Fundamentals of Funding: How to Finance Real Estate Without the Big Banks

This story was originally published at BiggerPockets.com

Private money is a “secret weapon” for real estate investing, allowing you to dodge the major banks and fund real estate deals on your terms. But just how easy is it to get this type of funding? The answer might surprise you. You don’t want to miss this masterclass on direct lending!

Welcome back to the Real Estate Rookie podcast! Concluding our three-part miniseries on the fundamentals of funding, we’re diving into direct lending with investor and fellow BiggerPockets host Henry Washington. In this episode, he covers the different types of direct lending options that are available to new investors—including private money and hard money—and discusses the many reasons why he uses them to build his own real estate portfolio!

Unfortunately, too many investors adopt a scarcity mindset and throw themselves at the mercy of any big bank that might finance their deals. Henry’s about to prove why lenders need YOU more than you might think and teach you how to craft the perfect private lending pitch from that position! He also shows you how to properly vet a lender and shares what you can do today to build relationships with the smaller lenders in your community!

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Listen to the Podcast Here

Read the Transcript Here

Ashley:
This is Real Estate Rookie episode 410. Institutional lending may not always be the best tool for the job. Private and direct lending can be a valuable tool to fund your first or your next deal. My name is Ashley Care and I’m here with Tony j Robinson.

Tony:
And welcome to the Real Estate Rookie podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today we are joined by none other than Henry Washington, one of our bigger podcast family members. He’s a co-host of the Real Estate Show as well as on the market podcast and the BP Network. And Henry is a bit of an evangelist for the small local banks and using private money to help grow his pretty sizable real estate portfolio. So today we’ll get into what his banks look for when they’re working with investors and understanding how we can all vet private money lenders and using the right funding to find the right deal. And guys, this is part three of our Fundamentals of funding series where we’ve already talked to Jeff Wegan, my lender. We’ve talked to someone from the BP team who runs the Lender Finder. So now this is kind of putting it all together from the perspective of investors like myself, Ashley, and Henry. So Henry, welcome to the Real Estate Rookie podcast brother.

Henry :
What’s up buddy? Glad to be here.

Ashley:
So Henry, let’s start with the different types of direct lending there are. So can you maybe walk us through the bank side of things?

Henry :
Yeah, so when people want to get a loan, they initially think about a bank, but what a lot of new investors don’t realize is there are multiple types of banks and different banks have different loan products and that loan product may or may not fit the deal that you’re looking for. And so when most investors are going to do a deal, they think I’m going to go get a conventional loan from a big institution, but you can also work with small local banks and get loans as well. And when you’re dealing with a small local bank, there are loan products that are really, really, I guess cultivated for investors. So there are loan products that you can use where they will finance your investment property. Typically there is a down payment that they’ll charge you. It’s going to be anywhere between 15 and 20% down.

Henry :
And then they will also potentially fund your renovation as well and wrap that into the loan. And so a lot of investors are looking to buy value add properties, and if you go get a conventional loan, you got to go fund that value add out of your pocket. But with some of these more what they call construction loans is one of the names they call ’em or they call them commercial loans. The names are used interchangeable. But the general gist is a product made for you to buy a value add property, add value to that property, and then you can either choose to refinance out of that property or you can even keep your loan within this loan product.

Tony:
And Henry, you hit on a super important point that there are so many different options out there. Rookie investors and Ash and I both, our origin story is real estate investors really revolve around the local banks. The very first deal that I did, actually the first two deals I did, Henry, the exact same process that you talked about. I found a local bank who told me, Tony, if you can go out and you can find a property where your purchase price and your rehab costs are no more than, I think it was like 72.5%, something very specific, it was like 72.5% or less of the after repair value. We’ll give you 100% of the capital for the purchase price and we’ll give you 100% of the capital for the rehab. All you’ve got to do is find the deal. So I went out there and I did that twice with the same credit union with zero money out of pocket for myself. So that’s the power of being able to go out there and work with these local banks. And Ash, I know your first deal was with a local bank that was somewhat creative as well, right.

Ashley:
And actually the cool financing that I got was maybe my fifth deal where they did a 90 day unsecured loan so I could actually go and make a cash offer on this property. And then as soon as I closed on the deal, I started the refinance process to get a 30 year fixed rate long-term loan on. And then we just use that to pay off the short-term loan.

