details of the flip of the rehab that we\u2019re looking to get funded along with that Loom video. And then I\u2019ll say, \u201cHey, if you\u2019re interested, reach back out to me and my team.\u201d<\/p>\n
As far as the contract, so when the lender agrees already to sign, who do you recommend they put the name of the contract in? So we talked for you, you\u2019re putting it into your company name, but what about for the lender? What is your recommendation? Should someone put it in their personal name? Should they have their own LLC?<\/p>\n
That\u2019s a good question. No one\u2019s ever actually asked that. And I\u2019d say all of our lenders are doing this in their personal names. So all the notes are their personal names. When you look up on the county records who has the lien, it\u2019s their personal name. So yeah, everyone\u2019s sending it through their personal name. And again, I think that\u2019s because most of the folks that I work with, these aren\u2019t professional private moneylenders that do this a ton. So I don\u2019t know, maybe that\u2019d be a good question for Amanda Hahn or some of our legal folks to see if there\u2019s an incentive from a tax perspective to run it through an LLC as opposed to their personal name. It could possibly be because interest collected I think is considered as active income, so if you\u2019re running that through an LLC instead that\u2019s taxed as an S corp, you might get some favorable benefits. But again, we probably need to pull Amanda Hahn on to get some insight there.<\/p>\n
And one other thing we need to talk about too is if you are paying somebody interest, especially if you\u2019re doing it out of your LLC, is that sending them a 1099-INT at the end of the year so it\u2019s reported as to how much interest you paid them, and then it has to be claimed on the lender\u2019s taxes too that they received this income of the interest too. So take into account that you will have to most likely pay somebody to do this. Everybody always forgets to factor into their numbers the bookkeeping, the cost of the LLC, the cost of the tax return.
And also if you\u2019re using private money, we\u2019ll have to file the 1099s and you can do them online, they\u2019re pretty fairly easy to use. But there\u2019s also software that you can pay to do it or you can have your accountant or CPA do that for you too. But something to really think about is make sure that you are filing those when you are using private money and sending them to \u2026 If you are doing it in your personal name, I don\u2019t think you have to issue a 1099 though.<\/p>\n
I did ask my CPA and she said that we didn\u2019t have to and that it was more so up to the lenders, scout\u2019s honor, to report that on their personal tax return. So we haven\u2019t issued any 1099s in our business.
But it does bring up an important point actually about the entity piece. So we have a separate entity. I guess let me take a step back. So the tax advice that I\u2019ve been given is that you always want to separate your rental income from your active income. So rental income, short-term rentals, long-term rentals, all that is rental income. And then things like flipping, wholesaling, that\u2019s all active income. So we have one entity for all of our rentals, and then we have a separate entity for our active income, so our flips. I don\u2019t want to be wholesale as much anymore, only did that a few times. Our events, our coaching program, our media stuff, all that\u2019s in one entity. And again, the reason why was because apparently you don\u2019t want to mix your active income and your passive income into one entity because some of those benefits of the passive investing go away if they\u2019re co-mingled in the same entity with your active income. So from the borrower side, that\u2019s typically how we set it up as well.<\/p>\n
Okay. So one of the other questions I have is regarding insurance. So are you putting these private moneylenders as a mortgagee on your insurance policy you would do when you have a mortgage on the property?<\/p>\n
We are not. Yeah, so we just factor in the cost of the insurance policy. We usually buy a year upfront and we\u2019ll just make sure that that\u2019s done during escrow as well. So the homes are always insured, but some lenders, like real lenders, like actual institutions-<\/p>\n
Banks, yeah.<\/p>\n
-They\u2019re going to want to make sure \u2026 Right, they\u2019re going to want to make sure that you have that they have proof of insurance and if they don\u2019t, they\u2019re going to put the lender approved insurance, they\u2019re going to force that onto your property. Again, that\u2019s the benefit of going with the private moneylender is that they\u2019re just more so focused on the return. They\u2019re trusting us to make sure that the asset is insured. And that\u2019s typically how we set it up.<\/p>\n
Yeah. And part of the mortgagee side of it too is being listed as the mortgagee to make sure that the bank gets paid out first so that the check actually goes to that and not you too. So I was just curious if any of your private moneylenders had that requirement at all or asked for that, but I think it\u2019s something a lot of people probably don\u2019t even think of or they have that trust that \u2026 Is there anything in your contract that states if the property were to burn down or there was the loss of the property, that the insurance proceeds would go to the private moneylender or a portion of it would, or it\u2019s a complete loss, they don\u2019t get anything? If you will rebuild and they have to keep their money in the deal until you rebuild? Anything like that? I\u2019m thinking all this off the top of my head because I\u2019ve never thought about it either that way.<\/p>\n
Yeah, no, yeah, it\u2019s a good question. So we don\u2019t have anything in the promissory note specifically that dictates that, but here\u2019s the thing that I always tell all of our private moneylenders, it\u2019s like all it takes is one angry private moneylender to go on their Instagram, go on their TikTok, go on their Facebook, in the Facebook groups, wherever and say, \u201cI lent money to Tony J Robinson, and it was the worst experience ever.\u201d And now our ability to raise capital for all of our future deals is significantly impacted. So I\u2019ve always shared with every person that we\u2019ve done a deal with what\u2019s most important to me first is my reputation, and at the end of the day, I\u2019m always going to do whatever I need to do to make our private moneylenders whole.
