subject: My 5 Rules For Accepting Private Money From My Private Lenders [print this page] This is my businessThis is my business. After many years in a corporate job working for others, I left because I wanted to run my own real estate business my way and that's exactly what I am doing. I am using my business skills to create the kind of company I want. Along with creating my own rules, procedures, and systems within my real estate business, I have rules that I follow regarding my private lenders. They are:
a) Loan minimum limits
b) Make interest payment when property sells
c) One private lender per property
d) 70% loan to value (LTV)
e) I keep my word
Let me further explain what I mean on each of these...
a) Loan minimum limits...
I only accept loans over (x) dollars. It simply is more practical. There are a lot of folks out there who will want to invest small amounts. My staff is extremely busy and it is more efficient to have them handle the paperwork for one (x) dollar investor than it is for them to handle the paperwork for five investors with very low dollars each. I use these low dollar loans for my "subject to" houses to do carpet, paint or down payments.
b) Make interest payment when property sells...
I didn't start out that way. I thought everyone would expect monthly or quarterly payments, so I started paying some early investors monthly. But after a conversation with a sage RE guru, I quickly changed and now pay when the property sells. What a huge benefit to cash flow and what a BIG help with the office paperwork.
Not only is this a matter of less paperwork for the staff, there is another practical reason for doing this. When an investor's money is applied to a property at closing, the clock starts ticking. The interest rate starts. However, it may take a couple months to renovate the house and find a buyer or rent-to-own tenant. So the cash flow from the property will not even start for a couple months.
In addition, when you sell the house the lender gets a bigger chunk of money to lend back to you for your next project. Everybody wins.
c) One private lender per property...
If you need more funds to purchase and rehab a property, then the 1st lender (the one with the most money) gets a 1st mortgage on the property and if you need more money to rehab the property, bring in a 2nd lender and they get a 2nd mortgage.
They are your "Bank" and they get a mortgage (lien) on your property.
You take possession of the property in a land trust and you get the deed. The lender gets a mortgage. These are the two key documents on any real estate transaction.
Actually, you can have as many mortgages (1, 2, 3, 4, etc.) as you like on a property as long as you don't over leverage the property.
The #1 question I get from all over the country is "can I pool lenders money".
You cannot "pool" lender's money unless you ask for permission from the SEC. This needs to be one of your rules also.
d) 70% loan to value (LTV) max...
I buy houses right. Having the knowledge and available funds allows me to buy property at a price below what most people would have to pay because I can close quickly so I get houses at a discount. Listen, to this, I just purchased a bank-owned property for less than another person's bid because I could close fast for all cash.
My rule is that when I purchase a house for my lender, it has about 30% equity after it is repaired. It is just another way to protect my lender and assures me of a nice profit when the property sells.
Why would someone sell a house for less than its actual value? Frankly, people contact me all the time wanting me to take houses off their hands for a discounted price. Some folks get in over their heads with credit cards -- it's easy to do. They can't sleep at night and want debt relief NOW. Some people try their hand at having investment property but do not get the education they need to make it profitable or they get burned out being a landlord. They call and just want rid of the headache. Some people inherit property and want rid of it so they can settle the estate. Other folks need to move but don't have any equity in the house so any fee they would have to pay a Realtor would have to come out of their own pocket. And, there's no guarantee that the
Realtor could get the house sold. So they call me.
e) I keep my word...
I follow my agreement with each lender exactly. I run my business with integrity. Like I said earlier, my rule now is that I make interest payments when the property sells. But there are a few early lenders with whom I made the agreement to pay monthly. I will stick to my agreement with them regardless of how long they invest with me. And, since they love those checks, they'll probably be around a long time -- and that's great as far as I'm concerned.
by: Alan Cowgill
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