Doug: Hey there. My name is Doug Smith. I’m a real estate investor and founder of a few websites that pertain to real estate investing. Thanks for tuning in. Today, we’re here to talk about a topic that’s become increasingly popular in the world of real estate investing. That is private money. Today, I’ve brought here with me a subject matter expert of not just about private money but a lot of things. His name is Brant Phillips. He’ll be going into all sorts of details about what private money is, how to raise it and how to make as much money as possible from it.
I’ll go ahead and jump into Brant’s bio. He’s a full-time real estate investor. He’s an entrepreneur, author and speaker. He’s been featured on Fox News. He hosts seminars. His book Seven Fundamentals of a Highly Successful Flip is a monthly bestseller on Amazon. Brant is a proverbial rags to riches story. While living in an apartment and having no money, he was able to purchase his first investment property on a credit card. Not bad at all.
He went on to buy 10 properties that same year with no money down. Within only a few years, he was able to raise $3 million in private capital to fund his real estate investments. Brant now owns a successful construction company Invest Home Pro. He’s rehabbed hundreds of homes. He owns a portfolio of real estate properties worth millions. He’s involved in new construction development and routinely flips houses for cash. I would imagine he spends some of his time counting all his money.
Brant: Right, money which my wife doesn’t spend.
Doug: Brant is a former police officer who prides himself on integrity and serving others. He’s a husband and father of four and enjoys helping and teaching people to experience the freedom and success that he’s achieved through successfully investing in real estate. All right. Brant, I mentioned you have a lot of experience in real estate investing. How many private loans would you say you’ve taken out over the last few years?
Brant: That’s a great question. We’re where we’ve done hundreds of deals now. I started thinking about this the other day. I began using private lenders in the form of partnership in 2008. Since 2009, I believe we financed about 90% of our deals with private lenders. I know we’re above the 100 mark. We’ve done 100 loans with private lenders but I don’t know exactly how many, but that’s our primary funding for all of our deals.
Doug: Nice. All right. Really, a basic fundamental question for you here Brant? What would you see private money is and how do you go about finding it?
Brant: The number one thing that comes into my mind is relationships with private lenders, like individuals. The way to go about finding it is, what I tell people in the beginning when you’re first starting out like what is the first step that you take? I tell everyone to just begin talking to friends and family members. Not necessarily because that’s who you want your private lender to be, but just having conversations with people that you feel comfortable with prepares you for conversations when you begin talking to real private lenders or other private lenders about real estate and they don’t know you.
What I tell people to do, and that’s what I did whenever I ran out of bank financing. I couldn’t use the banks anymore at that point in time. I began just talking to friends, family members, just talking to everyone I knew because I really wanted to do more deals and I didn’t know where else to turn. Then you get comfortable having those conversations. You moved on to networking events, talking to people at real estate functions. It could be a City of Commerce Chambers meeting and going online and finding private lenders online and just becoming comfortable having those conversations.
You can have conversations with people at the grocery store, things like that. Just to get comfortable with it so you get really, really clear on what it is that you’re doing and the service that you’re providing potential investors, because if you haven’t practiced your pitch if you will or if you’re not comfortable speaking about it or asking for money which we may talk about that later but I encourage people to not really ask for money, just educate people on the opportunity that’s involved. Just start getting the word out with as many people within your network and then expand your network.
Doug: Okay, good deal. What would you say the typical private money loan looks like? They’re just maybe lending against the property, right?
Brant: Mm-hmm (affirmative).
Doug: With a guarantee that you’ll repay otherwise they could take the property. Is that how you would describe it?
Brant: Yeah, absolutely. The way we run our businesses is we will only have one lender per lane. We won’t pull money together to do one deal. You can structure that and it’s legal. We just don’t. I prefer to keep each lender and each loan separate. Ideally, it will be one lender per house but a lot of times we take on second or a third lane in order to get a deal done so that we can do deals with 100% financing. A real estate attorney does all the paperwork. Every loan that we do is secured with a note and deed of trust. Everything, we’re personally guaranteeing every loan that we do with the lender.
Doug: There’s several options for people financing their purchases, right? You could take out a mortgage or a bank loan or take over someone’s payments or maybe buy on a rent to own maybe hard money, your own cash, somebody’s else’s cash like on a partnership type deal. What makes you choose private money like loans, borrowing those loans over some of the other options?
Brant: Yeah. Where I’m at now is we use private lenders because not only is it the most favorable financing but it’s relationship based. We have relationship with private lenders where not only are we helping them earn great returns, they’re true relationships. While they’re helping us grow our business, we’re helping them at the same time grow their retirement. That being said, for some of the members watching today, in the beginning, when you’re just starting out, whatever financing you can get to make that deal happen is the financing that you take as long as the numbers make sense.
Doug: Right, right.
Brant: Because I know a lot of investors complain a lot about hard money rates sometimes or paying points, even to private lenders. My question always goes back to, do the numbers make sense? There was a deal last year where we had eight or nine rehabs going on. We tapped out most of our good private money lenders which were low interest rates. We had a particular deal that came across our table. The only money that we had available was like 12% and two or three points at the time.
It’s high interest. I had grown used to not paying that anymore. I had to take my own medicine. I said, “The numbers still look great.” We went into that deal with very high interest paying a lot of points but we still thought we’ll make $50,000 on the deal. On that particular deal, we ended up netting over $100,000 with 12% interest. That’s always my argument when people talk about paying high interest. It’s like whatever it takes to get the deal done, go ahead and use that option and progress towards lower rates and really what it comes down to is better relationships with your lenders.
Doug: Right. That makes sense, okay. Would you say that you have to establish some sort of credibility with a potential lender before you can borrow their funds, or maybe you need experience or you need to show them that, “Hey, actually I have a lot of money or I have good credit or something so I’m a good risk for you to take”?
