How to Buy Real Estate WITHOUT The Banks (Private Money Explained)

Ashley:
This is Real Estate Rookie Episode 342. My name is Ashley Kehr, and I am here with my co-host Tony J. Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we’re bringing you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today we’re switching it up just a little bit. You guys don’t get a bunch of questions from the Rookie audience today, but you get to hear from me from my experience. And Ashley’s going to interview me today to talk all about private money lending.

Ashley:
Yeah, we’re going to do a deep dive into everything and anything you need to know about being a private moneylender or getting money from a private moneylender. We’re going to talk about putting together the contract, the amortization schedule, what kind of document you need to file with the county clerk to make it official. We’re going to go through those documents that you need. We’ll give a little tax advice as to things you should consider for your taxes.
And then Tony also tells us how much money he had to pay out of pocket to a private moneylender when his flip didn’t sell. So it’s a jaw dropping amount of money, Tony, so make sure you listen for that. And I think it’s a great example as to the kind of character and trait that you should look for when you are investing with somebody too. And we definitely talk about scenarios where you can protect yourself and also what kind of standards you should have for the person you’re investing with and also as the private moneylender.

Tony:
So today we’re going to dive into one of my secret weapons in my real estate business, and that is private money, raising private money from other people, using that money to fund your deals. It’s been an absolute game changer for my ability to transact on deals and I’m able to scale at a rate that I wouldn’t have been able to if I was just using my own capital. So today we’re going to talk a little bit about what a private moneylender is, how to set those relationships up, how to navigate the water to private money lending, and hopefully give you a roadmap for doing this in your own business as well.

Ashley:
Tony has a lot more experience with private moneylenders, so we’re going to be focused mostly on Tony’s story today to kind of guide you guys and give you an all-inclusive kind of guidebook as to what private money is and how to actually get a private moneylender. So I’m going to be leading the questions today, Tony will be my lovely guest on the show.
First off, I want to start with who was your first private moneylender? When did you take that leap? Because you have talked about your first properties a lot. You went to that bank in Louisiana, they funded the purchase price, the rehab. What kind of made that transition from using bank financing to private money?

Tony:
Yeah, that’s a great question, Ashley. Maybe we should even start just with what the differences are between traditional bank financing, hard money loans, and then private money. Traditional bank financing is what most people think of when they think of going to get a loan. You’re going to your local credit union, your local regional bank, your big national bank, and you are applying for a mortgage with that institution. So that’s traditional banking.
And then you have hard moneylenders which focus more so on the real estate investor, and that’s where a lot of people who are doing the fix and flips or BRRRs are going with the hard moneylender. Hard moneylenders are typically also institutions, significantly smaller than some of the big banks that you’re going to be working with. But typically, these are businesses, right? These are people who make a living, right? These are businesses who generate revenue and profits by lending money out to investors. And hard money’s a good in-between because you’re going to be able to get debt on properties you definitely wouldn’t be able to get a loan on from Bank of America, but it’s typically a little bit more expensive as well. You’re going to pay a higher interest rate, you’re going to pay more fees. And typically hard moneylenders are a bit more rigid in what they want from a borrower and from a property, but it’s a good stepping stone, right? But as a rookie, honestly, sometimes hard moneylenders are tough to get into. They’re going to want more capital down, higher interest rates, and things of that nature.
And then the third type is the private moneylender, and to me this is like the holy grail of getting your deals funded because there’s significantly more flexibility when you’re working with the private moneylender. Typically, when we say private money, we’re talking about an individual or maybe one or two people that are working together. But the benefit of going with private money versus hard money is you get to really kind of have a say in what those terms look like. So how much down payment, if any, the interest rate, the term, all of that is negotiable when you’re talking with a person as opposed to doing it with a business. So at a high level, that’s kind of the differences there.
Ash, I’ve never used hard money. Have you used hard money for any of your projects before?

Ashley:
Yeah, I’ve used one hard moneylender, and I actually did a line of credit with them where I was able to get up to I think it was $1.5 million line of credit. So I was already basically approved to borrow that amount from them. I still had to bring each property to them. They would vet the property and then loan me the money, and it was the max $1.5 million. I couldn’t have more money out than that with them. So I actually did it for three properties, and honestly it was a nightmare. I hated it compared to private money or even bank financing.

