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5 Questions to Ask Your Private Money Lending Sponsor

Episode 076

John Larson and the Real Estate Cowboys talk passive income real estate investing.

Hear new episodes every Sunday morning at 8 a.m. The Cowboys talk about questions you should ask your private money lending sponsor before investing.

Keep the #CowboyCoffee hot while listening to John, and the Cowboys talk about how to #BeACowboy and earn passive income in real estate.

Episode Transcript

Keith Weinhold: Hey, this is Keith Weinhold from the Get Rich Education podcast. You are listening to my friend John Larson and the Real Estate Cowboys. Don’t quit your daydream.

Robert Helms: Hey everybody is Robert Helms, host of the real estate guys radio show, and you are listening to the Real Estate Cowboys.

Announcer: Have you thought about becoming financially free through real estate investing, but don’t have the time or knowledge to get started? Welcome to the Real Estate Cowboys podcast. Each week we discuss passive income investment opportunities in the red hot Texas market, John Ryerson and the Real Estate Cowboys will show you how to leverage their team to build wealth in real estate through passive investment opportunities. And now here’s John.

John Larson: And here we are back again with another edition of the Real Estate Cowboys podcast. This is your host, John Larson. Uh, if you’ve been following us and you’ve been following the show, you know that we have been, um, you know, transitioning into more of a private money lending program here at American Real Estate Investments and the Real Estate Cowboys. Our investors have really enjoyed this program. It’s a lot more passive. Basically you just take the role of the bank, um, you give us some money to take down a multifamily project, a commercial project out here in the DFW area or you know, we’ve been involved in the CBD industry where we’ve raised funds for CBD extraction equipment. We’re also raising funds for our farm down in Belize, where we are currently growing hemp. And so we’ve done quite a few different projects through our private money lending program and these returns for our investors have been as high as 15% annual.

That’s actually the current deal that we have going right now is 15% on your money annually for a term of one year. Most of our terms are below two years. Typically anywhere from a year to 18 months. We’ve done a six-month term, and so it’s a way to earn double-digit returns on your money fixed returns. So there’s no variables really. It’s just a fixed, uh, it’s a fixed dividend that gets paid to you each month, just like you pay a bank or taking out a mortgage or any other sort of bank loan and you have first lien position on the project, just like a bank would as well. So whether that’s in the form of a deeded trust for real estate or a UCC-1 for a business or equipment, you hold the first lien on that business or equipment or on that actual real estate property, land building, whatever it may be.

So really, really exciting program that a lot of our investors have been very interested in. And we’ve raised quite a bit of money since basically when we started this program early last year, it’s taken off, been very, very successful and I believe our investors have been pretty pleased with it. So, on this episode, I wanted to talk about five questions to ask your private money lending sponsors. So many of our listeners may be new to the idea of private money lending. Maybe you have gotten involved in real estate by flipping houses or investing in a REIT, investing in turnkey rentals, whatever it may be. You may have kinda got some bumps and bruises along the way with flipping houses or dealing with rentals. But with private money lending, it’s really designed to be very, uh, effortless and very easy and very passive for the investor. And we also try to minimize risk by providing the investor with first lien position. I’ve been offered a lot of opportunities to where investors come in behind a bank loan and take second lien. I’m not really a big fan of that because I do want to minimize my investors’ risks as much as I can. So that’s why we really look for projects that are small enough, not too large to where the investors can come in and fund the whole deal and not have to take a back seat to anyone else, especially a financial institution; a bank, whatever it may be. So private money lending in the real estate industry is definitely a reliable way to get double-digit returns on your investment dollars. I think the lowest return we’ve provided our investors in the form of an interest payment is, uh, 10 and a half percent. We’ve done some at 12 and we’re currently doing one at 15. It far surpasses most other forms of investment including CDs, stocks, bonds, and it’s also, you know, one of the most passive investments there is available.