Brant: Yeah. That’s a great question. I feel actually that you don’t have to because you don’t have to a lot of times with all lenders. The answer to that question is it depends. It depends on the lender. Also, like a new, a lot of new investors who are just getting started, they feel like that. They feel like I have to have credibility. I have to have a lot of money in the bank or I have to have a lot of real estate experience. Really, what I’ve seen is that private lenders are attracted to two things. They’re attracted to good deals. They want to invest in good deals but more so they want to invest with trustworthy people.
While that you may need some credibility, it doesn’t always have to be from the real estate arena. Some people’s credibility is they’ve managed, successfully managed a business, a small business for 10 to 20 years or they achieved some success in the corporate world. You can use other things that you’ve done as credibility. Another thing that you can do as well is new investors can borrow credibility from a coach, a mentor or a training. I’ve seen them talk about, we have this contractor who does phenomenal work. Then you can just put together the deal.
Doug: Yeah. You could say, “I’ve got the team to back me up.” Right?
Brant: Leverage your team, leverage your team and explain to them how you’re going to secure their investment. Even though it’s your first deal because I’ve had students and I’ve known other investors who’ve gone out right away and got private lenders lined up right away. Case in point was a few years ago, I had a neighbor a few houses down. We were just outside talking and he said he wanted to do real estate and had been thinking about it.
I emailed him one of my home study courses on private money. Just a couple, two or three months later, he came over. I wasn’t really close with the guy. He came over a few months later and he’s like, “Hey man, we’re closing on some rehabs. I need to get some contractors lined up next month where I’m closing on two houses.” I’m like, “Two houses man, you were just talking for only a couple of months ago. How are you financing?” He was like, “I got private lenders.” He had like three or four lenders lined up for him. I’m like, “He just put it into action.” His first and second deal was private money. Every deal he’s ever done since has all been private money.
Doug: Wow, that’s incredible. I guess it’s pretty plausible to go from never having done a deal to just jumping straight into private money?
Brant: Oh yeah, yeah. I’ve seen that happen a number of times. The main thing that I want to stress though, with my students, I feel as if they felt confident doing it because they had the proper education and the backing to successfully do the deal. If you’re just starting out and you don’t feel comfortable, you don’t have the confidence to successfully pull off the deal in the beginning, I encourage people to start with hard money in the beginning to get your feet wet and get that credibility because a hard money lender is really good at looking over your shoulder, analyzing the deal, checking the ARV, checking your rehab budget. Once you do a few deals or even one deal with a hard money lender, then you’ve got a little bit of credibility and you have the confidence to …
Doug: Right. You can share the numbers from that deal to your private lender and say, “Hey, this already worked one time. I’m pursuing another deal. It’s going to work again.”
Doug: With that in mind, if I’m looking to borrow private money and let’s say you’re a lender, should I only approach you when I have a deal or should I go ahead and establish that relationship when I don’t even know when my next deal is going to come across my desk?
Brant: Yeah. As a real estate investor two things you always want to be marketing for. Always marketing for deals, always marketing for money.
Brant: You don’t want to put yourself in a corner where you get a deal and you don’t have a lender. I highly advice that you should always be looking for lenders, talking to lenders because you may not have a deal today but tomorrow you may have three or four deals. You never know. You may have multiple deals that come up but you don’t have the lenders ready. No, have those conversations and get a general pulse on your investor if they’re wanting to lend, how much they’re wanting to lend, how soon. Then you can gauge like what type of investment is right for them.
Doug: How do economic conditions affect people’s willingness to lend? Whether it be a recession or an expansion or like the stock market is booming or maybe there’s a bust or interest rates are high or low. How is that affecting you?
Brant: It affects me well. As real estate investors, it affects us great, right?
Brant: If prices are going up, we’re selling houses, we’re flipping houses, all that kind of stuff. Lenders, a lot of the lenders are attracted to that. They feel safe when the market’s going up and so that’s when they choose to jump in even to real estate. Market goes down, market is crashing. We’re buying houses cheap. It attracts a whole nother group of investors who it’s usually more experienced and savvy investors who know they really see the real opportunity that is there. Those are usually your more financially well-being investors.
Brant: Then the other thing I found though is like whenever we’ve gone through times when the stock market is down, people are really getting hurt, right?
Brant: In the stock market so they’re much more open to the conversations about real estate.
Doug: They’re going to sell their stocks and move over to real estate?
Doug: Basically they bought high and they’re going to sell low?
Brant: Yeah exactly.
Doug: When the stock market is booming maybe they’re less likely to move their money over when maybe that’s actually like a really good time because maybe it’s a bubble?
Brant: Yeah. If you’re still producing, like I’ve got investors that have been with me for seven, eight years now. Some of this came in when the market was low. Market’s back up, they’re staying with us. Market goes down, they’re happy. You’ve established yourself as being a viable source to help them increase their retirement. That’s the thing with lenders, is retention. We really haven’t lost many lenders. All of my lenders, because maybe one was not a repeat lender. That’s why I’m saying like if you just start off with one and grow that, develop that, cultivate that relationship, it will just grow and grow.
Doug: They’ll talk to other people and say, “Hey, you need to lend your money to Brant.”
Brant: Exactly. Another thing, a little tangent here is a lot of students, people I talk to, they come in and they feel like they need to get 10 private lenders. They’re just like a new investor who feels like he needs to do 10 deals or I need to do, I’m going to do 10 deals in the next six months or 100 deals.
Doug: I think when I met you, you told me that but you actually did it.
Brant: I actually did it. I actually did that. If I were coaching myself back then, I would have said, “Brant, just do one deal and then focus on the next one and the next one.” That’s what I tell investors who are starting out. I’m like, “Don’t worry about getting 10. Just focus on getting one and taking really, really good care of them. Then you get two and you get three and it will organically grow.”