Tony:
Was that the hard moneylender that you had recommended to me, the one that … I think I remember this, and yeah, if I recall the person, I remember some headaches with that one. But to go back to answer your other question, Ash, about what caused the transition. As we were building out the business, we realized that we needed to go after properties that needed some work and the ability to get turnkey deals, it was drying up a little bit. We couldn’t find as many good deals just sitting on the MLS that were turnkey, ready to go. So we were kind of forced into rehabbing properties.
So once we made that decision to start going down that route, I definitely didn’t want to go the hard money routes. I said, “Hey, let me tap into my network and see if I can find some folks that might be willing to fund these deals for us.” And luckily, I already had some folks that I knew that were successfully leveraging private money. So you ask a few questions, kind of understand how to set things up. And I had a really, really good escrow officer that I work with here in Southern California, and she honestly educated me quite a bit on the process as well. So it was really just out of necessity that we needed to go down the route for private money.

Ashley:
Yeah. For me starting with private money, it was working for another investor and I managed a lot of his companies. And one of the companies was kind of at a stalemate where it wasn’t really doing anything, and it was collecting interest from loans on vehicles. So this company had created with another business partner actually almost like a loan shark on vehicles. So if you couldn’t get a loan on your car, you could come to them and they would charge you 15 to 20% interest on your car loan and you would pay them. And there was no activity anymore. They had maybe four loans that were still being paid over the amortization, and there was a line of credit with this company.
So I approached him and said, “What if I paid you more interest then your line of credit and I this money to purchase this property?” And so that was my first private moneylender and still one of my private moneylenders today. But very, very casual as in the agreement of that private money. As far as the documentation and stuff like that, there was no actual lien on the property. It was just we had a note payable and a contract between the two of us for that. And that was just because of the trust we have built up. If I was to do it with anybody else, we would do it the property way that Tony is going to explain today, the proper way to do it and not this way.
So Tony, let’s start off with what are some of the documentation that you should actually use when you’re putting together private money?

Tony:
Also, you said something important Ashley I just want to circle back to, but the trust piece. And I definitely do think that that plays a role in how this relationship looks. If you’re lending from someone that you’ve worked with a dozen times, maybe you don’t need to go through all the hoops that I’m going to talk through today. We have a mutual friend Cam and Lexi who flip out in the Midwest, and I know that they typically, their step is a little bit different than mine, and I think a little bit more lax. Amy Maggiore, who’s been on a few episodes of the Real Estate Podcast, I think it was like 636 was her first episode, but if you go back and listen to Amy’s episode, I’ve spoken with her and a lot of times she’ll take the money directly from the private moneylender. So everyone kind of does it differently. So as long as you’re not breaking laws in your state, don’t feel like you have to do it my way. My way is just one approach. It’s worked well for me, that helps me sleep better at night with the way that I have it structured.
But one other thing that makes me think about too Ash is that the trust thing is important because the private money relationship is a partnership. It is a form of a real estate partnership, which if you haven’t picked up the Real Estate Partnerships book, hit over to biggerpockets.com/partnerships. And we actually do have a chapter in the book where we break down the differences between a private money partnership and an equity partnership. So if you want to understand what more of those nuances are, you can jump into the book. We just know there are differences.
But anyway, going back to your question Ass, Ash, about … Sorry, did I just call you [inaudible 00:10:14]?

Ashley:
If you did, I didn’t notice.

Tony:
You guys can cut that or just leave it in.

Ashley:
Or leave it.