It’s a really, really good investment opportunity, especially if you’re loaning out of an IRA or 401k. You can self-direct those accounts, self-direct some of that money and you can lend that money out and then your dividends are paid back to your retirement account, tax-free or tax-deferred depending on the retirement account that you have. If it’s a Roth, self-directed Roth, there is no taxes. If it’s a regular retirement account, right? IRA, self-directed IRA, self-directed 401k or a solo 401k as it’s called, then you would defer those taxes, right? When you become a private money lender, you’re essentially, like I said, just acting as the bank. You supply the money and the private money lending sponsor, which could be us or there’s many other groups out there; acts as a middleman and lends the money to the borrower. Right? In our case, in most circumstances, we are the borrower as well.

You might want to establish that, you know, what’s the relationship? Are you just the sponsor, who’s the borrower and are you actually the borrower? And all that will be lined out in the, uh, private placement memorandum or any marketing documents that you’re getting. I’m talking about the deal. It should explain who the borrower is, who the sponsor is, so on and so forth. The track record, there should be a lot of pertinent information in there in order for you to make a educated decision on whether you want to loan this money to that borrower or sponsor, whatever it may be; office building 50 or 60% occupied and the suites need some renovation. And um, you know, there’s, there’s value-add in terms of uh, making the building, uh, nicer, right? Maybe the building’s outdated. It just needs some new paint and carpet tile or whatever it may be to make the building more attractive to prospective tenants, and then, in turn, you can also raise the rent of the current tenants by making obviously the common areas nicer, the exterior of the building, nicer. Then eventually maybe giving them some tenant improvement money to play with as well. So when it comes time to renegotiate the lease, we can go in and kind of renovate their suite and bring up the uh, the value of the rent also, the price per foot. I really like those deals that are really already cash flowing, buildings already in place, so on and so forth. When you build a building from the ground up, you have a lot of other moving parts. You have to go through the permitting with the city, the zoning, and then you have to go through the construction of the building, go through the certificate of occupancy process. Then you have to get the buildings out there and market them for lease and get them leased up before you could go through with a refi or even potentially sell the building to an investor.

So there’s just a few more moving parts with that. It’s not that I don’t like that model, but I prefer buying buildings that are already cash flowing. I already have tenants in place and there’s just room, like I said, to bring up rents, convert them to triple net from gross leases. Like I said, spruce up the building to where then you can justify increasing rent on the current tenants and then also those vacant units that are in that building. You can easily get in and renovate those right away and put them on the market for a new tenant at a higher cost. Okay. That’s, that’s really my bread and butter model. I would say once you’ve made the decision to become a private money lender, there’s some questions that I would recommend you ask, and number one would be how do you vet your borrowers?

Borrowers are the entity or individual who will actually be using your money to fund their projects. So you know, if it’s a sponsor that you’re dealing with, then you’ll ask, okay, how do you vet these borrowers that you’re working with? If it’s the borrower you’re working with directly, feel free to ask them these questions right off the bat. Borrowers should be fully vetted in terms of reputation, experience, credit rating, and previous success rate. Obviously you don’t want to lend any money to an entity that’s a big credit risk, right? If they haven’t proven to pay their bills in the past, how do you know they’re going to pay back your principal and your interest payments on this particular deal? Right? Whatever you’re looking to invest in. When you act as the bank, as a private money lender, you rely on your sponsor to do the vetting of the borrowers, but in some cases, like I said, if it’s just the borrower that you’re working with directly, you’ll want to do some of this vetting, which is why I wanted to do this show.

It’s not out of line for you to ask what the lending criteria is when you’re talking about the sponsor and how they vet the borrowers. I mean that’s, that’s a honest question. From there. I would want to ask, you know, how long have you been in private money lending and it’s not to say that a borrower or a sponsor if they’ve just getting into it, is a bad borrower or sponsor, but it’s good to know, Hey, do you have a proven track record? Right. With us and our investors, we have a proven track record for years by providing turnkey rentals and things like that. We started getting into commercial. We had built a reputation with our lenders in the form of other investment opportunities which made it, uh, I wouldn’t say easier, but I mean we built some rapport with these investors to where they felt more comfortable loaning money and trying out the private money lending program.

