Everything you need to know about Private Money Loans

Speaker 1: [0:00] Really quick, before today's episode, I wanna talk about our new accelerator program. We're gonna be taking 10 investors every quarter and plugging them into our proven marketing systems that we use to operate our business every single day. And we will be applying them to you and your business in your market. And at the end of twelve weeks, you will have greatly increased the velocity of which your business has started to take root and hold in your market. So you can spend less time building, less time trying to figure stuff out, and instead just focus on closing deals. So this is an intensive program. It is only for people who are extremely serious about wanting to take their business to the next level and ultimately quit their w two job in the next twelve months, which believe it or not is possible. So if you think you are a good fit, please go to collectingkeyspodcast.com/launch and submit your information and see if you're the right candidate. We're all doing again, we're doing 10 people every quarter. So spots are limited. So if you apply, we don't get back to you. We apologize. But it will be first come first serve or I guess, like, first qualified first serve. So again, collectingkeyspodcast.com/launch. Go there, and we'll talk to you soon.

Dan Austin: [1:06] Welcome to the collecting keys Friday focus. Hey there. Welcome back to another episode of the Collecting Keys Friday Focus. You got me, your host, Dan Austin today, and I wanna talk everything private money lending. Perhaps some time later on in the episode, I'll talk about other lending resources, but if not, I'll I'll do a second episode on on other lending sources. But for today, I wanna be mostly about private money lending, and before I dive into that, I just want to ask a simple favor. If you like what we're saying, if you learned even one thing from any of the episodes, which we've got hundreds of episodes out by now, if you haven't given us a review, please just go to wherever you're listening to these, go to the show and give us a five star review, and leave us a comment. And by the way, we're still giving out free Collecting Keys t shirts. They're nice shirts, they're comfy, they fit well, lots of different colors, just screenshot your review, DM me on Instagram at investor man Dan with that screenshot and your address, and I will mail you a free shirt. It's a sweet shirt, I like them, and it's definitely worth doing a review. You know, I used to be a pretty passive listener of podcasts until I started producing a podcast, and really realized how much the reviews do help the podcast grow, and also just how they help us, Mike and I, you know, look at our show and make it better for you all, and it fuels us to get excited when we when we see a new review coming. And so yeah, if you don't mind just stopping for a second, go in and do that, I would very much appreciate it. Anyhow, let's dive into private money lending, and I wanna start out by setting a baseline of what I'm talking about when I'm talking about private money lending, because sometimes the terms get kinda squishy and thrown around between private money and hard money, and all other terms that people like to use. When I talk about private money, I'm talking about going and finding somebody in your network that has cash, money, gold, and is willing to loan it to you, typically secured by an asset, or at least secured by you with a personal guarantee. It doesn't have to be a first position, it can be a second position on a property, or it can just be, honestly, written to you as a loan with no security, no asset securing it except for maybe a personal guarantee by you.

Dan Austin: [3:13] Lots of ways to do this, but it's from a private person, not an institution that maybe has a fund that they've raised of investor money, and they do what we call hard money loans, not a big bank that is loaning out money, and then selling those mortgages, none of that sort of stuff. Just simply a private party transaction almost, not involving a business or an entity, friends, family, other investors within your network. So that's baseline what I call private money. Sometimes can be confused with hard money, or are interchangeably used at times, because they're kind of the same loan a little bit. Okay. So now that we know what that is, let's talk about why you should use private money, because a lot of times people tell me, they're like, man, can't wait until I have enough money saved up, I'll just do my deals with cash. Now if you wanna do your deals with your own cash, that's fine, but like anything, you're gonna run out of cash. Real estate is a cash and asset intensive business, it takes a lot of resources to do this. So you might save up cash and you can do one deal at a time, but do you have enough money to keep marketing, and so on and so forth? Do you have enough money to do a flip and a bird at the same time, or how many flips can you do, right?

Dan Austin: [4:20] So by using your own money, you're going to limit your capacity. Mike and I still, we still use other people's money on projects we're doing, we even have our own hard money lending company, and do our own loans through that business, but we still borrow money from other people and other hard money companies, so it's a way of, to use leverage to expand what $1 can do, and most importantly, it gives you the ability to keep operating your business, especially if you're operating a direct to seller market real estate business, where you gotta keep pumping money into it, in the event that, you know, you've got a month where maybe you bought all of your deals that you found marketing to people, and now you don't have a wholesale fee coming in to pay your next marketing. So having that liquidity is highly important. But on top of that, it's super flexible, it's fast to close, it's just easy, generally speaking. Once you have a good relationship with a private lender, and they know how to underwrite it, and you've helped them figure out the whole document piece, or they've come to you with their document package, whatever it is, once all that stuff's in place, you know, Mike and I have done loans for people where we can we'll turn it around in twenty four hours, know, you give me the details on it that afternoon, and by the next morning, I'm ready to rock and roll, usually if it's a good deal for us to loan on.