Tony:
Yeah, and just bleep it out. But going back to your question, Ash, so there’s I guess really three main documents that I create whenever I’m entering into a private money partnership. We have the promissory notes, we have the deed of trust, and then we have the amortization schedule. And I’ll break down each of those in a little bit more detail.
So first is the promissory note. This is basically the outline of what this loan looks like. So myself and the private moneylender are entering into an agreement about the amount of money they’re going to give me. How long are they going to lend that money out? What’s the term of that note? What is it going to cost me to borrow that money, so what’s the interest rate? What happens if I need to extend? What happens if I’m … Whatever rules you want to put into your note with that person, that’s what goes into the promissory note.
So for us, like I said, typically we’ll have the actual loan amount, so someone might loan us 350,000 bucks, so that’s the note amount. Then we’ll have the actual terms. So how long can I hold this money from this person? How long are they loaning it out to me? We typically set our terms to be about 12 months, not about, to be exactly 12 months. And then we usually have an option to extend, and if we have to extend, there are some incentives for the lender. We always have the interest rate, and that’s an annual interest rate. So say that someone lends us … I’ll use round numbers here. Say that someone lends us $120,000 and they’re doing that at a 10% interest rate. That means over the course of an entire 12 months, they’re going to get back 10% or 12,000 bucks, which would be 1,000 bucks per month in interest that they’re accruing. So that’s how we set up our notes is that it’s an annual interest rate that they’re getting.
And then we also have the terms of repayment. So we typically set our notes up so that we’re not making any monthly payments during the life of the loan. We pay the private moneylender back at the end of the project, that’s either when we sell or refinance the property. But during the actual rehab itself, we’re not making any payments. And again, that’s something that we’re able to negotiate with the private moneylenders. If it was a hard moneylender, it might be different, but private moneylenders, we have that flexibility.
And then we also talk about the … I guess I’ll get into this later with the amortization schedule, but it’s also like how is this loan being amortized or how is this loan being structured from a principal versus interest? Our loans are always … we’re not paying down any of the principal balance during the life of the loan, so that interest is just accruing. So if someone gives us money, their principal balance remains the same, and then we’re just adding interest on top of that every single month. So that’s kind of how we set it up from the note perspective.

Ashley:
Yeah. So with the note, is this something your attorney is drawing up? And what is your recommendation for should you get a sample from somebody else? Should it be specific to your state, the private moneylender’s state, the state the property is in, or does it not matter?

Tony:
Good question. So I had my attorney draft up the note for me. Typically, she’s the one that does it. Actually on a refinance we just did, my escrow company did it for me. So I’d say go to an attorney in the tenure 10-year state or maybe in the state where the property’s at. That probably maybe makes more sense. I don’t know. I don’t know which one is more important, either your residence or the property’s residence. But my attorney is the one that usually drafts it up for me, and I actually have just a template that’s like fill in the blank. So every time I have a new deal, instead of me going back to my attorney, I’m just filling in the specifics of that deal. What’s the amount, what’s the term, what’s the interest rate? That’s typically all the information I need to update. And then that person’s name. So the attorney’s the one that usually drafts it for me.

Ashley:
And what about your name? Are you putting your personal name? Are you putting the LLC of the property? Do you have another company that’s going on the document?

Tony:
Yeah, so we usually put the name of the LLC on the note and usually because it’s our LLC that owns the property as well. So yeah, but we put our LLC on the note. I’ve only had one instance where a lender asked for a personal guarantee where if for whatever reason the entity itself wasn’t able to pay the loan, that I would then become personally liable. But outside of that, typically it’s just our LLCs that are signing for the property.

Ashley:
So you want to move into that amortization piece as to how you’re defining the terms of it. Are you making monthly payments? Are you paying at the end? Is it interest only? What are some of the options you can do as far as that repayment term and how are you putting that into the contract?

Tony:
So I’ll go into the amortization schedule and I’ll finish off with the deed afterwards because the deed kind of ties it all together. But we always create an amortization schedule. So if you’ve ever purchased a home, in your loan, that big loan packet they made you sign, somewhere in that loan packet is an amortization schedule. And that schedule basically says over the term of your loans, say you typically have a 30-year fixed mortgage, you’re going to see monthly payments stretch out over 30 years. And then every single one of those lines for every single month will show the payment amount that you’re making and then of that payment amount, what amount is going towards your principal pay down and what amount is going towards your interest payments. And you guys can just Google like amortization schedule, you’ll see an example of this. But with a usual mortgage, with a traditional mortgage, when you make a payment, that payment every month again goes towards both your principal and a portion goes towards your interest.
When we set up our private money deals, these are typically interest only. So it means we’re not making any payments that go towards principal reduction. So at the end of the term, the 12-month term, we’re paying back the entire initial principle that someone gave us, plus the interest that’s accrued. So it works out well for us because we don’t have to make any payments during the actual loan, but it also works out for the private moneylender because their interest is based off of that principal balance position isn’t getting smaller. So they’re getting a nice big payday back at the end, but that’s typically how we set it up.