Tony:
Now Henry Ashley, do you think you guys could go to Bank of America and say, I want a 90 day unsecured line of credit?

Henry :
You just walk in and say, look, I don’t know if you know who I am, but I’m Tony j Robinson and I need an unsecured line of credit for a hundred thousand dollars today,

Ashley:
Right this way, Mr. Robinson.

Henry :
So that’s a great point is these big banks, these bigger banks where you’re going to get these more conventional loans from, it’s all about how is the bank making their money in business to make money. And if you look at the way a big bank makes their money is they want to fund loans and then they want to take those loans and then they want to sell those loans off to somebody else who’s going to end up actually servicing those loans. And so because they’re selling these loans off, they have to make sure every loan fits in this pretty perfect box with a bow on it that their buyers are going to want to buy. And that adheres to all the regulations that they have for these loans. Whereas a local bank, like we are talking about local community banks, they’re oftentimes called portfolio lenders. And the reason they’re called portfolio lenders is because they keep their loans in-house within their own local portfolio. And so the way they make money is they have to lend money to small local businesses. And so if you understand that these banks need to lend to local businesses to make money, it helps you understand how you can approach these banks and present yourself and your deal in a light that makes them want to loan to you.

Tony:
I think the other big benefit too of working with a smaller kind of local regional bank is that you can actually build a relationship with the people who are there and you can go talk to the VP of the bank and say, here’s the deal that I’m looking at. Let me know what I need to change or what you need to see. Whereas going to the big national banks, it’s harder to do that. So as I’ll start with you, Henry, I want your opinion either, but when you’re working with these local regional banks, do you have that kind of access where you’re able to go in, share your deal, get feedback and actually have a conversation? Or is it like, Hey, open shut, this is what we need, either take it or leave it?

Ashley:
Well, I do the exact same process every single time I have the deal and I send it out to three or four different loan officers that I’ve worked with and then I just wait for them to tell me what they have available. And then from there I work from there. And it’s especially on the commercial side of things when working with a small local bank, it is so easy to change things or negotiate things like not having a prepayment penalty, lowering your commitment fee. Let’s see what else your basis points adjusting what the actual interest rate is going to be. So I found that I’ve loved the relationships with local lenders because you can negotiate with them on certain things that can actually make your deal better in terms because of the different things they’re able to change or offer. You

Henry :
Absolutely agree with you. The relationships are huge. One thing to think about when you’re thinking about the relationship, so I know a lot of people are like, well, how do I just go build a relationship with this banker and I’m doing my first couple of deals? Well, it’s all about putting yourself in and around the spaces where the bankers are as well. So yes, they’re obviously in the bank, but I encourage everybody, if you live in your local market or you’re going to invest in a certain market and you’re in town for any period of time, join the local chamber of commerce in the cities where you’re looking to do deals, lots of bank VPs, bank owners and loan officers are all very involved in their community and are members of the local chamber of commerce. And so if you go to the Chamber of Commerce meetings and then become a member and then find yourself actually adding value to the Chamber of Commerce, maybe volunteering and doing some things, you’re going to build a strong relationship with a lot of lenders who want to see you be successful because you’re pouring into the community in which they provide lending and banking for the small businesses in that community.

Henry :
Great way to build relationships with small local lenders. And you’re right, the better the relationship Ashley, the more flexible they’re willing to be on some of these rates and terms. Maybe they’ll waive their origination costs, maybe they can drastically reduce them. And then another thing to think about when building their relationships with these banks is each bank has or is interested in a certain type of asset or asset class. They might call them their specialty or the thing that’s comfortable or cool that they like to invest in. And so oftentimes this can change too. So understanding, having those conversations with the bank and talking to them about what types of deals are in their wheelhouse, it will get you a lot of information about who you can build that relationship with. Because if you’re talking to a local lender and they really only like doing large scale multifamily development deals, well then when you bring your little single family buy and hold to them, they’re not going to be that interested. It’s small potatoes to them. But there are plenty of small local lenders who love the smaller single family deals because they’re safe, they’re safe for them to invest in. And a lot of banks right now are trying to get out of the big commercial stuff and more into lending on the smaller, more safe assets in this tough economic time.

