Why I lend money to my clients....

Over the past decade I have been fortunate to be more selective on my real estate investing, both in ventures I commit my time and money to but also who I work with. I recently posted on a deal in which I found the deal for my client, made a commission on the purchase, but then in addition selling the property to my client I also lent my client over 90% of the purchase price. I was surprised to see how much engagement the post had, including how many people thought it was the craziest thing they have ever heard. Conventional has never been my forte, but helping others has so this blog post is to explain my point of view with a real life example.

Like all decisions I make when I invest in real estate, the primary reason that drives my decision making is return on time and return on money. I rather do fewer really profitable deals than spend my time chasing the next so lending on deals my clients buy allows me to maximize the efficiency of the deals I don’t buy myself. In the case of my client, he was purchasing a duplex for $210,000. The duplex next door with a very similar layout and condition sold for $285,000 a year earlier so we knew we had a good deal on our hands. I knew the bank would likely appraise the property at $265,000 so I offered my client who would have probably bought the property either way, the opportunity to finance the property so they could boost their cash on cash return. When a property is purchased cash or with a private money mortgage the lenders we use allow a refinance of the property at appraised immediately with no seasoning. If my client were to purchase it with a regular conventional loan he likely would have been stuck with having to buy with 25% down or a $52,500 down payment. However, by buying it with private money I lent to him on 75% Loan-to-value of what I thought it would appraise for or $190,000, reducing his down payment to 20,000 plus closing costs or only 10% down.

The long standing joke with my family, friends and partners is that if I am lending you money on real estate while I only loan to people I trust, I also am lending you on the deal because if you can’t pay me I have no problem taking the deal off your hands. I LEND ON DEALS I WANT TO FORECLOSE ON. In the case of this deal, if it cost me 3-5000 to foreclose and I get a duplex worth 265,000 for 190,000 plus foreclosure fees there wasn’t a way I felt I could lose. The cost of the financing was roughly 4,000 which was a good deal for my client because a conventional loan could easily cost that after you add a lenders policy, appraisal, underwriting and third party fees. In addition because my private loan is considered a private money mortgage, my buyer secures better financing rate and terms than a traditional BRRR which would be considered a cash out refinance instead of a rate in term refinance. On your traditional BRRR you are limited to 70% LTV on a cash out refinance for a duplex and paying a higher rate and terms with the interest rate typically 0.25%-0.50% higher. On a payoff of a private mortgage, the refinance is considered a rate and term refinance and you can go up to 75% LTV on a duplex

This brings me to my second point on why I lend money to my clients. It creates additional streams of income for me both now and later. On a traditional realtor purchase, a realtor makes a commission one time and then the client has to either save money through cashflow or their other job to buy another rental or not at all if they are your traditional home buyer, or wait 6 months to refinance to meet seasoning requirements. My business is predicated solely on repeat business. Rather than always finding buyers, I find deals, and buyers find me but also stay loyal to me when I find them great deals. On this deal I have created 4-5 streams of income. First, when they buy I get a commission, secondly when I am paid off when they refinance the property I earn interests and fees, thirdly when they have an additional 30,000 in their pocket they are that much more capable of buying again and will likely go through me for their next purchase resulting in more commissions, fourth when sellers who often have multiple properties appreciate the fast, no hassle transaction they often ask me to sell another property for them, and lastly if the buyer list they will also likely sell the property with me as well in appreciation of how good of a deal we put together for them and do also make sure they stay high up on my buyers list for my next deal.

The third reason I lend to my clients is while I am well versed in many types of real estate, sometimes I like to lend on deals I want to learn from. I hear many times investors that invest in syndications invest because they want to learn from the syndicator how they structure the deal and so they can go on and syndicate their own deal. In my opinion, what’s the difference between you investing in a syndicator to learn and make money off their deal and me lending money on a deal and learning from the execution plan. As the lender I normally get better access to the deal, than a passive investor on a syndication. For example, I may not be as familiar with luxury high end rentals, or section 8 tenants so I get a first hand look because the buyer expects I am going to ask them questions on their plan of action when determining on whether I want to lend, and also it’s written into my lending agreement they may be required to show proof of their financial stability which includes the status of executing their plan.

The last reason and quickly becoming a favorite reason on why I lend to my clients is because I generally am friends with a lot of my clients or recognize they are good people and want to help them. I may have a contractor that does a lot of good work for me but has had trouble getting their first deal so I want to help them. I have clients that really want to service low income underserved areas and I like their cause. Lending to these clients helps me build their wealth, and I know when they have more wealth these are the type of people I know will do good things with their wealth. Rather than giving them money as the old adage says, “Give a man a fish, feed him for a day, teach a man to fish and provide him food for life.”

While these are my top reasons for lending money to my clients, there are many more I did not mention or I’m sure you could think of with the right mindset. Feel free to comment with thoughts or questions.