All Forum Posts by: Alex Breshears

I had bit of an unconventional track to RE investing. I was at a local REIA meeting almost twenty years ago and got talking to some people. One of them was a private lender. He lent out his own capital to active investors. I got to see the "back side" of real estate investing through the eyes of the lender and what was really going on with projects. My boss was basically out on the golf course while I kept the office going with phone calls, faxes (this was awhile ago!) and borrowers coming in to make their payments. It sort of clicked for me right then and there that I really wanted to be on this side of the table versus the borrower side of the table. It was a lot less headaches! You could get started in private lending with your own capital, or brokering funds from those in your network. There is a bit to learn about it, but if you can underwrite a deal from a lender's perspective, you will definitely learn the ins and outs of residential real estate investing because you have to vet the deal to lend on it!

Hi Edward! Welcome to BiggerPockets! You are in the right place for connections!  I am a private lender and have a book coming out in July by BP about private lending. I know some great private lenders in TX that lend out their own capital in that market.  I'd be happy to introduce you two! Please let me know if there is anything I can do to help! Welcome and I look forward to seeing how your investing journey shapes up!

I can't wait to see everyone there! We will be speaking on a creative financing panel about private lending, and where that may fit into your business model as an active investor, or someone who wants to learn more about private lending! 

@Travis Beatty - I am not particularly familiar with this paragraph specifically so I am going to work of the example you provided in your question.

First - the 5 years of interest only payments are income the lender has already received (or the borrower has paid). If the loan is ONLY interest only payments, then the original principal balance would be $130k because all the payments have gone towards just the interest on the loan.  If the property sells for 190k 5 years later, the borrower still owes the $130k (and ignoring closing costs) the owner that sold the property would get to keep the different between the sales price and the liens on the property, so the $190k (sales price) and the $130k (lien on the property), which would be $60k net. Depending on which party you are considering "the investor", both make a pretty decent return. The investor that is acting as the private lender has received $52k in interest payments AND will receive their $130k principal balance. The "active investor" will also make out well because they (hopefully!) have been collecting rent and then keeping the difference between what the tenant paid and then what they have to pay out to the lender for the interest only payments. This happens over the course of 5 years, and then when they sell the property they net that $60k difference between $190k sales price and $130k lien on the property.  I hope that helps!

Hi Henry! The terms you are quoting are pretty typical for hard money lenders. So let me explain the thought process behind it so you can potentially find a work around for it.  When you sign on the dotted line for a mortgage, the lender is taking on the risk of that capital being deployed. In hard money lending, they are lending money on an asset that often needs significant repairs, renovations etc.  That is a much riskier scenario because the property may not be "worth" the amount of capital for the loan at the time of closing. To use your example, the $150k purchase price is the value of that property as it stands (just to keep things easy), but then they are loaning you another $50k to improve it to get it up to a $300k value fully done (again just to keep the numbers easy).  Now imagine you buy the property, they give you the $50k check at closing to go work on the property.  There is nothing stopping you from hopping a flight to Vegas with that money and just having the weekend of your life! Then from the lender's perspective, they now have a $200k loan outstanding for a property that at that moment is only worth $150k.  To avoid this scenario, lenders build in certain performance gates, like you mentioned above, certain portion of the rehab completed, certain aspects of the project completed and inspected etc.  They do this as a way to have some assurances that the money they are providing to you is A) actually going towards real estate renovations and B) going towards the specific property the loan is out on.

Now understanding the lender's thinking, you can see why some of these parameters are in place. Not all lenders will have the same parameters. Some private lenders might actually let you leave closing with $50k because you have built a relationship with them and they trust you and your track record.  I would say that you could start out by investing with a mentor as a partner. Maybe you are the sweat equity side of the house and you bring some funds to the closing table, but you are handling the project management, maybe some of the work etc. In exchange, you are gaining valuable experience from that mentor (assuming you select the right one).  This will decrease the upfront capital required while also offering some experience to help guide you in the process (which could save you thousands!).

In the past, I have heard of active investors that have built relationships with those in their network and they will get an unsecured loan for the renovation costs from that investor, and then once all the rehab is complete they are then refunded by the hard money lender and they pay off that other investor. AGain, more of an advanced strategy and not one I would recommend to a new investor, just merely offering some alternatives to know what is possible out there.

Another option is obtaining some sort of line of credit either on your primary home or maybe a business line of credit. This can help extend your capital, but realize there will be an additional monthly cost to that capital, in addition to potentially putting up your primary residence as collateral on an investment property. You also likely will need to personally guarantee any business line of credit especially with a new business entity, but again it's an option that is out there. 

I hope that helps you some! Just keep talking to lenders and make sure you are very clear on what their draw model is for getting those funds being held back for renovations.

I agree with Ben! You sound like you can just turn this into a BRRRR rather than having to sink more money into it with a downpayment, but you might with some of the rehab costs. Once the property is renovated and up and running, move in, and then refinance into an owner occupied loan. I will say it might be easier to get a rate and term refinance versus a cash out refinance. So if you did pay all cash and you want to refinance it in the future, it might be good to have some lien on the property ahead of time. Conventional lenders are getting a bit risk averse in the current environment, and for owner occupied stuff when they see someone wanting to do a total cash out "refinance" because they own the home outright, that is perceived as riskier than someone who has debt on the property and looking to pull some extra money out from it. Depending on your plan for financing, the condo part may actually be tricky depending on the make up of the building and the association. Some conventional lenders will only work with condos when the owner occupied % is above a certain mark. So if your condo building is mostly rentals or short term rentals (if allowed) that may throw a monkey wrench into obtaining conventional financing. In that case you may have to look at something more on the non-QM or commercial side of the house, so it may be shorter amortization timeframes (think 20 or 25 years as opposed to 30) and likely a higher interest rate versus the conventional 30 year fixed, and also likely to have some adjustment period or prepayment penalties to watch out for.