Doug: I would imagine a lot of private lenders don’t even really know that they could possibly be a private lender. You’ve mentioned approaching maybe friends or family members, right?
Brant: Mm-hmm (affirmative).
Doug: They probably don’t know the first thing about real estate other than maybe the home they bought for themselves. It seems like you are in a situation where you are introducing this new topic to them. Somehow having to persuade them to lend their money. In that kind of situation, what are the first few things you do or say to open them up to that?
Brant: Okay. Ideally, you’re going to want to talk to people who are already inclined to invest in real estate. Whenever it comes to sales, I like to work with people who are raising their hand, like, “Give me more information.”
Doug: Like a warm lead I think.
Brant: Yeah, yeah. I’ve done that though. I’ve talked to people who no knowledge or experience about real estate investing. What I did was just like the conversation we had was just educate them about what it’s all about, what’s in it for them, the returns, the upside and the downside, what are some of the risks? Just to fill them out like on what the opportunity is and if it’s something they’re interested in. That’s not the ideal way to go.
Brant: The ideal way to go is someone who’s already done some real estate, they understand it so that you don’t have to bring them up on that process because sometimes it can be time consuming. It can be time consuming. That being said, I’ve had some really good lending relationships that started from me educating them. They’ve been very passive.
Then I’ve had some where it’s kind of, there’s a saying like, “If you have to drag them in, you have to drag them around.” I had one lender in particular who was very risk adverse. All the deals we did together, there’s never any issues whatsoever. I’m like, “You have the most perfect properties.” We partner on these. She would call a few times a year worrying that the sky was going to fall or whatever and it never did. Ideally, you want to work with people who are already educated on it and know the ins and outs about it. Sometimes you’re just going to have conversations. It’s a good chance for you to get clear on your message in better representing the opportunity.
Doug: Okay, good deal. To those watching who are interested in borrowing private money just like you are, what would you say is the first step that they should take?
Brant: They need to get educated. Get educated on exactly what the opportunity is.
Doug: Hopefully they did a little bit here today, right?
Brant: Yeah, hopefully so. Hopefully so. Then you get educated and then you just start taking action. Just start having conversations, going to networking meetings, going to online social sites that have lenders, potential lenders and other investors to find out what they’re doing that works. Really, that’s it, because as your education grows and grows, you’ll be able to communicate it better. Then that’s what really it comes down to, because once again, it’s relationship based. The more knowledgeable that you are about the opportunity, the better you’re going to be able to explain that to other potential lenders.
Doug: Right. Maybe they could also start putting together either on paper or in their head the credibility kit, right? About how am I going to convince people that I am a good investment? That this is safe, without using the word safe, right?
Brant: Yeah, without using the word safe or guaranteed.
Doug: Okay, got you. Good deal. A lot of people in the private money investing world talk about something called their credibility kit. That’s where you have several different papers that are put together. Maybe it’s your resume, maybe it’s your bank statement or your last year’s tax returns or maybe a list of your team members or whatever. You put that together and you hand it to a private lender and say like, “Look, I’m good for the money.” Right?
Brant: Mm-hmm (affirmative).
Doug: Is that something that you’ve done before and would suggest?
Brant: I put together a credibility kit in the very, very beginning when I first started working with lenders. I emailed that to them. I’ve never actually sat down and used one. I think it’s important for investors who are beginning and starting out if they feel like it’s important for them. I haven’t found it to be that incredibly important for the lenders that I’ve worked with. For example, I’ve always had a great credit score and I’ve never had a lender that’s asked for it. I’m like here proud of my credit score. I’m like, “Ask me. I want to show you.” They haven’t asked. I know there are some that do because I’ve talked to other investors. My lenders haven’t. In the beginning, I felt like oh, I have to establish credibility, so I put together a credibility kit.
Another thing that I did in addition to that that I thought was very, very useful though was in the beginning I used to put a deal analysis kit. I would put numbers, columns, estimated rehab, what we’re going to do and I would send that to them. I thought that made them feel really good about the deal.
Doug: Yeah, that you’ve really put your homework into this?
Doug: If you were maybe in the middle of bankruptcy, I guess these lenders wouldn’t even be aware. Shouldn’t that be something they’d be concerned about?
Brant: Never been through bankruptcy.
Doug: I know you haven’t but they wouldn’t even know because they’ve never really looked at your credit, right?
Brant: No, that’s correct because they don’t ask about that. I had a student who was asking me about this yesterday, a consultation. He was asking what he needed to disclose to a lender. There was a particular type of deal that he was wanting to do that a lot of investors shy away from, experienced investors. He was asking if he needs to disclose that. My response was, “You need to disclose, any time a question is asked, you disclose that. Any time that the information is pertinent or if it’s unethical if you don’t disclose it, you need to disclose it.”
I’m like, “This is kind of a gray area here so I’m not sure, but technically, no.” If you’ve had bankruptcy or any of that kind of stuff, bad credit, what your lenders are really lending on is the deal. There’s a disconnect between your past and this deal because what they’re really loaning on is the deal. Now, if there’s something in your past that is going to affect this deal, you need to address that and fix it.
Doug: You’ve mentioned having a conversation with some of these private lenders, maybe before you even have a deal ready. If you were to be sitting across the table from or maybe on the phone with a potential private lender, how would you go about it? What kind of things would you be saying to them to get them to open up a little bit?
Brant: Great question. What I see happens a lot is investors will try to machine gun blast them, barrage them with information, data, deals, etcetera, etcetera, etcetera. It goes back to the word relationship. I encourage just asking a few open-ended questions, just get a feel for what it is that they really wanted to gain from this investment. Is it short-term? Is it long-term? Do they have a high risk threshold or a low risk threshold? Just gain an understanding of what it is they want. Then rather than selling, pitching, trying to firm up how serious they are, just educate them. Let them know about this opportunity that’s available and just give them the basics of what it is and let them understand it because you don’t want to force anything upon anyone. Just give them the information.
