Private Investors- too good to be true or the best path to take?

Question

Hey BP community, my name is Taylor, I'm 18 years old and I am a highschooler in Frisco Texas. I am attending college next year at either Baylor, SMU, or Texas A&M. I have been interested in real estate for the past month or a little less and have read 3 books, listened to about a hundred hours of podcasts and videos to learn as much as I can. I just got my first credit card to start building credit for my first loans in college.

I have recently discovered the scalable strategy of private lending. From what I've researched it almost seems too good to be true. I can't tell if people are trying to sell me on this strategy or if it really is that good. I have figured out that at my age it might be tough to get a private lender, especially without a track record but, after my first couple of deals, it seems like its just perfect to scale at an extremely fast rate. Can someone please give me an insight into this form of scaling and purchasing.

Pros, cons, how it works, can I scale incredibly fast with it, what can i do to make it easier to obtain lends from private lenders, what loans are good paired with them. And also how it can be used in multifamily properties (ie. what loan should be the other half assuming they only cover the down payment and rehab)

Thank you so much in advance!

Taylor

David M. · Answer

@Taylor Hughs

Yeah, i think its a "viable" strategy.  But, like any "successful" strategy, you've got to be an "amazing" "business" person.  Yes, of course, somebody is trying to sell you on this strategy.

if I understand the strategy you are thinking of, yes you need to find an "angel investor" who is willing to take a chance on you. Then, out of the gate you need to DELIVER, and probably hit it out of the ballpark.  That investor will want to see big returns, otherweise what was the point.  Then, doing again, and again, and again..

The strategy is not much different than say, "marrying a rich widow..."  Or, how the likes of Munger or some of those other guys that say you have to make your first $1mil or was it $100k.  Basically, once you have that seed money, you can use it to make more money, AND even afford to have a bad deal --- not that you want one, but in reality it DOES happen.

So, basically this angel investor is that first $1mil.  You didn't earn/make it, you just got somebody to back you...

As mentioned above, no... don't go betting your grandma's retirement, etc.

Yeah, it can be a really good strategy.. but its HIGH risk, high reward.

Bruce Lynn · Answer

I'm not saying it doesn't exist, but I expect this will be very hard for you to do and very hard to find the right people to do it with.  Would you lend you money?   Would you let you learn with your investment/retirement money.  Your best bet as a small business person is to go after friends and family, not strangers.  People who know, love, and trust you.  However you must also be 100% focused and obsessive about protecting their investment.  So you reach out to your parents, your grand parents, your aunts and uncles, all your friends parents.  That's your private money you're looking for.  If you make them good money, they'll repeat the investment.   You need to put their interest above your own.  DO NOT loose grandma's retirement money.  If things start to go south, you figure out a way if you have to work 3 extra jobs and two more on the weekends to pay them back 100%.   You should probably do this with anyone's money.  People are often too fast and too loose borrowing money from other people.

Also this money is not cheap money.  This is probably the most expensive money you can find.  So you want to do everything in your power to find cheaper money than private money.  Private money is taking a huge risk on you, so the people who want to lend to you want a risk premium.

Taylor Hughs · Answer

Thanks for this other point of view, I see what your saying. Good thing is, I have a lot of time for this phase to wear off, although I don't believe it will, or at least enough for me to drop real estate all together. I'm not starting until I'm in college, or after. I agree, it sounds like it's better used when scaling, after I've done my first couple of deals. You mentioned commercial lenders, I've heard a little about them. Can you explain what they are and how they are used, can I use them for non commercial buildings? Thank you so much !

Taylor Hughs · Answer

Ok this makes since, I really appreciate the insight and letting me know that it's not as perfect as these influencers make it out to be. Thank you!

Shawn Parsh · Answer

Taylor,

I think you have made a wise choice to look at real estate investing as a goal. I agree with the feedback you have been given so far, but want to challenge you on what you do with it. In real estate, and in life in general, there will always be challenges to achieving anything great. Those that are successful and achieve great things are those that find ways to make what they want happen. Unfortunately, most people use excuses to not even try.

Knowing that the likelihood of you getting private money at your age with no previous experience is low what are your options??? That reality shouldn't stop you it should motivate you to learn more to find out what Will work. Maybe you should focus on getting a place for yourself close to the college you plan to attend. Is it possible that you could rent out rooms in the same house to other students to create income? You may want to look at lease options on cosmetically distressed properties that you could rehab to increase its value.

I encourage you to stay involved in BP, ask questions, learn from others, and find what works in your situation. Don't let Excuses prevent you from reach your goal. Good luck my friend, let me know if I can help.

Bruce Lynn · Answer

One of the best ever answers on BP.  Certainly top 10.  Big Foot and Santa Clause financing.  Love it.

Evan Polaski · Answer

@Taylor Hughs, I appreciate your enthusiasm.  I will provide another point of view, but it aligns with the others.  You said "I have gotten into real estate the last month or less..."

To mirror Bruce's message: If I told you: "I really got into football the last month or less.  I read all the play books.  Now I want to go to Baylor/A&M on a full scholarship for football."  If you were the Baylor/A&M coach, would you give up one of your scholarships and positions on me?

I understand you are only looking for advice at the moment, and don't want to discount your new passion for real estate, but anything new is always the best thing ever.  The challenge is: if you buy a piece of real estate, whether it be with your money or someone else's, during this honeymoon phase, you will likely be stuck with it when the honeymoon phase wears off.

Now to your direct point: private lending is great to scale your portfolio, if used correctly.  The biggest reason I see to use it is because no other capital is available to you.  Ultimately, private lending is just an expensive mortgage.  As Chris noted, you are going to be paying points up front and likely a 10%+ interest rate, versus a commercial lender that will take a little longer to close, but closing costs will be much lower and interest rate will be lower.

So why do people use private lenders: some will lend more than a bank will, so you don't need as much money down.  And they can typically move a lot faster, so if you offered a seller a 10 day close, no traditional lender would be able to hit that timeline.

As for stacking loans, most lenders (traditional or private) are not open to that.  It would cause one of them to be in a second position, which neither wants.  You can do pref equity, which may function similarly to a loan, or bring in equity investors to fund the shortfall between project cost and mortgage, but generally, the lower down the capital stack (the order of priority for all the dollars in the deal) the more it will cost you, since each layer is taking more risk.

Bruce Lynn · Answer

This morning I was thinking since you are in DFW area that you should attend one of the Quest IRS mixers...as there should be people in the group with IRAs looking for private placement.  and BAM if they're not having a private money LIVE seminar soon.  Really for people with money looking to lend, but that's where you go to find them.

How to Score Big with Private Money LendingTomorrow, January 13th, 12pm CTActually looks like it is not a mixer but a zoom call.   You can lookup the contact info for quest and subscribe to that call.  Maybe good intro to how it works, what costs you can expect, and some of the players.   I would also suggest you go to some of their live events if you can.

Private Investors- too good to be true or the best path to take?

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