So we had an episode earlier this year where I shared one of our flips where market shifted, we have a buyer that backed out. By the time we found that next buyer, things just weren\u2019t working out how we wanted them to. We ended up having to refinance the property and it was a flip where we were supposed to make six figures on the actual flip and it ended up turning into a refinance where I had to put in over $200,000 to make sure that we pay back our private moneylender on time. So I\u2019m always willing to take the hit myself personally to make sure that we\u2019re mixing the private moneylenders whole so that way I can continue to raise money from people down the road.<\/p>\n
Well, what if everyone isn\u2019t as ethical as you Tony? If you are lending the money, would you suggest somebody ask that question as to what happens if this happens? The place burns down, or even in your situation, maybe let\u2019s go into that. How are some ways that you can protect yourself as a private moneylender? So in your contract, what are some things in place where people who are lending you money feel safe and secure?<\/p>\n
First thing I\u2019ll say is that I think that\u2019s why a big piece of a successful private money relationship is the preexisting relationship where it\u2019s like you\u2019ve met this person a couple times. You\u2019ve maybe seen some of their track record already. You\u2019ve got a good sense of who they are as a person. If someone just walked up to you and you\u2019ve only had one conversation at a meetup, maybe don\u2019t give them $500,000 to go fund their very first flip. So I think have a little bit of not common sense, but have a little bit of, I don\u2019t know, vetting this person and vetting that to make sure that this is someone that you want to get into bed with. But I think if a private moneylender really wants to protect themselves, just look at what a hard moneylender does because hard moneylenders do this as a true business and they\u2019ve perfected the art of protecting themselves because that\u2019s their first priority.
So hard moneylenders typically want down payments, right, they\u2019re not going to let you fund the entire thing. Whereas for us, with our private moneylenders, that\u2019s a requirement for us. We want to make sure that whoever we\u2019re working with trusts us enough to fund the entire deal. Hard moneylenders typically charge higher fees or maybe don\u2019t even work with new investors at all, right? If you\u2019ve never done a flip, some hard moneylenders don\u2019t even want to look at you, right because they\u2019re like, \u201cHey, there\u2019s too much risk inherent in that.\u201d So I think if private moneylenders want to protect themselves a bit more, just go fill out an application for a hard moneylender and see what all those things are that they\u2019re looking for and see what you can pull into your own private money relationship, and it\u2019s a great way to steal from someone else.<\/p>\n
Okay, let\u2019s keep rolling with questions to be asked. And this one would be from somebody lending you money. What happens if I want my money back beforehand, so before you sell the flip or before you refinance?<\/p>\n
So it\u2019s a question that\u2019s probably one of the top two questions that come up. And so the first one is like, \u201cHey, what if I want my money back sooner?\u201d Second question is, \u201cWhat happens if you can\u2019t sell this property for what you think?\u201d
So on that first piece, like what happens if I want my money back sooner, the way we\u2019ve set up our notes is that once it\u2019s inside, you can\u2019t touch it until the project\u2019s done. And we communicate that very clearly upfront to say like, \u201cHey, this isn\u2019t like a stock that you can just kind of trade in and trade out whenever it\u2019s convenient for you. Don\u2019t invest this money if you aren\u2019t comfortable with the idea of it being locked up for at least 12 months. If you know you\u2019re going to need this money back in four months, don\u2019t do the deal. We\u2019d rather have someone tell us no upfront, then get into the deal and down the road say, \u2018Hey, we want to change things up.’\u201d So we communicate that very clearly upfront that you can\u2019t.