Tony:
Henry, I just want to make a quick comment. I’ve never thought about getting involved in the local chamber of commerce for the city that I live in and I quickly googled my city plus chamber of commerce and they’re literally on the first floor of the building that I’m in for my studio right now. And I had no idea how crazy is that, right? I can literally just walk downstairs and introduce myself and get connected. So just go show you never know where those connections might come from.

Ashley:
So I want to touch on the individual side of a direct lender. So who is this and what is this and how does this compare to the portfolio loans that banks do?

Henry :
So when I hear individual side of direct lending, I think immediately my brain goes to private money lending and people often confuse private money lending and hard money lending as well. And the way I kind of define private money and hard money lending is hard money lending is when you’re going to borrow money from a company who is in the business of lending money. So not necessarily a bank, but a company that is formed and the money that typically hard money lenders are lending out is institutional money. So it’s a company that’s lending institutional money to real estate investors. They’re in the business of lending money. Private money lending by definition is really just you and somebody else agreeing to terms of you borrowing some money in exchange for something. And sometimes that in exchange for isn’t anything, it can really be, it’s whatever the terms and rates and that you guys decide it is a private loan between you and a private entity.

Henry :
But I think where the confusion comes in is there are also companies that call themselves private money lenders. And the reason they do that is because it’s all about where the money comes from. So I said Hard money lenders, the money comes from institutional dollars like Wall Street money and the private money lenders who have a company typically that’s just a bunch of wealthy people who’ve pulled their money, started a company and have decided to lend out their own money or other people’s money to real estate investors for deals. So I hope that wasn’t too

Ashley:
Confusing. No, that was amazing because we actually had a discussion about this before the show as to the way to clarify it and I think you did a phenomenal job of explaining it and breaking it out. We are going to take a short break and when we come back we are going to understand how to vet these kind of lenders. So we’ll be right back and we are back from our short break. Thank you so much for taking the time to check out our show sponsors. So just like a business partner, you need to vet your lender. So Henry, what are some things that you can do when you are vetting lender, whether it’s an institution or maybe it’s a private lender?

Henry :
Yeah, I think this is a great distinction because a lot of people are in the mindset of I need to borrow money and if I don’t borrow money, I can’t invest. And so these lenders are doing me a favor and so I need to just do whatever they say. But this is a two-way street. You need to vet your lender just as much or if not more than your lender needs to vet you. Remember we said that small local banks and private money lenders and hard money lenders, they need to lend money to stay in business. So they need you more than you need them. They’re in a service business, they’re providing a service to you. If they don’t provide service, they go out of business. And so they are selling you on something. And so if you don’t vet them properly, you can get sold a crappy bag of goods.

Henry :
Sometimes you can find yourself in some very difficult, expensive, costly loans. So the first thing you want to do is again, understand what’s their history with lending. Obviously they should have some sort of track record and should be okay with providing you some sort of references to other investors whose deals they funded. Remember, if something goes awry with your financing for your deal and it’s your lender’s fault, you still lose lose the deal. You lose the money that you could have potentially made you lose some reputation in the community with your title company. You lose some reputation with that seller in that situation. So you want to make sure that you understand, hey, have you done these types of loans before? How have they gone? Can you give me a couple of references from some investors who you’ve worked with? Any good private money, hard money or even local bank would be happy to pass you some names of people that you could talk to to see if what they’re providing you is actually, or what they’re telling you they’re going to provide you is actually what people got.

Henry :
And then secondly, if you don’t understand what they’re explaining to you in terms of a loan product, then either ask them to clarify it and explain it to me as if I was a five-year-old trying to understand what this loan product is because a lot of the times we’re not experts in banking and there’s a lot of words and terms and conditions and things that we just may not understand when we’re first starting out. And so they should be able to explain to you in a way that you fully understand what it is that you’re signing up for and what are the consequences if things don’t go according to plan. If you feel too uncomfortable then you should probably not work with that lender. And then third, ask them to give you a breakout of what are all the additional fees and costs associated with the loan product they’re giving you.

