Why does it make sense to have passive investments in real estate?
Most people go through life letting others make decisions for them and they are not in control of how their money is invested or what it earns. That means they’ll never really know if their investments will give them enough of a return to take care of their future, their family, the kid’s college, or their retirement. Because of that, they’re playing guesswork games with their money and hoping they’ll get in or out at the right time and it’s virtually impossible to always make the “right decisions.” By becoming a private lender who invests passively in real estate, you can get 10%-15% fixed returns, secured by local real estate. Since your returns are fixed, that means they never change. They’ll also be much higher than CD’s money markets, commodities, and most stocks and mutual funds with far less risk and volatility.
What is private lending?
Once I started making money buying, selling, and holding real estate, I realized I had a lot of friends and family members that were tired of the ups and downs of the stock market. I established a method of working with them as a silent partner on my real estate investments by putting their investment capital to use by lending it to BT Investment Group, Inc at much higher returns, secured by the property I was buying. This gave my family and friends an opportunity to make more money without losing sleep at night watching the stock charts. Investing as a Private Lender, they had a completely “hands off” way of earning 10%-15% fixed returns, secured by local real estate. Since their returns were fixed and never changed, it allowed them to plan and make better decisions for their future with complete control.
Why would an investor be willing to pay such high returns?
In this business, the availability of the short-term capital is more important than the cost of it. Using private funds allows investors the ability to make below market offers and close quickly with sellers who need out now and will forgo equity to be out of a property quickly. The tremendous amount of equity acquired at purchase allows the ability to share a portion of the profits with you by repaying the original loan amount plus a generous interest on top of it. Consider this similar example: if you use a credit card, pull it out and look at the interest rate you pay on it. Every time you use it, you’re putting the availability of the funds ahead of the short-term cost of the funds. This is exactly how investors approach the properties we buy and sell.
Are high interest loans like this new to real estate?
No. This is a multi-billion dollar industry that has been around for decades. I’ve never met one real estate attorney that is not familiar with private funding of real estate transactions. It is very common, very secure, and very profitable..
How is the private lender protected when they lend money?
First off, you choose which properties that you want to invest in and your money should never be pooled. You’ll typically have one mortgage secured against one property. That means there will always be a very large hedge factor between what you loan and the available profit/equity in the house. Personally, I am a very serious investor and have dedicated my life to investing in real estate. My team, staff, crew, and business is one of the most successful private real estate investing businesses in the country. In addition, there are also four key items that an investor should use to secure your investment each time you lend (the same security provided to banks is also provided to you):
• A Promissory Note which states the exact fixed return that you will receive. Whatever the note says is what you will receive.
• A Mortgage will be created by the real estate attorney to attach the property as collateral for your loan. That means you will have a lien on the property and I cannot sell it without paying you off.
• A Lenders Title Insurance Policy will protect you against any title issues or claims that may arise.
• A Hazard Insurance Policy will be in place for your protection in case of an unexpected catastrophe or problem.
Also, since there is such a large hedge factor in the amount of funds that you lend versus the equity in the property, even if something happened to me or my company, you could always sell the property and make more money than you’d make from the interest on the loan.
Who handles all of the paperwork?
The investors real estate attorney will handle all of the paperwork. If you want your attorney involved too, this should never be a problem. You’ll send your funds directly to the attorney’s office payable to them. The Closing Attorney won’t disperse any funds until all of the documents that secure your investment are in place and signed off on. They’ll create the promissory note that states the terms of your loan, the mortgage instrument that gives you collateral, and the title insurance policy. You’ll also get you a copy of the Hazard Insurance Policy. It’s also customary that the investor/borrower, will pay for all of the closing costs to secure your investment. You’ll get the original note signed off by us as the Borrower, as well as a copy of your title insurance policy. You’ll receive a copy of the mortgage that day and then once it is filed in the county and recorded in the Deed Books; you’ll get a stamped copy in the mail a few weeks later. By the way, the only person that needs to sign anything is the investor, as the Borrower. You don’t even have to go to the closing unless you want to.
Who collects payments?
Usually no one. Investors prefer that there will only be one payment to you, which is the principal plus accrued interest at the time the property is sold. This eliminates the hassle of payment collection on your part and minimized the pressure of cash flow for the investor, allowing him/her to focus all attention on the exit strategy of the property. You simply send a certified check or wire the money to the closing attorney for closing. After closing, the investor begins to “work their magic” on the house and shortly thereafter the house will be sold and your money returned with the earned interest. In simplest terms you: “write a check and later receive a bigger check.”
How long does an investor need the money?
The money should be used on an individual per deal basis. After the property is rehabbed and sold, your money will be returned plus interest. Each deal is slightly different but the average time out per deal is between 4-6 months. If you are pleased with the process then we will proceed with the next deal with you so your money can continue to grow.
What if I need my money back quicker?
With a little notice from you an experienced investor should be able to sell your note to another investor at it’s face value, or even write the check themselves. However, I wouldn’t recommend making a loan now if you think you’ll need it back right away.
How do I know the value of the property won’t decline more?
There is always the possibility of market decline, and no investor can predict the future any more than you can, but here are the facts: (1) You’re starting with 25-50% equity cushion. (2) Many real estate markets have stayed flat during one of the worst recessions in our history (3) FYI, the reason the real estate market took a dive a few years back is because lenders gave loans to unqualified homeowners. Your money isn’t going to an unqualified owner occupant, it’s going to an experienced investor at low LTV’s & high interest for the purpose of renovation and resale. This is why it works. (4) Real estate isn’t going anywhere and will ALWAYS have value, and I can’t say the same thing about stocks, bonds, etc. (5) Although I can’t speak for other investors, personally I’ve done hundreds of transactions since 2004 and never lost money on a deal.