And then like I said, that second question that always pops up is, \u201cHey, what happens if you guys can\u2019t execute your business plan?\u201d And like I mentioned earlier, our goal is to always make our private moneylenders whole, and whatever means we need to do to make that happen, we\u2019re willing and ready to do. So like I said, that last flip, we came out of pocket over 200,000 bucks to make sure we completed that refinance and paid that person back. And if we need to sell it for a loss, we\u2019ll do that. Luckily, we haven\u2019t had to do that yet, but whatever steps we need to take, that\u2019s what we\u2019re willing to do to make sure that those lenders get paid back.<\/p>\n
And hopefully everybody that lends money to an investor is an investor like you where they\u2019ll do everything to get paid back.<\/p>\n
Well, just real quick Ash because we also had \u2026 I wish I could remember what episode, maybe our producers can help us out. But we had, gosh, was it JP Desmond I think was the one that lost the money on those flips?<\/p>\n
Wasn\u2019t it like half a million or something? It was a lot.<\/p>\n
Yeah, it was a good chunk of cash that he had and his flip kind of fell apart, and he basically just refinanced or restructured that debt into a longer term. So I think he was paying them back over three years, even though the flip had already fallen apart. So there are always ways, again, assuming you\u2019re working with someone of high character, that they really does want to make sure that they protect that relationship, there are always ways to try and make that person whole again. Ideally, best solution is you go into it, you knock it out, everything works perfectly, and everyone gets paid back on time and on schedule.<\/p>\n
And that was Episode 279 if you want to hear that story. Okay. So now Tony, what happens if you can\u2019t sell? You\u2019ve kind of alluded through this throughout the episode. What are some maybe restructuring ideas somebody can put together or different extra strategies they could maybe present to the private moneylender?<\/p>\n
I guess I\u2019ll give you two different scenarios. So I already gave you the first one where we basically just refinanced the property ourselves and came out of pocket a significant amount of cash to get that refinance done. But we had a second rehab where we didn\u2019t want to complete the refi because rates had just gone up and the amount of cash we\u2019re going to have to put down plus the increased interest rate, it just didn\u2019t make sense for us. So we were able to negotiate with that private moneylender to extend his note for another year, give him a slightly higher interest rate. And even though the monthly payment was going to be higher than what it would\u2019ve been if we refinanced, our overall profit at the end of the year would\u2019ve been higher because we didn\u2019t have this big cash outlay to complete the refinance while still giving us time to hopefully see what rates do over the next 12 months. So he was happy and willing to refinance because it meant that he\u2019s still collecting that interest, and for him, that\u2019s better than it just sitting in a bank doing nothing.
So that was the second option. It\u2019s like if you approach that private moneylender and if they\u2019re not in a rush to get those funds back today, then just give them that option and say, \u201cHey, let\u2019s extend for another XYZ,\u201d whatever period you want to pitch to them, see if they\u2019re open to it, and then you just redraw the documents to make sure that everything\u2019s lined up with those new terms of that deal.<\/p>\n
Okay, Tony, this all sounds wonderful, but how do you find these people to give you your money?<\/p>\n
Great, great, great question. So there\u2019s two different ways to go about it. Actually honestly, you should be doing all these things, right? So let me kind of break it down, right? I\u2019ll talk the kind of in-person activities and the digital activities.
So from an in-person perspective, what I think every aspiring person that wants to raise capital should be doing is they need to build their network. And not in a self-motivating way, but just understanding that the more people that you know, the more people you are able to provide value to, the higher your chances, the higher your opportunities of finding the right person to fund your deals. So say that I\u2019m a rookie starting from zero. The very first thing I would do is look at my local city, look at my local area, and try and find some of those real estate meetups that are happening in that area.
And I would go to as many of those meetups as I can for as often as I can, and not necessarily with the intention of pitching everyone right away to say, \u201cHey, will you be my private moneylender?\u201d But just talking to folks and understanding what their motivations are, understanding why they\u2019re looking at potentially \u2026 What motivated them to come to this meetup. And what you\u2019re looking for are people who understand the value of investing in real estate, but don\u2019t necessarily have the time, desire, or ability to do it themselves. That is your ideal person to be a private moneylender because it means they\u2019ve got the capital, but maybe they don\u2019t want the headache of managing a rehab. That\u2019s just not what they want to do. They don\u2019t really like the idea of tenants and shopping for deals and giving 10% to a property manager doesn\u2019t make sense, so they\u2019re still wanting to use real estate to give them those good returns, but they don\u2019t want to do the work themselves. I think that\u2019s the ideal person for you to work with.