Ashley:
Okay. So then the deed of trust, explain why that’s important and how you include this as part of the documentation.

Tony:
Sorry, just actually one other thing on the amortization schedule. I would recommend that everyone include that when they’re talking with their private moneylenders, just for sake of clarity, because it’s very clear both in the notes, but then people can also see it visually in the amortization schedule that they’re not getting any payments during the life of the loan and they can see how much interest is accruing on a monthly basis. So they know, “Hey, if this project goes four months, here’s the interest payment that I’m getting back in addition to my principal. If it goes eight months, here’s the interest payment that I’m getting back in addition to my principal.” So it really lays it out clearly upfront for the private moneylender before they make a commitment to investing with you. It just kind of reduces any ambiguity there.

Ashley:
I do have a couple recommendations. So you mentioned just Googling the amortization. Bankrate.com has a very user-friendly one to generate it, just put in $100,000, 5% amortized over 10 years, and just see what it spits out. There’s also an app, Easy Calculators, which also has the amortization in there for a loan too, or all different types of loan products. You can play with the numbers, even for seller financing, to try to put an offer together. Those are some great resources there.

Tony:
And I’d take the easy route. I just made a simple Excel Google sheet template, so every time now I just go in, I update the loan amount, the interest rate, when it starts, and I’m just able to drop that into the note every time.

Ashley:
So everybody always says to me, “Lady in the streets, but a freak in the spreadsheets,” and here’s Tony, “Here’s a spreadsheet I created.”

Tony:
But it worked out really well for us, right?

Ashley:
Yeah, yeah.

Tony:
So then the third document is the deed of trust. And if you guys go back and listen to Pace’s episode, he does a really good job of breaking down the difference between the deed, the title, the mortgage, these are all separate things. So when we have a private money relationship, we are on title for the property. My LLC, like Tony Robinson’s home flipping LLC, is listed as the owner of that property. We’re then listed as a person that’s on the note, so we owe the Jane Doe $350,000. But then when you look up the county records, even though we are listed as the owner, the person who has the note has a lien against the property. So their private money note is shown as a lien against the property in the same way a traditional mortgage is listed as a lien against your primary residence.
And the way that that happens is through the deed of trust, and it has a different name in every state. In California, it’s called the deed of trust. I think the general name is a mortgage security document. So every state has some sort of mortgage security document. In California, it’s called a deed of trust. So that deed of trust basically takes the promissory note, the debt that that person is giving us, and it ties it to the property. It ties it to the property. And what happens is that if for whatever reason, some worst case scenario, say that we are unable to complete the rehab or we’re unable to sell the property, we’re unable to refinance, or we’re unable to fulfill our duties to repay that promissory note, that deed of trust then gives the private moneylender the right to foreclose on the property, take it from us, obtain ownership, and then they can go out and fix it themselves, sell it, do whatever they want with it. But the deed of trust is that document that really solidifies everything and gives the private moneylender protection in case we ever stop making payments.

Ashley:
Okay. So now you have disclosed all of this, you’ve presented it to your private moneylender. Before you’re putting these documents together, to kind of backtrack, are you agreeing on these terms before you actually put the documents together? Or is this part of your presentation as to, “Here’s the terms I’m offering,” and you are giving them everything right there? Or is negotiating taking place beforehand?

