Real Life of a Private Lender

[Wendell De Guzman]

Real Life of a Private Lender - Business Update Week #1

Alright BP Nation, as promised, I am giving you guys a peek into what happens in the week of a private lender. By doing this, my hope is that:

1. You will understand the psychology or what goes in the mind of a private lender (e.g., how they look at risks)
2. You will see what DEALS get funded and why
3. You will see the BORROWER profile that gets funded and why; NO personal info will be shared of course; and finally
4. You will learn how private lenders RAISE CAPITAL (and what you can and cannot do when raising money)

With these goals in mind, here's week #1:

MAKING GOOD LOANS

We have been approached by 2 borrowers regarding 2 deals:

1) A temple worth $250K and loan required is $60K. The borrower promised to pay $1,000/month.
2) A 3-unit property in a good part of Chicago; borrower claims ARV is $145K and total cost of the project is $92K. Borrower can put down 10%.

Here's our decision regarding these 2 loan applications:

1) Temple - NO DEAL. Who really knows the value of a temple? It's tempting but we have to stick with our underwriting guidelines of funding 1-4 units only. Why? Because 1-4 units are familiar to us (I have 11 years experience in buying, selling, leasing & rehabbing houses), and they're easy to sell and finance with a conventional loan in case the borrower fails to sell.
Next step: we will look for a commercial lender that can help this borrower.

2) 3-units - DEAL. The total loan required is $82,800 and if the ARV is correct, our Loan to Value is only 57% (this fits in nicely with our max LTV of 65%)
Next step: since the borrower is a beginner, we require him to prequalify first with our portfolio lender so our exit strategy is assured. Once he is prequalified and his numbers have been verified, we will definitely fund his deal.

Do our decisions make sense? Any comment or feedback specially from experienced lenders will be appreciated.

ORGANIZING FOR SUCCESS

My partner and I talked last Friday and finalized our Underwriting Guidelines (these help us decide whether or not we'll fund a deal), our Loan Application Form and our Loan Application Process. In the latter, we decided on who will do what so there will be no finger-pointing down the road as to who should have done what tasks - who is responsible is clear from the very beginning. We've also finalized our Loan Products and the interest rates and points we'll charge for each loan type.

RAISING CAPITAL

We don't need additional capital right now as we have plenty. However, as a wise investor pointed out: You have to dig the well way before you are thirsty. So, we are always raising capital. How do we do this? Networking with other real estate investors.
In raising money, I don't go in front of a room full of people and ask for money (nor do I pass out flyers saying I need money). That's asking for trouble with the SEC because you might be deemed as selling a security. Instead, I talk to people one-on-one and get to know them first. I find out what their goals and dreams are. I find out what help they need and I genuinely help them. I sometimes find resources for people and I refer them my dream team of real estate attorneys, title companies, investor-friendly real estate agents, contractors, lenders, etc. I don't even talk about my lending business or my real estate business. When I network with people, it's not about me - it's about the person I am talking with.
Then I follow up and build the relationship through constant communication. Coffee meetings, phone calls, etc. I am willing to be patient and invest the time. Months...even years of building relationships are all worth the investment. When you have a pre-existing relationship with someone and that someone invested money with you or lent you money, the SEC does not frown upon that.
I am willing to plant the seed of goodwill (through networking as I described above) and water it (through follow up and building the relationship). I might do this with 100 people and only 1 will invest with me eventually but if I've helped all 100, it's ALL worthwhile. Real estate investing and lending money is fun but what makes it even more fun and worthwhile is if you work with people you trust and like. In the end, real estate investing, lending or any business is about relationships.
So dig a lot of wells NOW and if you do it right, you will not be thirsty of capital :)

Do you have any questions or comments? Write them below.

[Wendell De Guzman]

Real Life of a Private Lender - Business Update Week #4

Alright BP Nation, as promised, I am giving you guys a peek into what happens in the week of a private lender. By doing this, my hope is that:
1. You will understand the psychology or what goes in the mind of a private lender (e.g., how they look at risks)
2. You will see what DEALS get funded and why
3. You will see the BORROWER profile that gets funded and why; NO personal info will be shared of course; and finally
4. You will learn how private lenders RAISE CAPITAL (and what you can and cannot do when raising money)

With these goals in mind, here's week #4: (to be honest, due to the holidays, I have nothing much to update)

MAKING GOOD LOANS
No Loan applications received this week.

ORGANIZING FOR SUCCESS
I took advantage of this lull in activity in designing how our website will look like. I like the website of Brian Burke so I am using it as a template (but obviously I am not copying it). Below is the home page mock up design. What do you guys think of the website? Do you like the color scheme (blue indicates credibility)? Any inputs or comments will be appreciated.

RAISING CAPITAL
Again, not much activity here. I received a message from a BP member (@Matt Taylor), who is also a private lender and he posted a very useful forum post. This is a COOL way for you to borrow money from credit cards at little to no cash advance fee and use that as your "skin in the game" when borrowing money from a private lender or hard money lender. (I don't require as much downpayment or skin in the game though but still...I will feel more comfortable lending you money if you have cash invested in the deal)

Here's his forum post:

Folks,

I am a private lender, mainly for residential flips, and it kills me to turn away the vast majority of my applicants because they don't have the upfront cash to qualify for my loans. I require them to have substantial skin in the game because I don't want to assume all the risk in THEIR project.

I require a 35% (that's 35% of the purchase price) down payment and I also require that the borrower have enough cash reserves to get them through the project. I give 3 or 4 construction draws for 100% of the estimated rehab cost, but I give them in arrears of each stage of the construction, so the borrower must also have 25 - 33% of the cost of the rehab in reserves, as well as reserves to cover carrying costs.

But there is an easy solution to the upfront cash problem if you have a good credit rating. I know that your mama told you never to finance anything with credit cards, and to never use credit card cash advances because they kill you on the cash advance fee and the super high interest rate. But I personally have 5 credit cards ($90K in available cash that I treat as a line of credit), all of which have NO CASH ADVANCE FEE! The best one has a cash advance interest rate of only 8% and the worst 10%. That's better than most private lenders offer (including me)! My credit limits on these cards range from $10K to $25K.

4 of these 5 credit cards come from credit unions. There must be many, many more of these no-cash-advance-fee credit cards available, because I found 5 or 6 and I haven't even looked that hard. If you can find a list of credit unions online, you could go to the website of each and look up their credit card terms.

There is one no-cash-advance-fee credit card that I found that is not from a credit union. It's called the Barclay Card Ring, interest rate for cash advances at 8%. Apply here: https://www.barclaycardus.com/apply/Landing.action...

There are different requirements for becoming a member of each credit union, but they usually leave you an easy way to qualify to join. So for instance, the Pentagon Federal Credit Union was set up for employees of the Pentagon, but if you join the "Voices for Troops" organization (it'll cost you $15 the first year and you don't have to renew after that) they'll let you join PFCU and get their awesome Pentagon Promise Visa card: www.penfed.org/Penfed-Promise/

You do have to be careful when planning out your cash flow, though. Most of these cards require monthly payments of something like 2 or 2.5% of the outstanding balance.

On that topic, you really should plan out your cash flow for every month of your flip project. For example, let's say that you're doing a flip in which the rehab is planned to take 2-3 months, then it will take 2 months to sell it and another month to close, so that you're holding the property for 6 months. You should have your cash flow all planned out month by month so that you make sure to have enough reserves. And don't forget the carrying costs - insurance, loan payments, property taxes, water, sewer, electricity, etc. Then make sure to add in a buffer as well because you will undoubtedly exceed your rehab budget, unless you've got years of experience.