What I found is when you properly educate a lender on the opportunity that they have the, and the opportunities that they can invest in their own backyard in whatever city or area that they’re in, in residential or commercial real estate, a building they can go touch and feel and drive by and see versus Wall Street when who knows what’s going on. This is secured by the real estate, personal guarantee. When you educate them on all that, they’re naturally just going to gravitate towards it. If you’re just trying to sell them and close them, they’ll put up a natural resistance, right?
Doug: Right, right.
Brant: Just educate them really.
Doug: Okay. I would say a lot of people have someone maybe from their childhood, maybe they went to high school with them, college or maybe a cousin, uncle where we know that they’re sitting on a ton of money. Okay? They earned it.
Brant: “The rich uncle.”
Doug: Yeah. They earned it, they came into it, whatever, somehow through a conversation or through the grapevine you found out that they have this money in a checking account. Okay?
Brant: Mm-hmm (affirmative).
Doug: Or in a CD. You know that both you and that person can make a tremendous amount of money off of their funds if they would only lend it to you. Do you approach that person? If so, what do you say?
Brant: Are we talking about a friend or a family member, right?
Brant: Okay. My rule on that is, if it’s a friend or a family member that you’re going to potentially talk to about partnering with or them lending you money, you need to ask yourself this question like, “Am I okay if things go bad losing this relationship?” A lot of times the answer is yes. A lot of times the answer is yes.
Doug: Christmas might be a little bit awkward, right?
Brant: Yeah, yeah. Certain family members, “Yeah sure. I’d be glad to.” Sometimes the answer is no. Like, “No, this relationship means too much to me. I don’t want to approach that person.” If you do decide to approach that person, really all that you need to do to safeguard yourself is the way that you should be doing all your deals anyways, is making sure you’re doing thorough due diligence that a real estate attorney is handling all the paperwork. That the property is properly insured. If you’re covering all your bases, that is all that you can do. Then you’re also disclosing risks to your lender so they know the upside, they know the downside. That’s all that you can do. I would say absolutely yes.
Doug: If you, and let’s say this guy’s name is Bill, you’re sitting across the table from him. You see him once a year. Like, “Listen bill, can I talk to you about something?”
Brant: Mm-hmm (affirmative).
Doug: “Listen, I know you came into a big insurance settlement, okay? It’s no secret. No, I don’t want you to like just give me some of your money but I think there’s a way for both of us to really benefit from what you’ve come into.”
Doug: Would you go about it that way?
Doug: Or are they just going to be like, “Oh my God. Is that Brant? It’s like he turned into a salesman. He’s like one of those multilevel marketing people and wants to sell me every time he sees me”?
Brant: Yeah. All right. My advice I guess on that is like, yeah, always never try to sell. My internal thing is if I feel myself wanting to go that route and like close someone or if they think I’m about to close, that’s when I always pull back.
Doug: That’s when you put them in a headlock, right? You give them …
Brant: Yeah. That’s when you headlock them. That’s when I’ll intentionally pull back. A lot of investors, when they talk to a lender, I’m always like a lending relationship is like a dating relationship. It’s like the very first time they talk to them, they’re trying to go for the kill. They’re trying to go for the close. A dating relationship, the first day …
Doug: You don’t say, “Will you marry me?” Right?
Brant: Yeah. The first day it is, if you like the person, get a second date and a third date, and things progress. My goal when I talk to a potential lender on the phone, the first conversation, first meeting is just to have the second meeting. Then you get more into details. Then you’re asking the question this is what I’m doing, this is what about, this is what it looks like. Do you think this is something you’d be interested in?
Brant: Taking it that route versus like trying the hardcore route.
Doug: Right, right.
Brant: I’ve done both. You can do both. I found the other, the latter to be much more effective.
Doug: Yeah, yeah. I got you.
Brant: Much more effective.
Doug: It makes sense.
Doug: What would you say to the idea of this hypothetical rich relative saying, “Listen, just lend me like 500 bucks on my next deal. I don’t need your 500 but through this process you’re going to see how this works because we’ll draw up all the paperwork as if this is 50,000 or 500,000.” Right?
Brant: Mm-hmm (affirmative).
Doug: “I’ll make you a $2.15 mortgage payment every month.” Then once three or four months has passed, you’ve made all those payments. You pay me back. You say, “Okay, did you see how it works? Now, let’s add a zero.” What do you think of an idea like that?
Brant: Love it.
Doug: Love it?
Brant: I absolutely love it because whenever you do a deal with a lender, even the ones who are a little bit hesitant or nervous in the beginning, when you perform and they get that mailbox money or when they log in and see that you’ve paid the account on time. Actually you should always pay your lenders early. We especially set up our auto bill pay to pay them early. They take note of that. They take note of that. When you do that and when you perform, it grows.
Brant: You know those like, an inside little joke with me and other real estate investors, you know those little banana-?
Doug: It’s not going to be so inside anymore.
Brant: Yeah. It will be outside now. You know little banana trees, little things in your yard and you can, I don’t know if you ever try to dig those things up but they always come back, that’s kind of like that with lenders. They spread and they multiply. Even sometimes you don’t need them. You try to get rid of them, they just come back.
Brant: What began happening with us is we would do a deal with a lender and return their money. They began calling us. When are you going to get another deal, get another deal? At that time, we’re getting multiple lenders, literally having lenders calling us telling us to buy more real estate. Then people like to brag also about their investments. Whenever …
Doug: Speaking of that, can we just focus on me for a second now?