Henry :
A lot of these lenders, especially when we’re talking about hard money lenders, a lot of these hard money lenders are baking in all their money that they’re making in these fees and charges on the front side. And so make sure they give you a breakout, what is everything that you’re going to charge me in order for me to initiate and get this loan funded and have them? And if you don’t understand what that is for, then ask them to explain it for you. What is this charge? What is it covering? And then make sure you line that out because you, I’m telling you, fees will get buried in a closing statement and you won’t even realize that you’ve paid 7,000, 8,000, $10,000 just to get access to the loan.

Ashley:
There’s a couple of things that I want to touch on too. From my own experience. I did a hard money lender and it was an awful experience and some of the takeaways that I had from that is first of all asking what their process is. So if you actually do a loan with them, if you’re maybe doing a rehab, what’s the draw process to get the contractor paid and knowing all of the steps of like, here’s everything I need to do. The second thing was I asked if they had experience in New York state, which nobody wants to lend in New York state because it’s so awful. And they said yes. Oh yeah, we do loans there all the time. Where the red flag was to me was when they asked me for an attorney to use in New York State, if you do business all the time in New York State, you should already have an attorney that you’ve worked with to actually do that.

Ashley:
So that was another thing is to, if you’ve done deals in this state, then you should already have your team, you should have a connection there. And then the third thing was working with a broker who was actually knowledgeable about the loan product. I worked with a broker who was just trying to make a sale and basically I was on my own after I started the loan process and every question sent to him was, oh, I don’t know. And then I guess the last thing there’s doing more is to how many people are you actually going to be dealing with and working with through the process? Is it going to be you have one point of contact or is it going to be all these different people will be your point of contact? And that was the worst thing was I would’ve rather had one person to contact.

Henry :
That’s a gold list. So whoever’s listening, I hope you wrote those things down, this is huge, but one of the things you said was huge, the draw process, and I just want to talk a little bit about that because it can be a very big deal, especially for a new investor. And so the way typical draws work or people think draws work is that you need to get some work done. And so you get a quote for it and then you send that quote to your bank or your institution and you say, I need $5,000 to do this. And they say, sure, and then they send you $5,000 and then you go pay the contractor. But that is not how it works typically, and everybody does it a little different. Most lenders are only going to give you a draw for services rendered, which means it needs to already be complete before you ask for the draw, which isn’t the end of the world if you’re doing things one at a time.

Henry :
But if you don’t ask about this process, I made this mistake, I got a loan, I did it just this year. I got a loan from a new lender. I’ve been doing tons of deals, most of the draw processes work the same. This one was different and I didn’t ask. And so when I went to get a draw for doing some of the work, they said, no, we only do two draws throughout the project. One at the halfway point and one at the end of the project. This was a $70,000 rehab, so that means I had to come up with half of that money to fund everything. Then I could get a drawback for that and then I needed another half before I could get that back. If you don’t have that money in reserves and this is a lender you went with, you could find yourself in the world to hurt not being able to get that property renovated.

Henry :
So big, big deal there. And then the second thing is also ask about the appraisal process. And this is more from a timing standpoint because is your lender going to do an appraisal? Most banks are going to do an appraisal. Private money lenders won’t require an appraisal. Some hard money lenders will, but they’ll all do it a little different. Some like to do their own comps and you never even hear about it and they just do it real quick. Some hire a third party appraisal company to go out and some don’t do it at all, but the appraisal is usually what takes the longest for you to get a deal from under contract to closing. So if you’re trying to close fast and you use a hard money lender who’s going to hire a third party appraisal and they don’t do it until after two weeks of the project being under contract, well it’s going to take you about 45 days to get that thing closed. So you got to make sure you understand what’s their full process, especially when it relates to appraisals.

Ashley:
And that was one thing that happened with me too as hard money lender, quick close, you can make a cash offer because you’re bringing cash per se to the table and I’d made cash offers, but I had to have the appraisal done and the seller’s like, why is this happening? You’re making cash, why are you doing an appraisal and all these things. So I had to learn that anytime I’m using hard money and sometimes even a private lender that I’m having to make my offer as financing and state that it’s not conventional financing but it’s still financing because of the process of some of the lenders

Tony:
Guys we’re talking a lot about the fees to draw schedule and I’ve personally never used hard money. Like I said, I’ve used the local regional banks, I’ve used a lot of private money, but never hard honestly for the reasons that we’re talking about right now is that it tends to be a little bit more complicated. So when you are working with the private money lender, Henry, I’m curious what your process is first. How does that differ in terms of the fee structure, in terms of the draw schedule? How do you draw those things up when it’s a one-to-one relationship.