Tony:
Great question, Ashley, and it is usually the latter where we’ve already kind of set up the terms that we feel will make sense for this deal. And honestly, our terms are pretty much the same always. The only thing that will change is the interest rate kind of given where interest rates rather than general, right? When the market was at a 3% interest rate, I think we’re offering folks 10. Now that we’re at 7, 8%, right, we’re offering a little bit more than that, but we typically present to people, “Hey, here’s the amount that we’re looking to raise, here’s the interest rate that we’re offering, and here are the terms of the deal. And if this is something that you’re interested in, reach back out and let us know.”
And what I’ll usually do is when I send out the information, I’ll send basic details of the property itself, and I’ll always include a short Loom video of me walking through both the promissory note and the deed of trust so that way people who maybe haven’t been private moneylenders before have an understanding of what the process looks like. So a lot of the breakdown I just gave right now, I have that in a Loom video. So I’ll send out the details of the flip of the rehab that we’re looking to get funded along with that Loom video. And then I’ll say, “Hey, if you’re interested, reach back out to me and my team.”

Ashley:
As far as the contract, so when the lender agrees already to sign, who do you recommend they put the name of the contract in? So we talked for you, you’re putting it into your company name, but what about for the lender? What is your recommendation? Should someone put it in their personal name? Should they have their own LLC?

Tony:
That’s a good question. No one’s ever actually asked that. And I’d say all of our lenders are doing this in their personal names. So all the notes are their personal names. When you look up on the county records who has the lien, it’s their personal name. So yeah, everyone’s sending it through their personal name. And again, I think that’s because most of the folks that I work with, these aren’t professional private moneylenders that do this a ton. So I don’t know, maybe that’d be a good question for Amanda Hahn or some of our legal folks to see if there’s an incentive from a tax perspective to run it through an LLC as opposed to their personal name. It could possibly be because interest collected I think is considered as active income, so if you’re running that through an LLC instead that’s taxed as an S corp, you might get some favorable benefits. But again, we probably need to pull Amanda Hahn on to get some insight there.

Ashley:
And one other thing we need to talk about too is if you are paying somebody interest, especially if you’re doing it out of your LLC, is that sending them a 1099-INT at the end of the year so it’s reported as to how much interest you paid them, and then it has to be claimed on the lender’s taxes too that they received this income of the interest too. So take into account that you will have to most likely pay somebody to do this. Everybody always forgets to factor into their numbers the bookkeeping, the cost of the LLC, the cost of the tax return.
And also if you’re using private money, we’ll have to file the 1099s and you can do them online, they’re pretty fairly easy to use. But there’s also software that you can pay to do it or you can have your accountant or CPA do that for you too. But something to really think about is make sure that you are filing those when you are using private money and sending them to … If you are doing it in your personal name, I don’t think you have to issue a 1099 though.

Tony:
I did ask my CPA and she said that we didn’t have to and that it was more so up to the lenders, scout’s honor, to report that on their personal tax return. So we haven’t issued any 1099s in our business.
But it does bring up an important point actually about the entity piece. So we have a separate entity. I guess let me take a step back. So the tax advice that I’ve been given is that you always want to separate your rental income from your active income. So rental income, short-term rentals, long-term rentals, all that is rental income. And then things like flipping, wholesaling, that’s all active income. So we have one entity for all of our rentals, and then we have a separate entity for our active income, so our flips. I don’t want to be wholesale as much anymore, only did that a few times. Our events, our coaching program, our media stuff, all that’s in one entity. And again, the reason why was because apparently you don’t want to mix your active income and your passive income into one entity because some of those benefits of the passive investing go away if they’re co-mingled in the same entity with your active income. So from the borrower side, that’s typically how we set it up as well.

Ashley:
Okay. So one of the other questions I have is regarding insurance. So are you putting these private moneylenders as a mortgagee on your insurance policy you would do when you have a mortgage on the property?

Tony:
We are not. Yeah, so we just factor in the cost of the insurance policy. We usually buy a year upfront and we’ll just make sure that that’s done during escrow as well. So the homes are always insured, but some lenders, like real lenders, like actual institutions-

Ashley:
Banks, yeah.

Tony:
-They’re going to want to make sure … Right, they’re going to want to make sure that you have that they have proof of insurance and if they don’t, they’re going to put the lender approved insurance, they’re going to force that onto your property. Again, that’s the benefit of going with the private moneylender is that they’re just more so focused on the return. They’re trusting us to make sure that the asset is insured. And that’s typically how we set it up.