Brant: People love to brag and they tell their friends and they tell their neighbors. Then the other little thing about this is what I found with talking with some of the lenders or potential lenders who’ve never invested in real estate, the other thing I found is that people love the idea of investing in real estate. They’ve watched all these shows on TV. Though they may never actually go out and do it, to loan on it, even if it’s like the $500 or $1,000, they derive some enjoyment from that. Right?
Brant: Because they’re like, “Oh, I’m in real estate investor.”
Doug: They have a portfolio of stocks in real estate. Maybe they have a little bit of gold or something.
Brant: Exactly yeah. If it’s even like five or $10,000, that can grow in the beginning, meaning if they just test you out. Yeah, I love that strategy.
Doug: All right. For some of these private lenders who, when you’re aware that they have a decent amount of funds maybe tired up in CDs, savings accounts, checking accounts etcetera, do you ever go so far as to help them look into their finances and show them, “Hey, you’re not getting a good return here. Maybe this annuity was a bad investment. Look at all these fees. Here is how much better you would do if you started lending your money to me.” Do you do stuff like that?
Brant: Yeah. I’ve sent just simple spreadsheets like, “Hey, here’s what you’re making right now.” Just don’t pry too much but get a general idea on what they’re making. Then you compare it to what they could potentially be getting with real estate.
Doug: Is that pretty good at convincing them to maybe move some money over?
Brant: Yeah absolutely. Even some lenders, I had some lenders that I’ve used a comparison to show them some lenders like 10% or 12% because they’ve been told they can get that. What happens is me like we’ve progressed to where we have a lot of lenders who’ve loaned at 6%, 7% and 8%. We give them first priority. The 10% or 12% lenders will call back a lot of times if their money is just sitting for a while or if they’ve loaned to another investor and it didn’t go so well, they’ll call us. It’s like, “I’d love to work with you but right now we can only loan at 8% or 9%.” They’re like, “Whoa, I used to get 12.” I’m like, “I understand. This is what we can provide.” I’ll send them an analysis.
I just had a conversation with a guy today. He was like, “I used to get 12%.” I’d emailed him like, “Are you interested in lending?” He came back at 15. I was like, “No, we can do 8 right now.” We had a conversation today. He’s like, “Well, I got 12 the first time. I thought maybe I’d be able to get 15.” I’m like, “No, we’re actually going to go the opposite way at this point.” I’m like, “What I’ll do is I’ll send you a spreadsheet showing you at 12% what you’re going to make if your money is working like six, to seven, eight months versus 8% but it stays working the whole 12 months.” They’ll make more money.
Brant: Sometimes, they don’t understand that.
Doug: All right, Brant. When you’re meeting with lenders, what would you say are some of the objections that they might raise?
Brant: Yeah, fear is a big one. Fear is a big one. Some lenders are very risk adverse and they see real estate investing as very risky. It’s our job as investors just to show them the whole picture and lay out like I said creating an analysis sheet like this is projective ARV, this is the repairs we’re going to do. Just answer as much information as you can. If you’re doing a good job of presenting that information and you’re still running into objections, it’s probably not a good fit. When you find the right lenders, you’ll find for the most part, there’s not a lot of selling that has to go on. There’s going to be a natural gravity that’s going to be created.
Doug: If all else fails, I guess you could just wrap them in a blanket and rock them to sleep. Would that help? Do you think?
Brant: I’ve only tried that twice.
Doug: How did that work out?
Brant: Not too well.
Doug: It seems to me that the biggest fear with private lenders is well, what if you don’t pay me back. What do I do? I guess I foreclose on the house. Then what happens? Do I lose all my money? Do I lose most or some of it? What happens? How do you ease their fears? Also, how do you go about explaining to them what that process would look like?
Brant: This is an important topic especially for the SEC. You need to have some disclosure statement where you’re disclosing what would happen if this happened or that happened with some of these things. The best thing to do is if they’re especially not only if you’re noticing that they’re fearing that but just get it out in the open right away. Just inform them and educate them on how they can actually make more money if they take the property back. That’s what a lot of them don’t understand.
The simple things that you can do is just give them some action steps. Say, “If this happens, here is my contractor. Here’s a real estate agent or just contact a real estate agent, contact a contractor or whatever as a property management company to basically manage the asset.” Show them how they can make more money if they take the property back.
Doug: Right. I guess one of those steps is contacting a certain attorney, maybe their attorney or one you recommend who would go through the foreclosure steps.
Doug: Or ideally you would tell them that if I was in some sort of negative financial situation, I would just deed the property back to you. Is that something you might mention?
Doug: As opposed to dragging them through months of that?
Brant: Yeah. You definitely can. The situation I did go through was I referred a friend, ex-friend to one of my private lenders and that deal went sideways. What I told my lender, this was years, and years and years ago. I told my lender. I said, “Hey, this is someone I know. He’s looking to do this deal. I know you have some money to invest. I’m letting you know I’m letting you make a decision.” I said, “If anything ever goes wrong, just call me. I’ll help you out.” She did call me. She did call me because he went through some rough times. They ended up taking the property back. Then I stepped in and I took the property back, so she didn’t lose a nickel.
Doug: Oh good. You preserved that relationship?
Brant: Yeah, yeah. I took over. I purchased the property, fixed it up, sold it and that was it. She was completely happy but she just didn’t want to deal with, she didn’t want to deal with the management side of things, doing some repairs and all that kind of stuff. I told her when she doubted. I said, “Hey, if anything goes wrong, just call me.” I didn’t think anything would ever go wrong.
Doug: Right, right.
Brant: Years and years later, things happen.
Doug: Right, right. Good point. Okay, nice. Some private lenders who I’ve spoken with and maybe you have as well think that lending against real estate might be risky. Then you look at their portfolio and they have a bunch of money in the stock market. That’s extremely risky, right?
Doug: It could go down to zero.
