Private Money Lending Top Mistakes

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  1. Never buy a note on something you wouldn’t want to own. Consider the worse case scenario where if your borrower defaults you take it over. You might need to have a team there or some contacts local that you trust.
  2. If the loan goes into default, take action immediately start the timeline just like an eviction.
  3. Do not loan money to someone you would feel uncomfortable foreclosing on such as a friend or relative.
  4. If you are lending money on repairs you might want to originate a separate note with a higher interest rate with separate collateral as to not encumber the original asset with debt that you put you in a lower leverage position if you ever have to collect.
  5. Beware of borrower robbing Paul to pay Peter. Collect monthly installments so you know if the borrower is getting into financial trouble.
  6. If you don’t know what you should get in terms of interest rate or don’t know how to evaluate the risk get a mentor or hire a 3rd party professional who will give you their opinion of the deal. Don’t do a sucker deal even if they are offering you 12-15%+.
  7. Get lender’s title insurance for the loan. The purpose of title insurance is to shift risk away from you to the title company when creating a real estate note.
  8. Verify that there is property insurance on the deal and that you are named as an additional insured. Even though it’s a remote chance of any issues it costs very little to have you covered. Plus you as the lender often has more to lose than the flipper.
  9. Insist that the borrower provide you with evidence of payment when property taxes, insurance, and homeowner’s association fees become due and are paid, or when possible have your loan servicer set up escrow service to pre-collect the required funds.
  10. Get a personal guarantee if you are lending to an entity or to an individual with some weakness. Or, have the borrower execute a Deed in Lieu (DIL) of foreclosure and send it to you or your custodian. Should the borrower default, you can record the DIL to save the expense and time of foreclosure.

TRANSCRIPTION:

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Today’s podcasts gonna be talking a little bit about private money lending. And this is where you lend your money to a more active investor and you’re the passive investor and you’re typically getting like eight to 15%, which

0:15
is just going to be what’s up simple passive cash flow listeners wanted to announce the first multi day we mastermind in Hawaii will be holding it on my island of Oahu, Honolulu is on President’s Day 2020. And that’s February 14 to 17. And a reminder, Valentine’s Day is the 14th. But we’ll keep that evening for you. families and couples want to come on down for that we’re actually encouraging spouses and families to come down because that’s part of the whole experience. Getting to know other families and getting to know other committee members is gonna be a big part of this. So what to expect

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3:00
So again, that’s simple passive cash flow calm slash club.

3:05
Today’s podcasts gonna be talking a little bit about lending private money lending and this is where you lend your money to a more active investor as and you’re the passive investor and you’re typically getting a anywhere from like eight to 15% return. Now the caveat there that this is an active return

3:29
in terms of taxes, and it is not. There’s no depreciation coming back at you for this if you guys want to follow along and go to the show notes and info page, go to simple passive cash flow comm slash land where we’ve done a previous webinar on this topic, but today and what I wanted to hash out because you know, in the past year I’ve had some students in the mastermind do some private money lending and some these deals have gone bad. So what I wanted to do today is I had a

4:00
In addition to this article, and these are the top 10 mistakes that I have seen people go wrong with when lending the private money lending to number one here, never buy a note or something you wouldn’t want to own. And when I say this, like, you know, because you always have to understand that if things don’t go well, and sometimes they don’t, you might have to take over the property. And that’s the nice thing about private money lending is that you own title, it’s a collateralized loan. And some of them were situations or when you’re in a deal with non collateralized debt, you know, and what that means in layman’s terms is if the guy screws up, you don’t have any asset or not protected. Consider the worst case scenario here where if you’re the borrower defaults, you take it over, do you really want to take that thing over? Don’t maybe you should reconsider your loan to value calculations and just so nobody gets left behind. The loan to value calculation is

5:00
A great way to start out assessing the risk. So if you’re taking over property that’s $80,000, and you’re giving them $100,000 loan, you’ve got 80% loan to value, typically, you want to stay anywhere from the 60 to 80% range, something does happen and the borrower does default. You know, maybe you can cut losses at 20%. And, you know, there’s always gonna be friction costs and headache costs, at least that way you’re covered, your original investment is, is covered there.

5:29
Number two, so if the loan does go into default, make sure you take immediate action and start the timeline. Just thinking and fiction. You know, there’s a procedures on this, again, this is where it’s nice to be working with people, you know, like or trust, you know, they they could go into default, but they could act in a very, very professional matter and, but you still want to do is follow the timeline because they’re procedures and different in every state. I’m not familiar with all of them, but that’s where you get a lawyer involved in that.

6:00
jurisdiction to represent you.

6:03
Number three here do not loan money to someone you would feel uncomfortable for foreclosing on such as a friend or relative.

6:13
So sometimes you got to foreclose and you got to do what’s necessary. Number four, if you’re lending money on repairs, you might want to originate a separate note with a higher interest rate with separate collateral not to uncover their first original asset with that this will do is put you in a lower leverage position if you ever have to collect. So what we’re talking about here is most times what you’re going to do is you’re going to go on first lien onto the property and you know, first thing is important because you’re first in line to collect if you’re the second or third lien holder, imagine getting in line second and third. Now what we’re talking about here is you know, if sometimes what they’ll do is they’ll get of the the flipper or the active real estate

7:00
operator will ask for a loan for the repairs, they might get you or they might get somebody else to lend on the actual acquisition of the property. But they may need more money for the repairs at this point in time. You got to ask yourself how are you covered? What’s your collateralized debt here? Are they going to encumber the property because if they are, well they’re probably putting you in second place there. So something to think about.