I will say your advice was solid, finding a private lender, but the definition of private lender is currently in flux. There is a movement by the hard money community to call themselves "private lenders" because they claim the capital comes from private sources, which is rarely the case.  These large hard money lenders are backed by institutional capital, warehouse lines of credit, or even have a debt fund. Why does that matter to you as the borrower? When you are talking to what I would consider a private lender, you are talking to an individual that is lending out their own capital or capital they have direct control over. Why is that important? You are talking to the decision maker. You can explain to them why you need more funds, they likely are operating in your market already and can vet your numbers or can see your experience first hand in other projects. They also will likely come into a second lien position if there is enough equity in the deal, so there is no need to refinance the first mortgage right before you go to sell the asset.  My point is that you were both right.  Private lenders are out there, you will have to network to find us, but the people who advertise their loan products and rates are going to be hard money lenders.  Their capital is backed with a TON of stipulations because they aren't the decision makers. They sold someone else on their business model. For example, if they have a warehouse line of credit they are using to fund your loans they likely had to present that lender with a business model that included a lending matrix. They won't lend on properties unless they are in X state, above X purchase price, above X loan-to-value, to borrowers with X credit scores.  They don't have the decision ability to go outside of those boxes because they have a business model and an agreement with their warehouse line provider. The same holds true for lenders selling their loans on the secondary market to be recapitalized and lend again. The same holds true for lenders that are using a debt pool of funds because they sold passive investors on X business model of lending.  So the advantage of networking and finding those private lenders if a matter of speed and convenience. My borrowers can text me an address, an amount, and a few other metrics and I Can say yay or nay usually pretty quickly because I've built a relationship with them and they have borrowed successfully from me in the past. It's time to get out there and start telling people about what you are doing, and what you are on the lookout for and just keep going.  We are out there, but like you said true private lenders will not publicly advertise they have funds available because it is a much more relationship based model than hard money lending.

HI Brandi!

I think what you may be running into is just a bit of confusion about the lending side of the house. Easy fix. First, your primary home was probably what is termed a conforming loan. So there are parameters that must be met such as credit, income evaluations, asset verification etc.  They must do this because the loan will most likely be sold as soon as the loan is closed and you have made the first mortgage payment. This process allows for the capital to then become securitized and basically recycled to be used in future loans.  This is conventional loans, usually owner occupied loans but there are investment property conforming loans.

You can transfer a property to your LLC with conventional financing, as long as you qualify for one of the exemptions. The one that sounds like it will most likely fit in your scenario is that you are a majority owner of that LLC. The borrower on the conforming debt must be a majority owner of that LLC, and in theory this will not trigger the due on sale clause.

https://servicing-guide.fannie...

Here is a link for Fannie Mae guidelines. Freddie Mac might be a bit different, so it is worth asking your lender about this if you are wanting to go down the conforming loan route (where you are being underwritten as the borrower for income, assets, etc).

Now there is another "class" of loans termed non-QM or nonconforming. That's a big wide field of options, but generally they do not check all the boxes for conventional underwriting on some level. Maybe they don't check credit scores, or they lend to businesses (LLC). Whatever it is, this non-QM stuff won't end up down the conforming pipeline. There are aggregators of loans that are non-conforming, with some stipulations of course for some level of conformity of the loans parameters. If you want to have an LLC be the borrower and you as a person are not getting the full conventional underwriting treatment, this is the space you are going to be operating in. A few options you might be familiar with are hard money loans (where they look at the asset more than the borrower), or a portfolio loan from a small regional bank in your chosen market that plans to keep that loan on their books and earn the interest from it. Obviously having an established banking relationship with them helps, so opening a bank account for your LLC with that bank you hope to work with in the future might be a good first step. As a beginner, many lenders are likely going to require a personal guarantee (often referred to as a PG). That means should the asset for whatever reason not fulfill the debt obligations if the loan goes into default, you are personally responsible for the shortfall in the difference. While these loans won't show up on your credit report, future lenders may ask about debt that doesn't appear on your credit report, and they will want to know what's outstanding that you are personally liable for, just for their own risk assessment.

I hope that helps clear up some things for you!

In addition to what Jeff Copeland mentioned, another downside would be that if you have one loan for each individual property, should the need arise to sell one building, it becomes a modification of the mortgage because the assets that are secured are changing.  It will lock you into somewhat of an all or nothing deal, or you refinance into a new loan (more closing costs) with a new lender for the remaining buildings you want to keep.

Another option in this environment might be to find someone to be a capital partner, depending on the purchase price point of the property. If you did a JV with someone, or a few someones, to purchase the property together, then you have some time to get is stabilized (if not already stabilized) and get that NOI up to boost the asset valuation if they will value all four properties as 1 asset even though they have individual deeds and parcel numbers. But a capital partner could work quickly, maybe even be on just the debt side of the equation as a lender, but most likely will want some of the upside as well as a JV partner. Just an idea to throw out there.

HI Paige! I can say that your story really resonates with me and I wanted to throw another idea out there. Have you thought about private lending? For example, you would be acting as a lender for another active investor. There is no real major oversight once the funds are working for you, so that may fit a bit better into a busy lifestyle that a lot of us have. While you won't necessarily have the upside potential of gain in asset prices, it does become somewhat passive and just checking in with borrowers to find out how the project is going.  You can start lending out your own capital, maybe work into a line of credit or brokering capital of friends and family. There's a lot of ways to scale that as a business should you choose, or if you want to remain more passive and just use your own funds for some extra cashflow every month, you can do that too!