Henry :
So you need to understand what it is that your private money lender wants. A lot of the times when you’re dealing with a private money lender and it’s just a one-on-one relationship kind of a thing, all they’re really concerned about is a helping you because typically your private money lenders are going to be people you like, know and trust. And the second thing they’re going to be concerned about is how much money am I making? How much money am I making? When do I get that money? Am I getting it monthly? Am I getting it at the end? Once all those things are established, it’s pretty easy for you to set the intricacies of the everyday part of the loan up to whatever fits your needs. Now when I’m working with a private money lender, my goal is I want this to be painless and convenient for you.

Henry :
I want you to want to lend to me over and over again so I don’t want to have to come bother you every single time. I need a little bit of money to do this and a little bit of money to do that because typically your lenders are going to have a day job and a life and kids and a family and it’s just that’s a lot and especially they’re not in the real estate investing business. They don’t want to be. So when I work with a private money lender, I’ll set it up if I’m going to get money on the draw, I’ll either set it up where I get all that money on the day of closing and then I’ll put it in a separate account so that I can pull draws from it myself. Second option is you can have your title company actually hold that money in an escrow account and then when you need a draw, you get the draw from the title company and that way you’re not bothering your lender, but your lender can still feel safe because they didn’t give you all of that money on day one.

Henry :
It went into a third party account that’s managed by a third party. So those are typically one of the two ways I’m going to do it so that my lender feels safe and I make it convenient and easy for them.

Tony:
I like the idea, Henry, I’ve never gone the route of just leaving it in escrow. Typically when we work with private money lenders, we set it up so that we get the full amount on the day of closing, like you said. That way we don’t have to worry about going back to them over and over again during the project and then we just repay them all of their principle plus their interest when we either refund answer if it’s a flip when we sell that flip. And that’s been the process for us. But you touched on something that I want to drill down on just a little bit more as making your private money lender feel comfortable and confident, what kind of things are you putting into your relationship with that person to give them the peace of mind that Henry’s not going to run off in the middle of the night or if he did that there’s some kind of recourse there, right?

Henry :
Yeah. First and foremost is no matter how close we are, we’re documenting everything. So there’s a promissory note and that promissory note’s going to explain exactly how much we’re borrowing. It’s going to explain what the payment schedule is for repayment and that is going to get notarized at the title company. So as many professionals as you can involve in the sequence as possible, it’s going to give your lender some peace of mind that, yeah, yes, I am lending Henry money, but I’m doing it as if I was an institution just like anybody else. So that they have that peace of mind through the process. It’s not just me and you on a napkin, I’m about to borrow $40,000 from Tony, I’ll pay you when I pay you kind of a thing. And so involving the professionals and making sure everything is documented is one. Two, letting them know what they’re able to do.

Henry :
A lot of your private money lenders, especially if they’re people who like no and trust you, they’re not going to know that they can go take that promissory note and file it as a second mortgage against the property. I tell all of my lenders that this is something you need to go do in order to protect yourself in the event something goes wrong. Now, a lot of the times they still don’t go do it, but I make sure that they understand that this is something that they need to do to protect themselves. This loan is secured by the real estate that I’m borrowing the money for, and so filing this second mortgage helps protect yourself and me explaining that process to them helps them feel more comfortable that I’m actually looking out for their best interest. Dude,

Tony:
I love so much what you said of it doesn’t matter how close we are, I’m going to follow the same process. And my mom, she came into some money I think two years ago and I put hers, one of my private money lenders on one of my deals. And same thing, I had a signed promissory note. There was a deed of trust that got filed with the county, so my mom was listed as a lender on this property. So same thing, we tried to make sure that it was as legitimate as possible, and I think when you’re working with people and they see that you’re treating this as a true business transaction, it really does give them that peace of mind to say, Hey, if things do go terribly wrong, at least I know I have some level of recourse. As for you, I guess, what has that process been like for you in terms of peace of mind, making sure that that relationship runs smoothly?