7:25
If you’re going to go in second position now, I would probably be looking at more of a 12 to even a 20% interest rate cuz that much higher risk level

7:37
number five, put yourself in the shoes of a flipper active real estate operator. Now if you’re losing money, you have to pay rent you got to put food on the table will happen a lot of times these guys will pay Paul to rob Peter or vice versa and even though he paying you the monthly installments, you don’t know if the bar

8:00
Getting into financial trouble. So just be aware that this could happen be looking out for the sign. And this is where it comes into knowing people personally. And sometimes you can kind of keep track of them. I mean, it’s your money, you can do it however you want social media is that good use for this. Number six, if you don’t know what you should get in terms of interest rate, or you don’t know how to evaluate the risk, get a mentor or hire a third party professional who give you their opinion of the deal. Don’t go into a sucker deal, even if they’re offering you 12 to 15%. So this is very common, you know, most newer investors will just be shopping based on rate. As I mentioned earlier, you know, let’s just say for example, you’re taking a first lien on a property. Like I said, anywhere from eight to 12% is the normal range. But if you’re working with a newbie, I mean, I wouldn’t even invest in that type of deal.

8:57
But if you have to maybe 15

9:00
A 20% might be fair for that type of deal. A lot of people in my collective genius mastermind you know, these are the pros flipping over 100 houses per year they have investors that are lend money to them and, you know, low single digits, which is crazy.

9:16
I’d sure like to get some of those guys to invest with me. But, you know, that’s, that’s what reliability does. And in the grand scheme of things is something is very reliable. You know, it’s a lower risk and, you know, they’ve earned it, they earn the right to pay 5% for money, and that’s what you call cheap money. Number seven, get lender’s title insurance for the loan.

9:42
And the purpose of this title insurance is the shift of risk away from you to the title company when creating a real estate note.

9:52
Number eight very similar to title insurance, get property insurance on the do that and make sure your name does an indigent additional insurance.

10:00
I don’t think it costs anymore or might not be might be pretty negligible. But in a remote chance if there’s any issues like a construction worker falls or any kind of lawsuit, you know, you’re sort of involved in the deal. Even if you’re in a limited partner type of facet, you could be named in a lawsuit plus you as the lender probably has more to lose than the flipper because the flippers the ones that are borrowing the money, typically, they’re not in pretty good financial straits. Most times house flippers are pretty broke. They’re active real estate operators and, you know, unless they have a lot of rental properties, their net worth isn’t typically as high as it seems. And in a lawsuit, the deeper pockets so the always the ones that are kind of targeted first.

10:51
Number nine insist that the bar provide you with evidence of payment when property taxes, insurance and homeowners association fees become

11:00
And are paid, you can look up your property taxes on your own typically and see and you can probably put in the property address and see if that’s been paid with insurance and the homeowners association fees you’re gonna have to do a little bit digging on it. You know, I think the same goes trust but verify here.

11:20
You can also set up your loan servicer to collect to escrow the pre collection of these funds also

11:30
on and number 10 here get a personal guarantee if you’re going to lend to an entity or an individual with some weakness. Now LLC These are a way that people can hide behind them and fold up

11:47
one way of protecting yourself is to have the bar execute a deed in lieu of foreclosure and send it to you for Chris Odeon. Should the bar default you can record the deed and lose

12:00
And take over the property to save the expense and time of foreclosure

12:05
know there’s there’s a lot more information on private money lending on the page at simple passive cash flow comm slash lend

12:13
but me personally I kind of moved away from private money lending I like my infinite banking strategy to make low single digits when my money is not doing anything but I try and keep my money and hire IR type of deals that are value add and cash line day one such as multifamily apartments or mobile home parks these days I’m kind of playing around with some oil and gas investments and what I don’t like about private money lending is that your debt investor you’re not an equity investor equity investors have more upside. Another mistake I see is a lot of the lower net worth guys seem to be doing the private money lending and it’s completely the opposite the people with the Lord network need to be going after equity deals. You know, let the guy

13:00
A two $3 million net worth in their Roth IRAs or their self directed IRAs, do the private money lending at high single digits. Those guys don’t really need to grow their money. And hopefully they’re working with people they know like or trust. But, you know, it’s the people who go to the local areas are these kind of newbie groups are the people investing in or what I say kind of suckered into these deals as private money lending, when really they should just be going into private placements and actually good deals out there. But again, you know, that requires a good network and to be a little bit more experience.

13:41
But if you guys have any questions, feel free to shoot me an email Lane at simple passive cash flow, and we’ll catch you guys next time. Aloha.

13:54
This website offers very general information concerning real estate for investment purposes, every investor

14:00
Your situation is unique. Always seek the services of licensed third party appraisers inspectors to verify the value and condition of any property you intend to purchase. Use the services of professional title and escrow companies and licensed tax investment and or legal advisor before relying on any information contained herein information is not guaranteed as an everyday investment there is risk the content found here is just my opinion and things change and I reserve the right to change my mind. Above all else, do your own analysis and think for yourself because in the end, you’re the only person who is going to look out for your best interests.

Transcribed by https://otter.ai

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