And like I said, I think thus far has been pretty successful and the projects that we’ve been working on have been pretty successful as well. Many of them are ahead of schedule. Some of them are right on schedule. It’s exciting stuff. And so you want to work with a private money lending sponsor that has experience in that space. I would say just starting off, maybe once you, you know, start to get your feet wet in the private money lending space and then maybe you might want to take a chance on somebody just getting started out that really has a good deal. You know, I mean I would really look at the, the deal as well. It’s very important. I mean if the deal is very credible, the person that’s the sponsor of the borrower is kinda new to this, but they have a really attractive deal. I mean, as long as you have first lien position, real estate’s never going to go to zero. So you’re kind of hedging your bet there with first-lien that might make you decide to kind of roll the dice a little bit with maybe a new borrower, a new sponsor. Being the bank as a private money lender on your end is very easy and straightforward. But there are many complex transactions that take place on the backend. You definitely want to work with a private money lending sponsor that knows exactly what they’re doing. Basically broach that by asking how long they’ve been doing private money lending, right? A lot of times it just comes down to experience. Another question I would ask is if they have any previous clients that they can speak to terms of recommendation or a referral or something like that. Just someone that they’ve worked with before that’s done private lending with that sponsor or borrower, it might be good to get them on the phone as a reference. Right? If you’re interested in becoming a private money lender, you most likely value your privacy though, right? You don’t necessarily want others to know about your private money lending activities. Therefore it stands to reason that the private money lender may not have a long list of past clients who are willing to talk to you about their experiences. But we do and we have some people that we’ve worked with for years that have no problem getting on the phone with a prospective client and just telling them about their experience working with us. And I think, you know, if you have a good track record in the space, you should have a handful of clients that are willing to kind of talk about their experience with your company and you know, if they’ve had a good experience in terms of the private money lending program. I think it’s important to speak to others that have done it before.

However, it is reasonable to be given the name and contact information for a business that a sponsor has worked with, right? Businesses, other B2B relationships shouldn’t have any problem getting on the phone with a prospective client. Could be a financial institution, one of the past borrowers or someone else that the sponsor works within the private lending space. That person can tell you whether or not the sponsor follows through on their promises and what they’re like to work with, right.? Are they responsive? Have you been getting your payments on time? Um, you know, things of that nature; are they professional to work with, have they been providing you with updates on the project, have their projects hit any snags, have they been running pretty smoothly? You know, these are all the questions that you want to ask. I believe that will tell you whether the sponsor or the borrower are, you know, working on the same page and if the borrower that the sponsor is working with has got everything together, right? You know, you want to see people over-perform right, not underperformed. So I think that those are all important questions to ask the sponsor.

Number four would be, can I roll my money over into new opportunities? So there’s many people I know, some of my family members included, who have found a private money lending sponsor that they work with and they invest their money out of their IRA or 401k self; they self-direct and then do that. And basically that sponsor, it makes it super passive. They act almost like a financial advisor as well, where they present these opportunities. And you know when it comes time for one loan to mature, they have another opportunity lined up to where you can just roll those funds into that next opportunity and just keep the money working for you in a passive manner. Receiving fixed monthly checks into your IRA or 401k or your personal account, whatever it may be, each month.

So I would definitely look for a sponsor and just say, Hey, is this going to be a longterm relationship? Is this just one deal? Is this like a deal-specific type of opportunity? And then once it pays off, I never hear from you again. Or are you going to have future deals lined up that I could roll my money into? I think that that’s a good question to ask because once the term of your loan is over, you may not necessarily want to take the repossession of your capital. You want to keep it working for you. And for financial reasons, taking back, your capital can make things unnecessarily complicated, especially if you plan on reinvesting in the next private money lending opportunity. So some sponsors offer you the chance to simply roll your investment to the next opportunity, but not all will do this. So you want to find out ahead of time what all your options will be when the term comes to its end, okay? And this way you won’t need to make a last-minute decision about what to do with your capital and you can make sure your money’s working for you without, you know, any nonproductive gaps, so to speak.