Ashley:
Well, I’ve used the same private money lenders forever where I just asked for a check and I get a check and there’s a promissory note that I don’t even think they have a copy of. There’s nothing secured, but I’m actually using one of, Henry is a private money lenders for my first secured, I feel like official private money lenders and honestly, my attorneys are handling the whole thing, so I have no idea what is happening. I just know the requirements of the private money lender and what they want and me telling my attorneys, let’s do this and set it up, and I got the call yesterday, we’re all set to close, so I think we’re going to be closing in a couple of days and I didn’t have to do anything my attorneys did. So I think maybe that sense of security that an attorney is actually doing the work for them and it’s not just me saying, here, sign this document or here this is how the process goes, especially since this is my first time actually following a process of how to do it with them having some kind of security for the note.

Ashley:
But I think my track record gives a little bit of sense of security and also I plan to have good communication. I’m also an investor on a JV deal where I’ve just invested capital and it’s actually for the deal that’s from on the market for the flip off where I’m going against Henry on this one and I get a weekly update as to what’s going on with project and things like that, which I think gives a real great sense of security to me and also really exciting. Wow, seeing the project moving, it’s making me feel like I actually am a part of the deal besides just being a money lender.

Henry :
One thing you said there that was important was your experience gives your lender comfortable, and that is something that I teach people to do as well, even when you’re dealing with friends and family is to have an experienced portfolio. And this can simply just be a PowerPoint deck and each slide is encompassing of a deal you’ve done picture of the house, what you paid for it, what you put into it, maybe an after picture and what you made and what your lenders made. So calling out specifically how much money your lenders made so that when you’re sitting down with somebody and you’re having that conversation because they said they’re interested in potentially working with you or lending to you, you’re able to show them, I have a proven track record of deals that I’ve done and here’s the money that my lender made. And if you’ve done bank lending, that’s okay. That’s still a lender that made money with you. So being able to document how much money you’ve paid that lender, you’re now showing this person, giving them more confidence that yes, I would lend to you because I like you, but I now understand that I feel safe in doing so because you have experience and B, other people have lent you money and they didn’t have to try to come after you and break your legs.

Ashley:
We’re going to take a short ad break right here, but when we get back, we’re going to be talking about how to actually pitch to a private money lender and what you should be showing and what you should be saying to give them an opportunity to invest in your deal. Okay. Welcome back to our fundamentals of funding series. This is part three and we’re here with Henry Washington. So Henry, when you are approaching a private money lender, what are some of the things that you are discussing with them about this opportunity you have for them?

Henry :
Yeah, so you said a lot of keywords there. First and foremost is opportunity. That’s the main keyword when you’re talking with people about potentially working with you. And so just before the break I touched on having an experienced portfolio. This is exactly the situation you want to have this experience portfolio for so that when you’re having these conversations, you can show people that this is something that you have experience with. When I am pitching somebody, I never see it as I am asking you for money. I see it as I am going to borrow money, and if I’m going to borrow money, that means somebody’s going to make money and I would much rather pay someone that I like know and trust and let you make that money than me having to pay it to some institution who doesn’t care about me. And so when you rephrase the situation like that, people realize they go, oh, well yeah, you do do a lot of deals and you pay people interest.

Henry :
Yeah, I would love to be able to make that interest versus somebody else. So it’s an opportunity because when you pitch it like that, where you’re showing them is like, this deal is getting done. I do this. This deal is getting done. I would like to be able to pay you within this process. If you don’t want to be a part of it, that’s totally fine. Someone else is going to make this money. And that frames it a whole lot differently than when you go to somebody and you’re like, sir, I would like to borrow some money. Could you please put some money into cat?

Tony:
But let me ask this, Henry, right now we’re all experienced investors. We’ve done this a few times. So I think we have this level of confidence both in ourselves and our abilities to execute. But if you go back to Henry Washington on maybe that very first one, I guess, was that your perspective? How did you gain that confidence to approach it in that way?