Ashley:
Yeah. And part of the mortgagee side of it too is being listed as the mortgagee to make sure that the bank gets paid out first so that the check actually goes to that and not you too. So I was just curious if any of your private moneylenders had that requirement at all or asked for that, but I think it’s something a lot of people probably don’t even think of or they have that trust that … Is there anything in your contract that states if the property were to burn down or there was the loss of the property, that the insurance proceeds would go to the private moneylender or a portion of it would, or it’s a complete loss, they don’t get anything? If you will rebuild and they have to keep their money in the deal until you rebuild? Anything like that? I’m thinking all this off the top of my head because I’ve never thought about it either that way.

Tony:
Yeah, no, yeah, it’s a good question. So we don’t have anything in the promissory note specifically that dictates that, but here’s the thing that I always tell all of our private moneylenders, it’s like all it takes is one angry private moneylender to go on their Instagram, go on their TikTok, go on their Facebook, in the Facebook groups, wherever and say, “I lent money to Tony J Robinson, and it was the worst experience ever.” And now our ability to raise capital for all of our future deals is significantly impacted. So I’ve always shared with every person that we’ve done a deal with what’s most important to me first is my reputation, and at the end of the day, I’m always going to do whatever I need to do to make our private moneylenders whole.
So we had an episode earlier this year where I shared one of our flips where market shifted, we have a buyer that backed out. By the time we found that next buyer, things just weren’t working out how we wanted them to. We ended up having to refinance the property and it was a flip where we were supposed to make six figures on the actual flip and it ended up turning into a refinance where I had to put in over $200,000 to make sure that we pay back our private moneylender on time. So I’m always willing to take the hit myself personally to make sure that we’re mixing the private moneylenders whole so that way I can continue to raise money from people down the road.

Ashley:
Well, what if everyone isn’t as ethical as you Tony? If you are lending the money, would you suggest somebody ask that question as to what happens if this happens? The place burns down, or even in your situation, maybe let’s go into that. How are some ways that you can protect yourself as a private moneylender? So in your contract, what are some things in place where people who are lending you money feel safe and secure?

Tony:
First thing I’ll say is that I think that’s why a big piece of a successful private money relationship is the preexisting relationship where it’s like you’ve met this person a couple times. You’ve maybe seen some of their track record already. You’ve got a good sense of who they are as a person. If someone just walked up to you and you’ve only had one conversation at a meetup, maybe don’t give them $500,000 to go fund their very first flip. So I think have a little bit of not common sense, but have a little bit of, I don’t know, vetting this person and vetting that to make sure that this is someone that you want to get into bed with. But I think if a private moneylender really wants to protect themselves, just look at what a hard moneylender does because hard moneylenders do this as a true business and they’ve perfected the art of protecting themselves because that’s their first priority.
So hard moneylenders typically want down payments, right, they’re not going to let you fund the entire thing. Whereas for us, with our private moneylenders, that’s a requirement for us. We want to make sure that whoever we’re working with trusts us enough to fund the entire deal. Hard moneylenders typically charge higher fees or maybe don’t even work with new investors at all, right? If you’ve never done a flip, some hard moneylenders don’t even want to look at you, right because they’re like, “Hey, there’s too much risk inherent in that.” So I think if private moneylenders want to protect themselves a bit more, just go fill out an application for a hard moneylender and see what all those things are that they’re looking for and see what you can pull into your own private money relationship, and it’s a great way to steal from someone else.

Ashley:
Okay, let’s keep rolling with questions to be asked. And this one would be from somebody lending you money. What happens if I want my money back beforehand, so before you sell the flip or before you refinance?