Brant: Mm-hmm (affirmative).
Doug: How do you persuade them that okay, this is just about the safest thing you could possibly be doing?
Brant: For the SEC, I try not to use the word safe. I let them know once again, I do let them know the upside. This is what we’re trying to do with the deal. I disclose some of the downsides, absolutely worst case scenario. Just have that conversation. You know?
Brant: Some people are afraid of talking about the worst case scenario. Worst case scenario, I die, I get hit by a truck, you take the house back. That’s it.
Doug: Do you give them like the phone number of the attorney who would help them do that? Because I was working with lenders who are like, “I don’t even know who to call. I don’t even know where the house is.”
Brant: Yeah. My lenders, they have a copy of all the paperwork and the note and deed of trust that was prepared by my attorney. The conversation hasn’t gone that far on who to call or what to do. I’ve gotten the call from my lenders who loaned to other investors and had to take properties back. Those are great lenders to have. We call them motivated lenders because they’re motivated to get back to good and trustworthy investors. They’re willing to take a lower interest rate just for the security of working with someone that they trust.
Doug: Right. I got you.
Brant: It depends on what stage of where the investment is at. Is it in the rehab phase when something goes wrong? We just bought a deal where the investor went, I don’t know what happened. The lender took it back and we bought it. It was halfway through the rehab phase. It depends on where they’re at. It could be leased and managed and it’s not that big of a deal.
Doug: Brant, let’s talk interest rates. How do you go about negotiating the interest rate? Are they coming to you with a number? Are you coming to them with a number? How do you get that ideally as low as possible for yourself?
Brant: Yeah. Great question. I used to go to them with a number. Like, “Hey, I will pay this for this deal.” I’d be very glad or happy with that number. However, I learned a very, very valuable lesson which is just ask the open-ended question which is, “What rate of return would you be happy with?” When it gets to that, right after you’ve laid out everything and what you’re presenting. If it’s something they’d be interested in, you’re getting that feeling that they’d be interested and they may ask that question like so you know what can I make on this? What does this pay? Say, “Well, it depends.” Every deal does depend. Is it a flip? Is it high risk? Is it low risk? Long-term rental. You say, “Well, what would you be happy with?” Just asking that question, you can save so much money or you can cost yourself so much money by just putting out an interest rate.
Doug: Right. It makes sense.
Brant: For example, there was, a friend of mine and I were talking to a private lender. We had a partnership and were speaking to a private lender. He asked the question, he’s like, “What rate of return would you happy with?” She’s like, “I’ve been making 1% so I’d be really happy with 5%.”
Brant: To which my friend responded, “It wasn’t exactly the number that we had in mind but I think we can work with that.”
Doug: Our actual number was about five times.
Brant: Yeah. You ask that question to see where they’re coming at. Sometimes they’ll say 12 or 15 and you’ll know well, maybe this isn’t going to be a great fit. Then you just let them know what that you can pay. I like to hear from them first, what they’re going to be happy with. Make sure I’m going to be happy with that and then just go from there.
Doug: Got you. As part of that discussion, is there any talk about points or fees? Or you just try not to bring that up at all?
Doug: You can explain what points and fees are too.
Brant: Yeah. A point is like 1% of the loan amount. If it’s $100,000, it’s $1,000 for a point. A lot of the lenders that we work with have never heard of the point. They don’t know about a point. My business philosophy is win-win or no deal. Right?
Doug: Mm-hmm (affirmative).
Brant: I want to be happy with the deal. They need to be happy with the deal. If they’re happy making 7% or 8% and no points, like they’re happy with it, I’m happy with it. I don’t feel the need to educate them on points, other fees and things because some lenders will charge fees. Hard money lenders for example, there are several fees. I’ve been working with some of the wholesalers. They have their own fees too. I’m like, “I don’t even know what this fee is. What is this internet, Wi-Fi Starbucks? Is that a fee?” You know?
Doug: Yeah exactly.
Brant: No. If your lenders aren’t familiar with points, you don’t need to go out of your way to educate them on the points.
Doug: Some lenders have been known to give you more money than you actually need to actually buy the house. You walk away from closing with money not just for the purchase but you have the repair money, right?
Brant: Mm-hmm (affirmative).
Doug: You don’t have to come out of pocket. Then some lenders will say, “Oh, you don’t have to make monthly payments, just pay me all the principal and interest whatever at the end of the loan.” How often are you able to work deals like that?
Brant: Not 100% of the time but really, really close, 80%-90% of the time were deals like that. Cash at closing came about when I first began real estate investing. I was used to hard money lenders having the repair money kept in escrow. I was having to come out of pocket to do that before I would get reimbursed.
One of my first private lender meetings, we discussed the deal. What we’re going to borrow to buy the house, what we’re going to need for repairs and got to closing. It was $20,000 or something for closing. Get to closing and on the HUD statement there’s 20,000 or so whatever it was after a closing cost coming to me right then and there that day. I’m like, “Oh crap. That’s the agreement. They loan that and I get it right now. I didn’t have to wait. That’s what we call makes its own gravy program. They did the house, you get the gravy right away.
Doug: Uh-huh (affirmative) not bad.
Brant: Then so we began getting cash at closing. Then we had one lender that was very educated, very sophisticated real estate started lending to us quite a bit. She had on one particular like IRA account. We were closing on a house she said, “I’ve got $5,000 more in the account that’s just sitting there. Do you need any more money on this deal?” I’m like, “We don’t.”
I’m like, “But there’s a couple of things that are in question like maybe the AC is not going to make it. There’s always some things that are popping up.” I’m like, “I don’t mind paying some interest on that money just in case. She was like, “You’re more than welcome to borrow it.” Now, we were in a really good loan position and she knew that. We knew that. We had established trust. We got $5,000 more at closing when we bought that house that wasn’t even our rehab budget. At that time, I was in my first couple of years of doing this so I needed that $5,000 just to be in my bank account. It made me sleep better at night.