And you can kind of pick up on those things based on the language that people use. If someone mentions that they have a stereotypical high-paying job, doctor, lawyer, I don\u2019t know, engineer, software engineer, anything that\u2019s super high six-figure salary, but they\u2019re like, \u201cMan, I work 60 hours a week and I barely have time for my wife and kids, but I really want to do this real estate thing.\u201d Those are cues without them saying, \u201cI\u2019ve got a ton of capital,\u201d that you can pick up on to say that. Or people that maybe have \u2026 For example, I have folks, some of our private moneylenders that invest using their 401ks and they\u2019ll basically take a loan out against their 401k at a relatively low interest rate and then re-lend that money out to us where we\u2019re paying them 5X what they\u2019re paying on their 401k loan. That\u2019s another cue to look for.
So I think the goal is to get out to these local meetups, network with people, understand what their motivations are, and then when you meet that person where goals might align, it\u2019s a simple question of like \u2026 Sometimes I find deals and maybe this is a good fit for you, maybe it isn\u2019t. But sometimes I find deals that I present to some folks that they\u2019re able to fund. \u201cIs that something that you might be interested in? If I find a decent deal, would you mind if I send it to you just to give it a look over? And if it\u2019s not a good deal for you, no sweat, but maybe there\u2019s a chance we can work together?\u201d Super unabrasive, very disarming, but just float that idea. And they might say, \u201cYeah, sure, send it my way,\u201d or they might say, \u201cAh, I don\u2019t really think I want to do that.\u201d No harm, no foul. So that would be my first step, Ashley, is going to some of those local meetups and building your network out that way.<\/p>\n
I want to touch on one more thing is I feel like having a private moneylender relationship, it\u2019s almost like a testing ground for partnerships. So maybe even before jumping into creating an LLC or a joint venture agreement with someone, maybe that\u2019s actually your first kind of baby step is to where they are just lending you money on the deal and they\u2019re just a debt partner instead of giving them any kind of equity or ownership in the deal, to kind of test just how that relationship goes with the person before you go ahead and build out a huge real estate portfolio with the person not knowing much about them.<\/p>\n
Yeah, I couldn\u2019t agree more Ashley. And honestly, two of our private moneylenders have transitioned to becoming equity partners for us, and the majority of our private moneylenders have done multiple deals with us. We\u2019ve had a few that were one and dones like, \u201cHey, I lent you money, but now I went out and bought my own property.\u201d But the majority we\u2019ve done business with multiple times, and it is a really good way to kind of build that relationships with folks. And it\u2019s really cool because if we\u2019re in a private money relationship and you\u2019re really good about letting us do what we\u2019re supposed to be doing and you check in at the beginning of the deal, we check in with you at the end of the deal, and you\u2019re just all thumbs up, that\u2019s a good sign to me that you\u2019ll probably be a good equity partner as well.
But say we do a private money relationship and you\u2019re calling me every other week saying, \u201cHey, Tony, the floor, is it in yet? Hey, Tony, is the back-splash in? Hey Tony, the cabinet\u2019s in? Hey Tony, what\u2019s the paint color?\u201d That\u2019s you kind of stepping into my world of work and not necessarily the person that I want to partner with on an equity deal. So I think the private money relationship is a really good stepping stone to potential long-term equity relationships. Or it could just be, \u201cHey, this is going to be a good private money relationship. We\u2019re both going to be happy. This person\u2019s going to continue to work their high paying W2 job, and I\u2019m going to continue to use their excess funds to give them a better return than what they get leaving it in the bank or put it in a CD or wherever. And it\u2019s a mutually beneficial relationship for all of us.\u201d<\/p>\n
Well, Tony, thank you so much for the wealth of knowledge for everyone today. I\u2019ve thoroughly enjoyed having you as a guest on the podcast. Thank you guys so much for listening to this week\u2019s Rookie Reply. I\u2019m Ashley at Wealth from Rentals, and he\u2019s Tony at Tony J. Robinson. Don\u2019t forget to check out our new book at biggerpockets.com\/partnerships. We\u2019ll see you guys with another guest.<\/p>\n
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