Tony:
So it’s a question that’s probably one of the top two questions that come up. And so the first one is like, “Hey, what if I want my money back sooner?” Second question is, “What happens if you can’t sell this property for what you think?”
So on that first piece, like what happens if I want my money back sooner, the way we’ve set up our notes is that once it’s inside, you can’t touch it until the project’s done. And we communicate that very clearly upfront to say like, “Hey, this isn’t like a stock that you can just kind of trade in and trade out whenever it’s convenient for you. Don’t invest this money if you aren’t comfortable with the idea of it being locked up for at least 12 months. If you know you’re going to need this money back in four months, don’t do the deal. We’d rather have someone tell us no upfront, then get into the deal and down the road say, ‘Hey, we want to change things up.’” So we communicate that very clearly upfront that you can’t.
And then like I said, that second question that always pops up is, “Hey, what happens if you guys can’t execute your business plan?” And like I mentioned earlier, our goal is to always make our private moneylenders whole, and whatever means we need to do to make that happen, we’re willing and ready to do. So like I said, that last flip, we came out of pocket over 200,000 bucks to make sure we completed that refinance and paid that person back. And if we need to sell it for a loss, we’ll do that. Luckily, we haven’t had to do that yet, but whatever steps we need to take, that’s what we’re willing to do to make sure that those lenders get paid back.

Ashley:
And hopefully everybody that lends money to an investor is an investor like you where they’ll do everything to get paid back.

Tony:
Well, just real quick Ash because we also had … I wish I could remember what episode, maybe our producers can help us out. But we had, gosh, was it JP Desmond I think was the one that lost the money on those flips?

Ashley:
Wasn’t it like half a million or something? It was a lot.

Tony:
Yeah, it was a good chunk of cash that he had and his flip kind of fell apart, and he basically just refinanced or restructured that debt into a longer term. So I think he was paying them back over three years, even though the flip had already fallen apart. So there are always ways, again, assuming you’re working with someone of high character, that they really does want to make sure that they protect that relationship, there are always ways to try and make that person whole again. Ideally, best solution is you go into it, you knock it out, everything works perfectly, and everyone gets paid back on time and on schedule.

Ashley:
And that was Episode 279 if you want to hear that story. Okay. So now Tony, what happens if you can’t sell? You’ve kind of alluded through this throughout the episode. What are some maybe restructuring ideas somebody can put together or different extra strategies they could maybe present to the private moneylender?

Tony:
I guess I’ll give you two different scenarios. So I already gave you the first one where we basically just refinanced the property ourselves and came out of pocket a significant amount of cash to get that refinance done. But we had a second rehab where we didn’t want to complete the refi because rates had just gone up and the amount of cash we’re going to have to put down plus the increased interest rate, it just didn’t make sense for us. So we were able to negotiate with that private moneylender to extend his note for another year, give him a slightly higher interest rate. And even though the monthly payment was going to be higher than what it would’ve been if we refinanced, our overall profit at the end of the year would’ve been higher because we didn’t have this big cash outlay to complete the refinance while still giving us time to hopefully see what rates do over the next 12 months. So he was happy and willing to refinance because it meant that he’s still collecting that interest, and for him, that’s better than it just sitting in a bank doing nothing.
So that was the second option. It’s like if you approach that private moneylender and if they’re not in a rush to get those funds back today, then just give them that option and say, “Hey, let’s extend for another XYZ,” whatever period you want to pitch to them, see if they’re open to it, and then you just redraw the documents to make sure that everything’s lined up with those new terms of that deal.

Ashley:
Okay, Tony, this all sounds wonderful, but how do you find these people to give you your money?