Dan Austin: [5:33] So it's super fast, not like a big hard money lender, or a big bank, where they're they say they need thirty five, forty five days to underwrite the deal, or two weeks to underwrite the deal. Private money's much more much more flexible, the terms are more flexible, you can kinda do whatever you want, right? It's between you and a private party, so there's no institution in between you guys. So that's why you should use it. Flexibility, fast to close, it's easy, and it's a preference for me than you overusing your own money, just because you could do so much more, because there's a lot more people's money out there than there is one person's money, when it's just you. So the next thing is, now that you know what it is, and why you should use it, is how the heck do you find it? Because that's like a lot of questions, especially for newer investors, or even some seasoned investors that just haven't had to use private money yet. You know, how do you find it? And the best way to do it, in my opinion, is to get out there and start telling people what you're doing, so they can observe it, so they can hear it, so they can see it, they can feel it. Social media is obviously a great platform for that, one way to do that is you can be posting on social media about the projects you're dealing with, or the things that you're working on, and talk about how much investor made with you, or how much an investor could have made if they had invested with you on the deal.

Dan Austin: [6:44] That just gets people hearing and seeing what you're doing, and starts building a track record to a very wide audience of people who follow you. And then, just tell people in your community, tell your friends, tell your family, go to people, know, at investor meetups, talk to other other local business people, entrepreneurs, you know, just tell them what you're doing. Hey, I'm in real estate, yeah, I'm flipping this house up, know, in this part of town, here's what what's going on, last year I did this many, this year I'm planning to do this many. Really just start talking about it and sharing, you know, what you're doing, and if you can always find a way to loop in investors, I think that helps, just because it piques people's interest that may want to be an investor. And to be honest, know, it's usually somebody close in your network that becomes your first private money lender, and a lot of times folks are quite honestly just not comfortable with asking for money from people, so especially if it's that close to their network. So what I say is just ask the people if you're uncomfortable, if they know, you know, somebody that might be interested in lending, and usually that will at least spark the conversation, and the person that you're asking them might get offended and be, hey, you know, have money, could loan to you. Or they might actually know somebody that, they have a friend that's been wanting to get into real estate, and that's also what you'll find a lot of times, is people will come to you and say, hey man, I love what you're doing, I wanna do what you're doing, like how can I get started? How can I get in the game? Maybe they've been saving up cash, or sitting on the sidelines just waiting for the right opportunity, those are the perfect people to say, hey man, I've got a deal coming up, why don't you why don't you be my private money lender on that? And here's the thing, it doesn't have to be a loan for the full purchase price, it could be a loan for the construction cost, it could be a second position loan for the down payment, where, you know, maybe you're getting a 90% LTV from your hard money lender, and you still need to come up with that 10% down payment, perfect, you know, bring them in.

Dan Austin: [8:30] A lot of times though, people, especially if they don't know what's going on, they'll want equity, they'll say, well, I'm bringing the money, I want half the deal. It's like, you don't really honestly have to do that, there's enough money out there. If you feel inclined to give away part of your deal, especially if it's significant, you know, be my guest, but you don't have to do that, that's kinda something that I I would frown upon, and it usually comes from people that don't actually have a lot of experience, and maybe have never loaned to people before anyways. So anyhow, really to summarize that, it's just like get out and talk to people, show people what you're doing, and build a track record. Most importantly, from an ethical standpoint, before you take other people's money, just build a track record, and prove to them, prove to yourself that you can operate this business successfully, and I always tell this to people like, you need to respect other people's money more than you respect yours. Like, if you lose on a deal, your lender should not lose on a deal, your private lender should never lose on a deal, you should be able to pay them back no matter what. Mike and I have lost plenty of money on deals, and we've never not paid our lenders back what they're owed, the interest that they're owed, Anypoints, full meal deal, and they keep coming back, and they keep doing loans for us, and that's just the right thing to do. That's an ethical thing to do. Don't go out there, and when I get into the documents, you'll get this here in a minute, don't go out there and saying, I'm going to try to get the loan, so that I don't have to secure by anything, in case something happens, I won't have to pay it back. Like, don't be that person.