Doug: With your gambling addiction I’m sure it would have come in handy.
Brant: Yeah. I was betting online [inaudible 00:45:22] right away, yeah. You just stole my thunder a little bit. The extra money that we sometimes get from lenders is not Cancun money, it’s not Vegas money. It’s set in the bank in case you have issues or things that come up on your rehab so you can sleep good at night and get it taken care of. Yeah, that’s the cash at closing program. That was great. That was great.
Then it went to a whole nother level whenever we learned that we didn’t have to make interest payments every month. If that lender was okay with the interest just accruing because a lot of your lenders are loaning from what’s retirement accounts, from IRAs, things like that. It’s not milk and bread money that they need to pay their bills every month. If it is, I don’t like to borrow from them.
I like the ultimate high net worth individuals or people just with IRA money because they don’t need it to get on by on a month-to-month basis. All they care is that at the end of every quarter or six months, end of the year that their retirement accounts are increasing. That was like a huge light bulb went off for me. I’m like, “Not only can we buy the houses and get the cash at closing, do the repairs, I don’t have to make any mortgage payments on all my flips. Cash flow increased right away. When you have five to 10 properties going on that you’re paying 1,000 or $3,000 a month, cash flow increases like ten to $15,000 a month.
Doug: That’s a small piece.
Brant: That’s a big one.
Doug: Yeah for sure. Okay, good deal.
Brant: A lot of investors don’t even think to ask that question. Do you want your payments, do you want monthly payments or do you prefer accrued interest?
Doug: The accrued interest actually works out better for them, for the lender because they’re collecting interest on the money that. See, if you keep making the monthly payments then the amount that they have out to you is lower so they’re not earning interest on that money.
Doug: Works out for everybody.
Brant: Exactly. That’s what my investor too, she knew what the 5,000 was like, “Why not put it to use?”
Brant: Yeah. Then that’s too, like if it’s going to be interest only, if you’re going to pay interest only or do you want to pay principal? Some investors in the beginning like they just say oh, they’re familiar with their home mortgage, they want you to pay principal. Then you let them understand you actually will make more on your money by doing interest only. It’s an education process.
Doug: Brant, a lot of investors and lenders get scared when the topic of paperwork is mentioned. They’re wondering what all paperwork is involved, what’s on there? Who’s involved? Who does that? Who pays for it? Maybe you could shed some light on that topic?
Brant: Yeah sure. Really the rule of thumb here is like all paperwork is done by an attorney. Just everything having to do with paper work in a real estate transaction needs to be done by an attorney. Very simple. Usually it’s a two to four-day process depending on your attorney of course. That’s something that I’ve known some investors to try to do some of their own paperwork. I just don’t advice it. It’s really standard, real estate documents, the note, deed of trust, making sure that your insurance is in place. Title company has title policy. Everything goes through the title company.
Doug: Right. Whether you’re dealing with the title company or in some states maybe you’re just dealing directly with an attorney.
Brant: It could be just done directly with an attorney.
Doug: You just get the information to them like, “Hey, here is the lender. The lender’s address. Here is how much they’re lending. Here is the terms. Here is the property address all that.” Then they just handle all the paperwork?
Brant: Yeah. The way that I explain it to some people is working with a private lender is really just, it’s a handshake agreement. Then you deliver that information to your attorney for them to put it in writing. You work out whatever you guys have agreed upon. Then you just call or email your attorney and say, “Here’s my lender information. Here’s the amount of money they’re investing. Here are the terms, the interest rate.” If it’s going to be the length of the loan, the amortization schedule, all those things. It’s a handshake agreement and you just give that information to the attorney who then put it together.
Doug: Who’s paying for all the fees there? Is it you as a borrower or is it the lender?
Brant: We pay for all the fees. We pay for all the fees, all the paperwork, all the processing fees. We pay for everything for our lenders. Our lenders aren’t going to pay for anything out of pocket.
Doug: Right, because if they did have to then they might feel like they’re being nickel and dimed and that maybe they’re not getting the true return on their investment that you had promised them because they’re having to subtract out fees, right?
Brant: Yeah, yeah. We gladly pay all the fees.
Doug: Okay, sounds good. Brant, Are you focusing more on borrowing long-term or short-term and why is that?
Brant: Both. It’s both. When you begin talking to investors, you’re going to find some investors are inclined to short-term flipping, some of them were long-term and there’s a marketing saying that says, “Give them what they want not what you think they want.” Some investors if they want to do short-term flips, and you’re trying to fit the square peg in a round hole or whatever they say, they don’t want to do rentals. They don’t want to do long-term, they want to do a short-term, just put them on a short-term. Just put them on a short-term. Develop the relationship maybe something will change.
Like I said, we have both. I’ve got one lender who’s loaned us a substantial amount of money. He’s very happy with 7.5%. His loans are set up for six and a half years. It’s odd strange numbers. This is just what he wants and that’s what we invest with with him.
Doug: You’re still able to cash flow that property even on such a short loan?
Brant: They amortize over 15 to 20 years but it’s like a six and a half year balloon.
Doug: Okay, I got you.
Brant: We’ve used his money on, we use it on flips and rentals. I like him. I like working with him. We have a lot of flexibility. Some other lenders will call and it’s like 10% and one point or whatever. Like, “Why aren’t you borrowing my money?” I’m like, “Because Mr. big pockets over here is 7.5% at six and a half years and a very nice gentleman to work with so he moves to the front of the line.” The answer to the question is like find out what the lenders want. Those open-ended questions and try to find deals that fit that or that are close to that.
Doug: Right. Even though you might be able to get a lower interest rate with the mortgage company, you still choose to go with the private lender over the long-term?