Henry :
Yeah, I learned it from other investors. And so for me, I was fortunate enough to get to early on, get really good at finding good deals, and as I was finding these good deals, I would go to my network of investors and I would sometimes see if they wanted to partner on them or we’re just talking business. And often as I would be explaining a deal, somebody would say to me, well, how are you financing this? And I’d tell ’em, they’d say, well, if you need some money for the down payment or something, let me know. We can work something out. And that’s what started to really get me understanding that like, oh, they want to give me this money because they know it’s going to make them money. And so my very first loan I lent to another investor who was also a house flipper, but he lent me money for my house flip because he wanted to make interest on it.

Henry :
And so immediately that turned the light bulb on in my head to say, okay, these are opportunities that other people want to be a part of. And so that helped me have the conversations with other people who maybe weren’t involved in the real estate investing space. And so I get it, it can be super scary. It’s supposed to be super scary, but when you’re looking for private money, that’s why the best place to start is people who know and trust you because that conversation can be a little less scary, but you should understand that I’m buying a good deal and I’m going to be able to pay this person back. And again, also, you should never be borrowing money that you can’t afford to pay. When I was first getting into this business, I was never borrowing money for these down payments for the properties that I didn’t have in my bank account. I was just choosing not to use my own money so that way if a deal went south, I could just pay them back no matter what, because what’s most important is them getting paid out before me and me having the opportunity to borrow from them again.

Ashley:
That’s such a good point. I went so long using my own money and using my lines of credit that it was so easy. The two days I transferred the money off my line of credit into my bank account. I wired the money at closing and didn’t have to be responsible to anyone. But you can only grow and scale so much doing it that way. And if you’re finding great deals, it doesn’t matter how much interest you are paying because you’re going to get the deal and you’re going to make some money rather than no money because you don’t want to go out and pay that interest rate or whatever it may be. So I think that’s a great example. And then you get to keep that cash in a five and a half percent savings account and make interest on it. Right. Now

Tony:
I want to ask them to both of you, because we talked before about hey, putting these successful deals into a pitch deck for these potential investors so they can see what’s worked well for you. What are your thoughts on putting the deals that didn’t work as well? For example, we had a flip we did last summer where we lost money on the flip and I had to write literally a six figure check to our private money lender to make them whole. So do you think that’s something we should also include into this credibility pack of like, Hey, not all of my deals work out, but even when they don’t, here’s how I take care of my private money lenders.

Henry :
That’s arguably more important than putting the wins in there because that’s what your lenders need to see. What you want is for them to trust you. That’s the point of the pitch deck. It’s not just to get the money, but you want them to trust you. So yeah, absolutely. If you took a loss and you put that in there and you can show them that, hey, even if things go bad, I’m going to take care of my investors. That’s the golden ticket, my man. That’s how you sustain lending over time.

Ashley:
One thing that we haven’t touched on yet for any of this kind of financing is what happens if payday comes and you can’t pay? What are the conversations that someone should have with their lender? I’m thinking of hard money too, for an example. If you need to ask for an extension, can you give us some idea of what your options are and when those conversations need to take place?

Henry :
Communication and transparency is key. Always. You are the steward of somebody else’s money, which means they need to know what’s going on in the event that you can’t pay. Typically what you’ll find is if you’re dealing with a bank or a local bank, a hard money lender or a money lending company, they have policies and procedures in place for this already. So it doesn’t have to be as scary or as uncomfortable as a conversation as you probably make it out in your head, there are ways for you to get extensions. So just right now I have a deal where I borrowed short term hard money essentially I had it for a six month term and that six months came and passed because I’m not finished with the project. That’s a whole nother story. So it’s not that I couldn’t make the payments, that payment is ballooning and I’m not done and I haven’t started to refinance.

Henry :
So what do I do? Well, I just reach out to the lender and say, Hey, the balloon payment’s about to come. What are the options here? And they reached out and they said, well, here are your options. And they gave me an extension option and they gave me a couple other options and let me choose the path that I wanted to go forward based on when I felt like this project would be done. This is built into the companies now when you’re dealing with somebody direct one-to-one private situation, there’s no contingencies built in typically, so you guys get to work out whatever that means. So in this situation, I had a situation like this with a private money lender where I had their money for a year. That year was up and I wasn’t done again, I needed more time. And so I simply just went to them and said, Hey, I know we only had this term for a year.

