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Part 4 in a series

Lending money to real estate investors can be a lucrative way to participate in a project without running the project yourself.  It can lessen your risk, because of where you stand in the line of people waiting to get paid.

First, lets make it clear we are talking about real estate investment deals here – not a homeowner purchasing a home to live in.  The real estate investor will probably sell to an end buyer, but a lot happens before that.

Irving Investor is going to buy a property in disrepair, using some of his own money and some of yours.  He’s going to fix it up, probably using your money, and then sell it to an end buyer in this example.  When he sells to an end buyer, everyone gets paid off:  The taxes, the utilities, the mortgages and the agent if Irving used one.  Irving pockets what’s left over.  For purposes of this discussion, we’re going to leave the agent out of the picture, simply because it’s not relevant to the issue I’m illustrating.  If there is not enough money, someone at the end of the line is left out in the cold.

Here is the order of payment:

  • Property Taxes
  • Condo fees
  • Utility Liens
  • 1st position mortgage holder
  • Mechanics and medical liens (The contractor you didn’t pay, Medicare, etc)
  • Additional liens
  • Equity investor

So since you are not the town levying the taxes and you’re not a condo association, the next best position is first mortgage holder.  Notice that the owner and/or equity investor gets paid last.  He takes the most risk.

Now, I’m not saying that the equity investor won’t make more profit – he might.  Or if something goes wrong, he might not.  The point is, the lender is paid before Irving Investor is paid.

Before you jump into lending with both feet, there are some things you need to know.  I’m going to cover a few here, and then some more over the next couple of posts.

First the disclaimer:  I am not an attorney, don’t play one on TV, and am not dispensing legal advice.  But I know lots of them in New Hampshire and Massachusetts and consult them regularly.  This information is presented as educational only, and if you are considering an investment, alway consult a professional.  A good real estate attorney is essential, as is an accountant.  If you are a real estate investor and are not a licensed agent, find a good investor-friendly agent or broker.

Do you need to be an accredited investor? No, not if you are lending directly to a borrower.  But by all means, take this to your attorney and speak to him about it first.

Do you need to be licensed?  What about the SAFE Act? Ok, here is another “consult your attorney” disclaimer.  But I’ve consulted several, and the concensus seems to be that commercial transactions are exempt from licensing requirements.  Since all my loans are made to companies acquiring property for business purposes, the licensing requirement doesn’t come into play.  All of our borrowers take title in an entity, such as an LLC, and do this as a business.

Should you buy into a “pool” or lend directly? Well, that depends on how much you are allocating to the endeavor, your experience level and your comfort level with the deal.  You should always make sure than anyone you do business with comes recommended by others and is someone you trust.

Buying into a pool may require (generally speaking) that you be an accredited investor, because you are pooling your funds with others, and that is considered to be a security.  You are likely to get a lower return in a pool than lending directly, because the fund keeps a larger part of the return.

Buying into a pool removes any decision makng about individual loans or borrowers, because the fund managers make all those decisions.  Individual lending leaves the control and the decision making about a particular deal in your hands.  You are also free to set the interest rate and terms, within state usury limits.

Here are some of the questions I’ll address in my next post, this one is long enough for today.

  • How do you choose the deal you will lend on?
  • How do you find these good deals to lend on?
  • Should you ever lend in second position?
  • What about business loans instead of real estate loans?
  • How do you protect yourself from fraud or incompetence?
  • How much of my portfolio should I allocate to lending?
  • What happens if the borrower stops paying?
  • Should I form an entity to lend?
  • Should I lend outside of my geographic area?

Part 1 in a series

I come into frequent contact with people wanting to make the jump into real estate investing, but not knowing where to start.  I’m on the Board of several Real Estate Investor Associations, and co-founded one of them, so my network includes many new investors.

Sometimes they ask where they can find deals. (That’s the mother lode, by the way.  It’s sort of like asking Coca-Cola for their formula.)  Finding deals- really good deals, I mean – is the skill that investors need to cultivate.  Great deals are found off and on market.  They are frequently found by speaking with sellers directly, some of whom don’t want to list their property conventionally with an agent for many reasons.

If you have the personality and the persistence to seek out sellers directly, this will probably be your best source of good deals.  You will need to make possibly hundreds of contacts per actual deal realized.  There are many trainers who teach these skills, and I am not the expert in this arena.

If you can find the deal, and have no funds, there are huge networks of investors who will buy your deal without your ever having to close.  Selling the deal is easy, finding the deal is the key.

Good deals can be found on the MLS if you are working with an investor-friendly agent.  But remember, if that agent has been in the business for a long time, they have a huge buyer’s list of real estate investors ready to snap up the best deals, and they call these investors first if they have proven they can perform.

Sometimes they ask if we lend their purchase price plus the fix up money. A new real estate investor frequently comes into the game with little to no cash.  They find what they think is a great deal on the MLS, and want to buy it, but have no cash for purchase or repairs.  They are told by the “gurus” that a hard money lender will lend them 100% of the purchase and rehab costs.  While that may have been true 5 years ago, it ain’t happenin’ now.

If you are determined to buy a property and rehab it for resale, but have no cash, you should partner with someone you know who does have cash but doesn’t want to manage a rehab.  Hard money will seldom lend out the full amount for a project, but if your partner puts up the needed downpayment, then you can use hard money for the rest.  If you are one of these people who have the funds but don’t want to manage a rehab, then read on.

Sometimes they ask if I will lend out their money, because they want to be involved but are not sure when to pull the trigger on a deal, and aren’t sure they want to be a landlord, or do a rehab and flip.  So this series will discuss what you should know before you decide to lend out your funds, either directly to a real estate investor, or through a hard money company.  Here are some of the issues we will be covering:

Do you need to be an accredited investor?

Should you buy into a pool or lend directly?

How do you choose the deal you will lend on?

How do you find these good deals to lend on?

Should you ever lend in second position?

What about business loans instead of real estate loans?

How does the SAFE Act impact your lending?

How do you protect yourself from fraud or incompetence?

How much of my portfolio should I allocate to lending?

What happens if the borrower stops paying?

Should I form an entity to lend?

Should I lend outside of my geographic area?

Covering all this is beyond the scope of one post, so I’m going to write a series.  If you have additional questions you’d like me to address, please, by all means, jump in and let me know.