Dan Austin: [9:54] There's people out there that pitch that, that's just unethical, that's not the kind of crap you wanna be doing. So at least my next point, once you do find people, and maybe they've never done a loan before, and you've never set up a loan, or if you're listening to this and you want to become a private money lender, this is the part for you, it's like, what documents and how do you do this? How do you set it up, so that everybody's protected, and that is exactly what you should do. You should never take money or give money to anybody from an investment standpoint, without having everything set up properly. So document wise, if you're a deed of trust state, which you should check on, if whatever state you plan to get a loan in, or you're lending in, have a deed of trust or a mortgage, those are kind of the two different types of documents. In Washington State, where I'm at, we use deeds of trust, and that is a recorded document against the property. So if I'm going to flip a house, say I pick up a house for a $150,000, I bring on a private money lender, and for a 150,000 to actually buy the property, that deed of trust basically records the first position lien against that asset, against the real estate, they go down to the county courthouse, record it, done, that is there, and then it also references the promissory note, which is the second document you should have no matter what state you're in. If you're a mortgage state, the mortgage would reference the promissory note, just like the deed of trust. So the promissory note is really all of the details and the terms around the loan that you're giving or you're getting, it's gonna have the interest rate, it's gonna have the monthly payment, it's going to have all the late payments, you're late on your paying the interest, or your monthly payment, all that details, it's gonna be a full page or two page of all the terms, and what happens if somebody doesn't pay, and all that sort of stuff.

Dan Austin: [11:37] So that's the second one you need. The third one is, you need to have a requirement that the person getting the loan, or if you're getting the loan, provides insurance with you as the lender on the policy, assuming you're a first position mortgage, or first position loan, like you would need to make sure they have insurance at closing, and you want to make sure that that insurance is enough to rebuild that dang house in case it burns down. Don't let them get it under insured, make sure the insurance is enough, and work directly with their insurance agent if you have to, to make sure that that happens. The other one, which is really important, is to make sure that the you have a business use document, it's a one page document that just basically says, hey, you are borrowing money from me, and it's only going that house is going to only be used for business purposes, meaning the person can't move into it. Because if you think about it, say they move into it, and the loans are typically less than twelve months on these anyways, they never pay you, and now you gotta go through a whole eviction process, because now, depending on the laws locally, what you're looking at is now they're a tenant, or a person basically you're foreclosing on and trying to evict, and that's a whole another mess of a nightmare.

Dan Austin: [12:49] So you have a business use document. And then the last thing is a personal guarantee, which basically says that if the person getting the loan does not pay you back, and their little LLC that they got the loan in, LLC 123 Main Street goes to you, which is very easy to do, because typically a lot of people out there that are doing house flipping and stuff like that, they don't have a lot of assets anyways in that entity that they're acquiring these properties in. They go upside down, belly up, at least at that point you can go out for their personal assets, including their personal home, to recover the money for the loan. Now if you are a person, an investor that wants to get private money loans, I would highly recommend you go out there and you get these five, minimum five documents drafted by a lawyer, a real estate lawyer in your state, a lot of times title companies and escrow companies can refer you, or have somebody on staff that can do this, and that's get that deed of trust and mortgage, or mortgage, sorry, rather, depending on the state you operate in, the promissory note, an insurance requirement document, a business use document, and a personal guarantee. Those are pretty much all standard documents that are floating out there, and you should have that all drafted up and ready to go, and so when you find that private money lender, you can say, here's all the documents, and this one protects you for this reason, this one's for this reason, because these are all just protections, right? I just gave you five documents that really protect the lender, so when you show up super professional, someone's like, yeah, I wanna give you $200,000 to to do this, I just don't know, and and you can show up super professional and say, here's the terms that I generally like to get loans from, or loans for, you know, maybe it's 12%, 10%, whatever it is, how many points, whatever, and you can say that to them, and you can show them the actual documents, and explain to them how they're protected. You're gonna answer all of their questions before they even know to ask them, and you, as the investor, are going to look a lot more professional, and be a lot more lendable from this person's point of view, and you should be that prepared when you're taking on other people's money.

Dan Austin: [14:54] That's So the last thing I wanted to cover here, I know I'm going a little bit long for one of our Friday focuses, but I hope that this helps you understand the full picture of private money, and this last portion, which is usually the biggest one that people don't know what to do about on both sides, those documents are huge. If you have questions about those, hit me up, investormandan on Instagram, DM me, just ask me whatever question you have, and these are really important to have, and once you have them in your back pocket, you can just template them and reuse them from a lender standpoint, and from an investor standpoint, depending on what side of the fence you're on. And if you're going from state to state, unfortunately you'll probably wanna get them reviewed and adjusted by state, so if you're a private money lender, or you're an investor hopping the fence to go from Florida to Georgia, or something like that, you just wanna make sure that they are in alignment with the state specific rules, and also remember that you can't just slap any interest rate on a loan, there are actually loan requirements in different states that have like maximum interest, and maximum fees, and all the stuff that you can charge, and so you don't wanna create an illegal loan by saying you're gonna give some crazy 25% interest, because that's probably illegal in most states anyways.

Dan Austin: [16:05] So I'll stop there before I keep rambling on about these, I could talk about loans, lending, investing, all that for days, because there's just a ton of little nuances here. So I'm gonna stop it there, I will do another episode that covers other types of lending sources and funding sources for your deals. But, anyways, have a great weekend. Hope you enjoyed this. Talk to you soon. Thanks for listening to this collecting keys Friday focus. Be sure to subscribe wherever you listen to your podcasts.