All Forum Posts by: Alex Breshears

Since I get these questions a lot - I thought going out to the BP community to see what they think might be educational.

As a private lender, I've discovered the term is very ambiguous and vague to borrowers. There are not unified terms within the lending space to differentiate a lender like myself that lends out their own capital in defined ways secured against real estate, a lender that is more synonymous with 'hard money' that has very strict underwriting criteria and documentation requirements, a friends and family lender that may give a borrower money for the downpayment or closing costs - or even DSCR lenders that will offer permanent debt on properties.

It gets confusing for borrowers. Before the pandemic of 2020, most borrowers didn't think about where the money came from to fund their deal, as long as it showed up on the closing day. Now, understanding the source of your capital and what can be done with that source will allow an investor to reach out for the right tool at the right time.

"Private Lender" as I am using it here denotes individuals (or their business entity) that are lending money they directly control and keep for the life of the loan. They are not turning around and selling it on the secondary market, so they have the freedom to be more flexible on underwriting and loan terms. Many have a business model of keeping the lights on with interest paid during the life of the loan. These lenders will want to have their capital backed by an asset - usually some piece of property. This will be done by filing a lien (mortgage vs deed of trust) in the municipality where the property is located.  A few smaller private lenders may offer 2nd lien products, but they will be under very specific criteria and with a combined loan to value usually below 75%.

"Hard money" as I'm using it here will be the large lenders you see advertising everywhere. They can usually lend in most, if not all, states in the US.  They have institutional backing from possibly a large fund, hedge fund, warehouse lines of credit, or large business lines of credit.  Usually these lenders are selling their loans on the secondary market and off to fund the next deal. Their business model relies on deal flow, and that requires some conformity to what the secondary market is willing to buy. That's why you see the very strict underwriting criteria and documentation requirements for these types of lenders.  These can be a great asset if you have a very standard deal, good credit, lots of experience, and potentially time for a more thorough underwriting to close your deal. They also have much higher maximums than some private lenders, so if you are looking to take down a luxury property or even a medium sized multifamily deal quickly - these types of lenders can be a great resource.  Some may also offer a short term bridge debt option that rolls into permanent financing at a certain benchmark, saving in refi costs.

DSCR lenders as I'm using it will be permanent debt financing for many investors because these loan products look heavily at the income the property produces. The underwriting may involve a credit check on the primary borrower, others do not but may require a personal guarantee signed by members of the business entity borrower. Terms can vary widely in this category from annual interest rates, prepayment penalties, income calculation, DSCR ratio, maximum loan to value, minimum and maximum loan size, amortization period, and requirements to escrow taxes and insurance. If the property is in a habitable condition at the time of purchase, and will have an income that can support the purchase price, these are a great option for many investors as long term permanent debt.

Where I think the waters get muddiest is with people seeking "gator lending".  These investors are looking for capital for anything and everything from earnest money deposits, renovation costs of the property, downpayment and closing cost assistance for acquisition of a new property, or help with holding costs while the property is undergoing renovation and not producing income.  Most of these requests have no ability to secure the capital against an asset, or if there is a 2nd lien placed on the property it may be behind a lender that doesn't allow junior liens.  While there can be ways to secure your capital in this type of lending, in many instances that I have seen these deals go bad because the borrower was undercapitalized to begin with, both borrower and lender are inexperienced, and neither understand the risk they are taking on. Yes, there is risk for the borrower doing this type of lending.  If you have a foreclosure notice or judgement pop up in public records, you will have a much harder time getting loans in the future to continue your real estate investing journey.

So what has your experience been with lenders?  Do you agree with this broad assessment? I realize these are highly generalized, but in order to provide a bit of clarity to investors on the sources of capital available to them I thought this would be a good starting point.

Sadly yes, I've seen a large uptick in this as "gator lending" takes hold in people's mind as a way to invest in real estate.  Many people reach out to me only when it's in trouble, and most of the time they have no asset securing the money - they literally gave someone money with a template promissory not they got off a website.

Most recent example:

Someone lent an investor $25,000 for rehab on a duplex they just bought.  The investor promised to return their $25,000 plus an additional $10,000 when they refinanced the property with permanent debt.  Five months into the loan, the hard money lender filed a notice of default because the borrower stopped paying their mortgage with that lender.  Turns out the borrower did not improvement to the property at all, and the lender has no record or idea where the $25,000 went. They only have a simple promissory note that they likely now have to file a lawsuit to win a judgement, with again no promise of repayment.  It was a cost of $0 to enter this transaction their way, and it could have been a cost of $0 to enter it the right way so it was secured (if they even still wanted to do the deal in the first place).  

People get lured in by the ultra high returns investors are promising these newbie lenders. The lenders don't know what questions to ask, what due diligence to perform, or assess the risk they are agreeing to.  Lastly, they feel paying for advice, consultations, or even paperwork isn't worth it - they see it as a waste of money - but fail to realize the paperwork is the only thing they get in return for their money at a closing.

You can - but honestly it is extremely inexpensive to have your own email address at your own domain. For example Hover allows you to buy a domain for around $15 a year and a small mailbox for $20 a year. That’s $35 a YEAR to have your own email address with a URL that is for your company.  You don’t have to build a website for that to work either. It looks much more polished and it’s very inexpensive. 