And then the final question I would ask is, you know, I touched on this a little bit earlier, but what will your lien position be? And in some rare cases, a borrower may default on a loan. And if this happens as the lender, you need to know where you stand in this event. Like I said earlier, the ideal position is to be in first lien position. This is where you and the other lenders have the right to take possession of the asset and do whatever you want with it. Maybe you guys decide to hold it, finish out the job that the borrower may have failed on, or maybe you decide, Hey, let’s just split this thing and sell it, get all or most of our money back.

You know, that’s the benefit of playing the role of the bank is you know, real estate never goes to zero and you can always repossess that property and sell it. And like I said, get most or all of your money back. Right? That’s the idea. You know, as the first lien holder, any other claimants to the property have to stand in line behind you. You could sell the asset as is or develop it further. Like I said, it’s pretty much whatever you all agree upon as the lenders. So first lien position is so important that we recommend not working with any private money lending sponsor that’s basically unwilling to give you first lien position. Cause like I said, if you come in behind a bank or a financial institution, they’re going to get their money out of the project first. So now you’re gonna be waiting and probably a long foreclosure process before you can kind of step up to the podium and get your money back out of the project.

The bank is going to want to get that first. You know, the larger financial institution. These are not questions that you should ask, they’re questions that you need to ask basically. But you definitely want to know what position you are in terms of the lien. No matter where or how you decide to invest your hard-earned money, make sure you only put it in trusted hands, for sure. In the case of private money lending, you need to do all your own due diligence to make sure that the sponsor can be trusted, as I said. You’ll find most of the information you need to know in the PPM, the private placement memorandum. Obviously, Google people that are involved, you know, do a little background search on that. But in addition to that information, you want to ask all of these important questions that I just named here.

Once you’ve found a sponsor, you can trust, of course, you won’t need to run through all these questions over and over again, right? You’ll start to build a relationship with these people and if they’re working with trusted borrowers, you’ll start to earn some trust, but you know on the first transaction, these are some questions that you definitely want to ask.

But if you’re interested in learning more about private money lending or how to get involved with private money lending, or you’d like to look at some of the deals that we have available right now that are paying anywhere from 10 and a half percent on real estate, up into 15% on our farm in Belize; which I know we only have a few positions left on that deal. So if you’d like to take advantage of that opportunity, I’d recommend moving pretty quickly before year’s end. I imagine we’ll have that deal closed before Thanksgiving.

All you have to do is go to our website, or the, put your information in. A member of our team will reach out, give you some marketing materials on the current opportunities that we have. If you’re an accredited investor, you can get access to the PPM right away or if you’re just still want to learn more, you can go to, tons of information on that site. I also have a book called the Passive Income Guide: What’s Your Return on Life? You can purchase that from our websites or through just through Amazon and it’s a very quick read. Very affordable book. Ebook is very inexpensive and then you can just read that and you know brush up a little bit more on how all these different opportunities work when it comes to investing passively in real estate.

So the book focuses on mainly, like I said, if you just want some more, some more info, just put in your email, your phone number and your name and a member of our team will reach out. So that’s all we have for this week. Uh, just wanted to give you a little bit more information on, you know, some due diligence when it comes to looking for a private money lending sponsor or a borrower to work with. You want any more information? Go to our websites, put your information in, and we will reach out right away. Just hope everyone has a good week and takes action and gets their money working for them. And always remember, what’s your return on life. Have a great week everyone. This is John Larson signing off.

Announcer: All opinions expressed by the host of the show or the opinions of American Real Estate Investments, LLC, and do not reflect the opinions of guests or sponsors. No personal or professional advice heard on this program should be considered an endorsement to follow a real estate financing or investment strategy. Before acting on any information, seek advice from your financial, tax, mortgage or real estate advisor as the information is not guaranteed, and investment strategies have the potential for profit or loss.