Henry :
Are you needing that money back? It was about 50 grand. I said, are you kneading all 50 grand back right now or would you be open to extending this for another 12 months? And they were like, man, you’ve made all your payments on time. It’s just icing on the cake for us. Let’s extend it for 12 months. So just having the conversation and being transparent with where you are and why you’re there and what your plan is to be out of that situation will help you have those conversations. It’s typically not as uncomfortable as you’re thinking.

Tony:
Super similar situation where we’ve seen in our business as well, we had a bur project we were doing out here, and by the time we finished the rehab rates had spiked. We were looking to do A-D-S-C-R loan, but that specific DSCR loan had a prepayment penalty where it’s like even if rates came down in the next year, we wouldn’t be able to refinance. So we were like, well, what do we do? And we went back to our private money lender, we said, Hey, same thing as a 12 month note and the whole balloon interest, plus the principle was due. We said, Hey, can we just re-up for another year and we’ll just continue to make payments to you every month and we’re paying him 10%. So he’s like, true. Why not? At least we get a 12 month runway to see where our rates kind of fall to see if it makes more sense to lock in at a 7% now as opposed to a nine that we got quoted last summer, and now we still kind of win in the long term. So absolutely, it’s hard sometimes to go and have that conversation because you feel like you might be letting them down. But what we found is that people want to put their money to work, and if they can just leave their money in that same deal and keep collecting a check, it almost works out in their favor. Right? Absolutely. So there’s a bit of a mindset shift here that we have to make. I

Ashley:
Think too, just one more thing to add is even having that conversation in the beginning and having that extension built into your note too. When I did my hard money loan, it was already known like, okay, you get this many extensions for this amount of period of time, and there was an interest rate change each time that would step up and increase and another fee you had to pay. We did one extension and we had to have a broker appraisal done, and there was a requirement that you could only do the extension if X amount of there was still that loan to value ratio. It had increased from whatever it needs to be. And so we had to have a broker appraisal done on the property, and that was great. So then we move on and we had to pay our higher interest rate for the next three months until we did actually go and refinance out of the hard money. Okay. Well, Henry, thank you so much for joining us today. We really appreciate it. We are having you back on in a couple weeks to talk about something new and exciting. Do you want to share with everyone what that is?

Henry :
Yeah, I wrote a book.

Speaker 4:
There you

Henry :
Go, man. Congratulations brother.

Ashley:
Thank you very much. Yeah. Okay. And you’re going to tell us what

Henry :
It is? Oh, do you want to know about the book? Cool. Yeah. So

Henry :
I wrote a book. I just get so excited to say I wrote a book that I forget to tell people that actually there’s actually something in the book. So I wrote a book called Real Estate Deal Maker, and it is a guide to teach people how to get really, really good at finding phenomenal deals and how to get really, really good at finding financing for those deals. These are the two problems that every investor faces, especially when they first get started. And even as you get seasoned, I mean, if you ask 10 investors today what problem they’re having, they’re either going to tell you they can’t find deals or they can’t find money. And so if we can teach people how to get really good at solving those two problems, well then you’re able to grow and scale your real estate business at whatever pace you’re comfortable.

Ashley:
And you can go to biggerpockets.com/deals book to check it out. Well, congratulations again, Henry, and thank you so much for coming on and sharing your experience and knowledge on the fundamentals of financing.

Henry :
Thank you for having me. This was fun. I appreciate you guys.

Ashley:
If you want to learn more about Henry, we will link his information into the show notes and make you check out on the Market podcast and the Real Estate podcast. I’m Ashley. And he’s Tony. Thank you so much for listening, and we’ll see you guys next time.

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In This Episode We Cover:

  • The EASY way to build your rental portfolio with low money
  • The mortgage approval timeline and what to expect during the underwriting process
  • How to get 100% financing (or more!) with down payment assistance programs
  • The biggest red flags to watch for in a lender (and key questions to ask!)
  • How to get a first-time home buyer loan (even if it’s NOT your first property!)
  • The most common misconceptions surrounding real estate lending
  • Conventional loans versus non-conventional loans (and which one YOU need)
  • And So Much More!

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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