What if something happens to the investor?
First, if something happens to the investor then the Company should still be in operation (in my case by my Vice President). Secondly, you’ll have a recorded 1st mortgage lien on the property to guarantee the collateral of your investment no matter what. Thirdly, I recommend that the investor you work with personally have an excess of 7-figures life insurance policy as additional backup.
Is this a mortgage pool?
No, you are the only one who’ll own the note. You are in total control.
Do I need a lot of money?
No, but the size of the deal may limit your ability to play. Investors typically prefer one lender per deal, which gives you 1st lien position. Smaller amount invested may be considered for a 2nd position or a fractionalized promissory note & mortgage. Despite your position, total Loan to Value should never exceed 75%.
Why don’t investors just borrow from banks?
Banks simply have too many federal, state, and internal guidelines to abide by to allow them to freely lend on our transactions in a timely manner, whereas a private individual (you) on the other hand has no “higher power,” Directors, Shareholders or other Government Regulations making the rules for you.
Can I use my IRA or 401k to lend from?
Yes, and It’s easy. I strongly believe that you must be in control over where your investments go from your IRA or 401k, and you can take any old IRA or 401k that you have and roll it over in to a self-directed IRA. There’s no penalty for doing this because your not taking a distribution, you’re simply changing the Administrator to one that allows you to self-direct where the funds go. Doing it this way, you can make all of your gains tax deferred or tax free for life. The company I use and that most private investors use is Equity Trust Company. You can get a free information packet via their website at www.TrustETC.com to learn how simple it is to do. You simply fill out a form and send them your last statement; they’ll do the rest and roll over your funds to your new account. The entire process only takes approximately 10 days.
Does the investor mind if your attorney gets involved?
If they do then don’t use them. Your investor should be able to explain everything to your attorney without problem, and even recommend that your attorney and the investors attorney have a conference call to get everyone on the same page.
Can I look at the house before I approve the loan?
You can, but understand that the plan is to rehab the house, and you probably won’t love what you see at the outset. A piece of advice that is worth sharing about this business is that you should ONLY fall in love with the numbers, NOT the house.” This mentality has been one of the most important ingredients to my success and that of my Company.
How quickly will I need to have the money ready?
The investor you work with should keep you be aware of upcoming deals in the pipeline leading up to an investment, and the closing attorney will expect you to be able to bring a certified check or wire the funds to the closing attorney within 24-48 hours. Until the funds from you are provable, there is no assurance that funds are available. Once the attorney receives the funds in his escrow account he will then complete the closing paperwork. We will accommodate with timing and do our best to provide as much notice as you request.
Is making a private loan really a safe investment?
If you apply common sense and don’t break the rules then it’s as safe as any other high yield investment and a whole lot safer than most. In fact, in my opinion, it’s a lot safer than the stock market. Think about it…with stocks you’re betting on companies you know little about and the volatility of the market is out of your control. You can do well one year and get wiped out the next. Every day you’re wondering if your gaining or losing and the only choice you get to make is when to buy or sell…now that’s risky. Houses don’t just disappear, but if something catastrophic did happen then that’s what property insurance is for. You can’t buy stock insurance to protect your investment if the company you invested in goes bankrupt and the stock becomes worthless. Also, have you ever seen a bank lend money with someones stock portfolio as collateral for a loan?…NO. They lend against real estate.
Who are the best people to become private lenders?
• Anyone who understands the power of leveraging money with access to capital and wants to see it increase.
• They are not banks or financial institutions.
• They don’t have to be the super wealthy or those who appear to be.
• People with IRA’s and other pension plans.
• People who’ve lost money in the stock market and have some left and want to regain control of their wealth.
• People with money in CD’s and money market accounts getting minimal returns.
What are the Tax Consequences of Lending?
You will pay taxes on the interest you receive in the year you receive it. If you’re lending from your Roth IRA or Roth 401K you will never pay taxes. Any other IRA or most pension plans will defer taxes until you draw out the funds.
What could go wrong?
• If the investor defaults for some reason – then they should just deed you the house. If they won’t deed you the house, then you simply call the attorney and tell him to foreclose to get the house back. All costs will be paid the borrower to redeem. A foreclosure process can take 60-90 days usually. This is the worst case scenario and one that results in burned bridges. Personally I don’t like to burn any bridges and I make every effort possible to always do what I say and keep my investors in the loop. The investor you work with should do the same.
• If something happens to the investors company and they file bankruptcy – then your interest continues to accrue and Chapter 13 will award you payments, or Chapter 7 will allow you to foreclose. Nothing happens to the position of your lien on the property.
• If repairs don’t get done – then the investor doesn’t get paid.
• If the house burns down – you’ll be insured as the lender and will get paid first from any insurance disbursements.
• If the house declines in value – that’s why an investor should never exceed 75% LTV. You’ve got equity cushion and it’s still better off in real estate than in the stock market.
• If the appraisal of the house is too high – then you are welcome to have your attorney or you order the appraisal if you have concerns.
• Honestly there are always dozens of other things that could go wrong. “Murphy” lives everywhere and nothing is perfect. But with common sense and proper due diligence on your part, I’m quite confident you’ll be a pleased investor as long as you do your own due diligence and work with a successful investor. Otherwise, if something like this will keep you awake at night, then you probably shouldn’t do it.