Why Do I Lend?
Sometimes I lend because I want to strengthen a relationship with a fellow investor. That’s right. Lenders want to partner with investors. After all, I have this SDIRA. I can’t take the funds out until I am 59 ½ years old without paying taxes and penalties on the funds withdrawn. I have to invest somewhere and I am not interested in taking a chance on the stock market. What to do? Why not lend the funds to a real estate investor and form a business alliance? If I analyze the deal correctly I can ensure the investment is relatively secure (there are no guarantees). If the deal goes as planned I earn my return and the investor earns considerably more. If the partnership is productive and I enjoy working with the investor (I rarely invest with people I don’t like—it is even rarer that I will do so a second time) the relationship will grow. We may do many deals together. In fact, most of the people I have loaned to I have loaned to several times.
Private money is, primarily, about relationships. When I need to borrow private money to fund one of my deals who do you think I am going to turn to? Do you think the investor I helped to earn $100,000 might be a good source? Do you think she might return my phone call? So do I.
If a deal runs into an unexpected challenge I may get to exercise my problem solving skills and try to restructure the deal. Please keep in mind that not all lenders will enjoy this (most probably will not) but I do, especially if I can find a solution that benefits everyone. If you are relatively new to real estate investing you may benefit from partnering with someone who has a bit of experience, someone who might be able to help you navigate through an unforeseen situation.
I live in Southeast Michigan, the Detroit suburbs. Southeast Michigan has experienced the results of a severe recession. Things are improving but unemployment is high, many jobs have been lost and there are still many foreclosures. To date, all the deals I have funded have been in the area where I live. This is intentional. The deals I fund create jobs; jobs for roofers, electricians, plumbers, title agents, insurance agents, gardeners, home inspectors—lots of jobs. I am also a landlord. I prefer my tenants be employed. I usually require that they be. If my investing helps to create local jobs I am helping to increase the pool of qualified tenants. This is not some bleeding heart, kumbaya agenda—this is good business. We are all in this together.
In my initial example (my first blog) I mentioned that I earned 21%. Good for me but 21% is a pretty steep rate to pay. Why would anyone agree to do that? Well, the investor who set this deal up borrowed $50,000 to purchase a home and sold that home for $70,000. They earned approximately $15,000 after expenses in 32 days and had none of their own money in the deal. They secured this money in less than 2 days and didn’t fill out a loan application or pay an application fee. They didn’t have to do the deal but that deal put $15,000 in their pocket. Was it worth it? Are you still using the excuse that you can’t invest in real estate because you don’t have any money?
Comments (10)
I echo John's post!
Dawn Anastasi, over 10 years ago
Thank you. I plan to post another installment tomorrow.
Jeff Rabinowitz, over 10 years ago
There are many of us out there that could utilize these funds to grow our business but the funds are either elusive or in many cases the lenders don't understand the business. It's refreshing to see someone in the business making funds available. Keep up the very good work.
John Moore, over 10 years ago
John, in my little corner of SE Michigan there are a lot of private lenders. Many, like myself, have run or still run profitable rental properties or have done flips and other RE investing themselves. I would suspect that my area isn't all that different than others though we do seem to have more active REIAs around here than most people I speak to from other areas. I come to terms with some of my repeat borrowers (partners) in phone calls that rarely last longer than 10 minutes (actually, they do last longer but the focus is rarely the deal, we just visit for a while. 10 minutes is plenty of time to discuss the deal.). I know their businesses and they know my expectations. It is a pleasure helping each other earn a little money.
Jeff Rabinowitz, over 10 years ago
Jeff, this is great stuff. I'm looking to start lending out of an SDIRA myself. Do you recommend any of the custodian firms? I've found that some of them are super restrictive and slow when it comes time to fund the loan. Any suggestions are most welcomed.
Stephen Katona, over 10 years ago
Stephen, Oh boy, where do I start? I have only used one custodian. It is one of the larger ones. ~4 years ago, when I opened the account they were excellent. They funded one transaction in less than 4 hours. I have never missed funding a transaction but one was delayed by 1 day (The deal closed in escrow. The worst part about the delay was that the delay was triggered by a fairly arbitrary decision and I wasn't sure another arbitrary decision wouldn't delay it again). Unfortunately, the custodian changes their paperwork ~3 times yearly and they seem to change their staff more frequently. Most of my transactions are very similar but if I forget to download the form of the day and my staff member of the day hasn't seen the almost identical form which was used 2 months earlier they might delay the transaction. For a while I would routinely call in the morning to escort the transaction through (I have developed a couple other tricks) but, to their credit, the last couple of transactions have been processed next day without my having to call at all. If I have a new borrower and am funding transactions with different parameters than I have done before I will often fund the first couple deals outside of the SDIRA to work out the mechanics before I try a deal through the SDIRA, especially if the transactions are time sensitive. I wish this wasn't necessary and I only do it if it seems likely that I will be doing a series of transactions with the new partner. I have considered moving my account on several occasions. So...do I recommend them? Kind of, but not really. The good news is there are a lot more custodians now than there were a few years ago. (Many were started by departing employees of my custodian). Unfortunately, the fee structures vary significantly and I don't really know if a new custodian will perform any better than my current one.
Jeff Rabinowitz, over 10 years ago
Very motivating, thank you!!
Billy Hills, over 10 years ago
Thanks for tuning in.
Jeff Rabinowitz, over 10 years ago
This is great stuff, Jeff, but I can't help but want to read more.
John Knappmann, over 10 years ago
Thanks, John. This is the second post in my first blog. I expect to continue this experiment a while longer.
Jeff Rabinowitz, over 10 years ago