As a military family - I feel every sentence of this post in my heart. The messaging our community gets of "buy a house at every duty station with your VA" thing is very real. I'm going to tell you we rented for 15 years as we were bounced around the globe. The landlord thing did not suit our personalities and the negative cash flow was an albatross around our necks. It's an unsustainable model if you want to continue to buy property in a future duty station. In a few cases we got 2 weeks notice we were moving - we were renting so we gave the landlord the appropriate notifications to vacate - scheduled movers - did our move out clean and left. We had no residual responsibilities to that home or area after we left. We didn't have an empty house sitting in the market while we made the mortgage payments looking for a buyer or renter. Moves are stressful as a family - having that hanging over our heads was not what we wanted. When we reached a place we felt we could put down roots we bought a home - knowing it would not be a rental. My spouse was then suddenly stationed out of the area and we chose to have him geo Bach. The cost of renting that house out at a loss was a factor in that decision. Ownership comes with expenses outside the mortgage as well - repairs are on you. There's no one to call to repair something that is also footing the bill - so when looking at the monthly expenses of buying versus renting don't forget maintenance and repairs in the ownership column! If you are really set on owning - buy in a place you will retire to and use it as a rental (that cash flows!) until you are ready. We bought a short term rental in the mountains as our retirement home and it's rented out in airbnb to cover its expenses until we move there on a more permanent basis.

Just another thought on this - since you didn’t mention it in the original post - remember equity to a lender is viewed through percentages not dollars as most people think about equity. For example - an investor may look at a property and think “I have $80k in equity sitting in this home” because they take the appraised value and subtract the current mortgage balance. For a lender - we look at that same scenario and think “you have only 10% equity in that property so we can’t do anything” because they want to still have some equity buffer above their loan. They most likely aren’t lending to 100% if the value of the property - especially in an alt doc loan situation. I would say if your current mortgage is 70% or less of your current appraised value - a second mortgage makes sense and it’s worth the time and effort to find an alt doc lender for a primary residence. If you are 80% or more - you are likely going to have a hard time finding a lender and if you do will the amount you are going to get be worth the time, effort and fees associated with that loan. 

Starting out it will feel overwhelming - so don’t feel alone in that. Many feel like they are drinking from a fire hose! What you do have going for you is it sounds like you have a market picked out AND you know the type of investing you want to do. That’s two very big rocks to have moved in the process. You are taking steps to get there. If you are solid on investing in residential real estate in that market have you thought about looking for a mentor or coach? Have you attended any local events and met other investors in that market? Some of the best referrals to agents can be found from other investors. They could also help you find a lender that has worked well with other investors. Just take it one step at a time. Analyze deals by practicing what is for sale in your target market, learn what rents are, insurance ranges and how property taxes are calculated and reassessed. There’s lots you can learn while looking for a realtor! I hope this helps - just put one foot in front of the other. 

Yes! We did it for an STR the year we bought it. We were lucky in that our CPA is very knowledgeable about real estate and was able to do the study for us. What we saved in taxes that first year was three times what we paid for the study. I will say just make sure you are keeping this property for awhile - otherwise you are paying back the accelerated depreciation. This wasn't an issue for us for this home because it will be kept in the family for years and hopefully generations to come - so we thought why not depreciate now!

Since you have mentioned cash flow is a big part of your goals - have you thought about private lending? That’s a pure cash flow play - monthly interest payments hitting your bank account is a great feeling! Downside is you won’t get the equity accumulation - but if you did this in conjunction with the properties that may not cash flow - the private lending income could help offset the low to no rental income from appreciating properties - so you get the best of both worlds without double the mortgage payments hanging over your head. Just an idea. BiggerPockets has a book about private lending and I’m one of the authors - so feel free to take a look if interest or respond with questions. Here to help. 

As a private lender - I'm going to say that's the best one obviously 🤣 but it depends on your interests, skill set and goals. As others have mentioned the methods you reference are very different in what you will actually be doing, how you receive cashflow and if you are building equity. For example - if you wanted pure cash flow to help with monthly bills on a consistent basis - then private lending is hands down it in my mind. That could be $3k a month coming in every month. Now if you like the idea of having a second home, you have the time and energy to devote to launching a short term rental - you can handle guest complaints and questions - find a designer - etc - then do a STR - but know the costs upfront can be substantial and cash flow is usually not consistent as there are off season months in every market - plus saturation. STRs are buying a business not a property and require your time and attention - even if you have someone managing it for a percentage of the revenue. Long term rentals will hopefully allow a little cash flow each month, but you have the overhead of a mortgage, insurance premiums are rising in most places pretty substantially, and your property taxes will continue to go up. So as long as you are in a market with a property that can justify rental increases when needed - and it will cash flow while losing 10% to a property management company - that could be a great way to build equity in a property - but realize you may not get a lot of cash flow. Decide what you are trying to get out of investing first - then look at only the options that allow you to get that goal.

Welcome to the community Tony! There is so much to learn here so buckle up!  One thing I always advocate to new investors is talking to more experienced investors in their chosen way of investing.  But!  Do NOT sit and ask them the logistics of HOW they did it, you can find that in books and YouTube. What you want to know is what did they learn, what did they like about investing in this way, what is their average day like, what would they have done differently knowing what they do now.  Those things usually aren't in books. lol.  For example, before I became a private lender, I did the landlord and fix and flip thing and I was miserable. It didn't suit my personality or my goals in the long run, much less my lifestyle!  If I had one thing to go back and tell my younger self, it would be to stop and think about those aspects before I dove into trying one method or another. So simple but so powerful.  Good luck and have a great learning journey!