Brant: Yes, most times we’re moving into, we’re doing some new development, new construction right now. We did several projects last year that were one particular was over $200,000 in rehab alone. We used the banks, the small banks, we get 5.5% to 6% construction loans. If I’m close to that with my lenders, within a percent or two, I’ll work with the lenders than I will with the banks. Just because of the paperwork and all the stuff that you have to go through. I’ll pay a little bit more working with private lenders than I will with the banks.
Doug: Because it’s a lot easier, right?
Brant: It’s so much easier. It’s so much easier to deal with. The small community banks aren’t bad. We have a really good relationship but she still has red tape that she has to go through.
Doug: Right, right. Makes sense. Brant, what would you say to an investor who is scared to reach out there and try to borrow private funds? They’re afraid of maybe the rejection of people who are going to look at them like, “Whoa, what does this guy want?” Or maybe scared of a deal going sour and now they’re on the hook and maybe they’re going to burn a relationship, what would you say to that person?
Brant: Okay, that is a big fear for a lot of investors, because their mindset is that I have to ask someone for money. When you think about it like that, I don’t know a lot of people that like to ask anyone for money.
Doug: Because that sounds like a favor, right?
Brant: Yeah. I have some family members who are pretty good at it but it’s not for real estate investment purposes. Most people don’t like to ask other people for money. Investors have that in their mindset. “I’ve got to ask this person for money.” Yeah, it sounds like a favor. It sounds like I’m just borrowing. The shift is made and this is where the light bulb went off for me and I realized this during the first couple of years of investing when I was doing so well in real estate and I was seeing that people weren’t doing well in the stock market. People’s 401ks weren’t doing well.
What I realized was like I wasn’t asking anyone to borrow money. I had a great opportunity to invest. Another thing that we started doing, after we had lenders that were reaching out and contacting us, it wasn’t because we were running our business any differently. It was just we were having a different conversation. We actually created an application that we were making our investors apply to lend with us.
Doug: The takeaway sale, right?
Brant: Yeah. We have an online application. Just like investors go to apply for hard money loan or a bank loan they have to apply?
Brant: We reverse the table a bit like, “We need you to send us an application,” like wow. That’s really it. It’s a mindset, a confidence thing is that when investors don’t have the confidence to have that conversation with the lender, that’s something that they need to educate themselves on and understand like that’s the root problem is they may not have that confidence. They may need to get that confidence and understand that they have a great opportunity for investors. If they can really see it and believe it, then their lenders will also see it and believe it. If they don’t see it and believe it, then they never see it.
Doug: Exactly. You mentioned that it can be a little bit awkward if you’re trying to borrow from another person, but the typical scenario is more like a win-lose. My car got in a wreck. I don’t even have enough money for gas or groceries or anything like that.
Doug: Now I’m reaching out help me, help me, right?
Brant: Mm-hmm (affirmative).
Doug: If you give me a couple of grant, I win now because I’m back on my feet but you lose because I will probably never pay you back, right?
Doug: That’s the typical scenario when friends borrow from each other, right?
Doug: With private money it’s a total win-win.
Doug: If you lend me, I don’t know 50 grand whatever, I win because I can buy this house, fix it, resell it and make 20 grand whatever. Then you get interest on that money at a much higher rate than you would have gotten elsewhere and it’s safe right there. Definitely …
Brant: Just don’t use the word safe.
Doug: Yeah exactly.
Brant: Don’t use the word unsafe either. It’s like [inaudible 00:56:46].
Doug: You’re right. As a potential borrower, you need just to be fully aware of how all this works. That hey, this lender really benefits. I am not asking for a favor at all. I’m providing a valuable service.
Brant: Yeah. If the people watching are getting like one thing from our conversation today, that’s probably one of the biggest takeaway. It’s that we as investors have a tremendous opportunity for lenders. The only problem is a lot of our lenders don’t even know about it. They don’t even know that they’re about private mortgage lending. They don’t know that. That’s our job to communicate and educate. Once investors really see that and they grasp that, their confidence immediately goes through the roof.
Doug: Yeah, totally. It’s not just like the borrower and the lender who benefit from this. The motivated seller benefits now because now, if I’m the borrower, now I can buy their house and get them out of a bad situation, right?
Brant: Mm-hmm (affirmative).
Doug: Of course, I benefit, the lender benefits and then any realtors who are going to be involved, the contractors who might get paid 15, 20, 30 grand and all their crew, title companies, lawyers, everybody is benefiting from all this. Even the buyer who comes along and now that they get to live in a really nice fixed up house. Even the neighborhood benefits because now you have a nicer house right there that’s going to slightly increase the values of all the neighboring properties.
Brant: That conversation, what you just said is great to have with your lenders. That’s like the Main Street versus Wall Street conversation. It’s like they’re not just investing in the house. It’s just like you said, you can get down to like you’re putting food on the table for the kids of our contractors but they are. Some of these jobs are $100,000 rehabs that’s employing multiple, multiple contractors and trades for sometimes months on end. It’s buying materials in our local community. You’re right. When you can paint that picture to investors, they just feel good about investing with you.
Doug: Yeah right. Everybody is paying taxes hopefully on their profits seriously.
Brant: Hopefully yeah.
Doug: It’s good for maybe America in general.
Brant: Yeah, maybe not some of the contractors but you know what, that’s not our responsibility.
Doug: Yeah right. Good deal. Yeah, I think that really clears things up. That actually brings us to the end of the interview. I just want to thank you again for taking time out of your hectic schedule to be here with us and to share your knowledge and experience with private money so candidly. I know I enjoyed this conversation. I hope you did as well.
Doug: Good deal. Thanks again for everybody who tuned in. hopefully, we’ll have even more education and training headed your way in the near future. Thanks a lot.