Tony:
Great, great, great question. So there’s two different ways to go about it. Actually honestly, you should be doing all these things, right? So let me kind of break it down, right? I’ll talk the kind of in-person activities and the digital activities.
So from an in-person perspective, what I think every aspiring person that wants to raise capital should be doing is they need to build their network. And not in a self-motivating way, but just understanding that the more people that you know, the more people you are able to provide value to, the higher your chances, the higher your opportunities of finding the right person to fund your deals. So say that I’m a rookie starting from zero. The very first thing I would do is look at my local city, look at my local area, and try and find some of those real estate meetups that are happening in that area.
And I would go to as many of those meetups as I can for as often as I can, and not necessarily with the intention of pitching everyone right away to say, “Hey, will you be my private moneylender?” But just talking to folks and understanding what their motivations are, understanding why they’re looking at potentially … What motivated them to come to this meetup. And what you’re looking for are people who understand the value of investing in real estate, but don’t necessarily have the time, desire, or ability to do it themselves. That is your ideal person to be a private moneylender because it means they’ve got the capital, but maybe they don’t want the headache of managing a rehab. That’s just not what they want to do. They don’t really like the idea of tenants and shopping for deals and giving 10% to a property manager doesn’t make sense, so they’re still wanting to use real estate to give them those good returns, but they don’t want to do the work themselves. I think that’s the ideal person for you to work with.
And you can kind of pick up on those things based on the language that people use. If someone mentions that they have a stereotypical high-paying job, doctor, lawyer, I don’t know, engineer, software engineer, anything that’s super high six-figure salary, but they’re like, “Man, I work 60 hours a week and I barely have time for my wife and kids, but I really want to do this real estate thing.” Those are cues without them saying, “I’ve got a ton of capital,” that you can pick up on to say that. Or people that maybe have … For example, I have folks, some of our private moneylenders that invest using their 401ks and they’ll basically take a loan out against their 401k at a relatively low interest rate and then re-lend that money out to us where we’re paying them 5X what they’re paying on their 401k loan. That’s another cue to look for.
So I think the goal is to get out to these local meetups, network with people, understand what their motivations are, and then when you meet that person where goals might align, it’s a simple question of like … Sometimes I find deals and maybe this is a good fit for you, maybe it isn’t. But sometimes I find deals that I present to some folks that they’re able to fund. “Is that something that you might be interested in? If I find a decent deal, would you mind if I send it to you just to give it a look over? And if it’s not a good deal for you, no sweat, but maybe there’s a chance we can work together?” Super unabrasive, very disarming, but just float that idea. And they might say, “Yeah, sure, send it my way,” or they might say, “Ah, I don’t really think I want to do that.” No harm, no foul. So that would be my first step, Ashley, is going to some of those local meetups and building your network out that way.

Ashley:
I want to touch on one more thing is I feel like having a private moneylender relationship, it’s almost like a testing ground for partnerships. So maybe even before jumping into creating an LLC or a joint venture agreement with someone, maybe that’s actually your first kind of baby step is to where they are just lending you money on the deal and they’re just a debt partner instead of giving them any kind of equity or ownership in the deal, to kind of test just how that relationship goes with the person before you go ahead and build out a huge real estate portfolio with the person not knowing much about them.

Tony:
Yeah, I couldn’t agree more Ashley. And honestly, two of our private moneylenders have transitioned to becoming equity partners for us, and the majority of our private moneylenders have done multiple deals with us. We’ve had a few that were one and dones like, “Hey, I lent you money, but now I went out and bought my own property.” But the majority we’ve done business with multiple times, and it is a really good way to kind of build that relationships with folks. And it’s really cool because if we’re in a private money relationship and you’re really good about letting us do what we’re supposed to be doing and you check in at the beginning of the deal, we check in with you at the end of the deal, and you’re just all thumbs up, that’s a good sign to me that you’ll probably be a good equity partner as well.
But say we do a private money relationship and you’re calling me every other week saying, “Hey, Tony, the floor, is it in yet? Hey, Tony, is the back-splash in? Hey Tony, the cabinet’s in? Hey Tony, what’s the paint color?” That’s you kind of stepping into my world of work and not necessarily the person that I want to partner with on an equity deal. So I think the private money relationship is a really good stepping stone to potential long-term equity relationships. Or it could just be, “Hey, this is going to be a good private money relationship. We’re both going to be happy. This person’s going to continue to work their high paying W2 job, and I’m going to continue to use their excess funds to give them a better return than what they get leaving it in the bank or put it in a CD or wherever. And it’s a mutually beneficial relationship for all of us.”

Ashley:
Well, Tony, thank you so much for the wealth of knowledge for everyone today. I’ve thoroughly enjoyed having you as a guest on the podcast. Thank you guys so much for listening to this week’s Rookie Reply. I’m Ashley at Wealth from Rentals, and he’s Tony at Tony J. Robinson. Don’t forget to check out our new book at biggerpockets.com/partnerships. We’ll see you guys with another guest.

Speaker 4:
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