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PODCAST EDUCATION

Should You Consider Becoming a Private Money Lender

Episode 064

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 whether or not you should even consider private money lending.

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, it’s 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 Larson 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: Hello, hello everyone and welcome back to another episode of the Real Estate Cowboys. This is your host, John Larson. Keeping up with the trend lately, the past few weeks we’ve been really kind of honing in on private money lending and self-directing your IRA and 401k. So we’re going to kind of keep going with that this week. Uh, this week the topic is, should you become a private money lender? A lot of investors that are out there that are on the fence, you know, maybe they’re just investing in traditional investments, stocks, bonds, mutual funds. Maybe they are just really comfortable with single-family residential properties right now. Maybe they’re just strictly multifamily guys, you know, that’s, there’s no shame. There’s no, you know, nothing wrong with diversifying your money. You know, pulling some of your money out of the stock market and self-directing it, taking it out of Wall Street, bringing it Main Street.

You know, even with your single-family rentals. I know right now it’s just very, very tough to find good single-family rentals in good neighborhoods with good schools that are going to attract good tenants that are going to spin off a high cash flow yield from, from rental income. Now you know, if you listen to the show, we talk about the six ways that real estate pays you. There’s just not, I don’t believe you can capture all six ways right now, especially with appreciation because I believe right now that the market is really at the top of, of value. Um, I don’t think it can go much higher than where it is right now. And I think that we are starting to see some pricing plateau and maybe even decline a little bit in other regions of the country. I know that I’ve seen some, a bit of plateauing here in some of these Dallas suburbs where we bought homes for a very long time and, and turned them into rentals and sold them off to investors.

I’m starting to see in certain neighborhoods the prices plateauing a little bit or coming back down. And that’s just due to a correction because of the fact that, you know, the values just started getting too high and some of these neighborhoods in the DFW suburbs where, you know, the demographic, um, or the person that would be looking to purchase a home in those neighborhoods just can’t afford them anymore. Or they can’t even afford the rents anymore because they’ve just ran too high for too long. So, you know, and with that you have pricing going up. So it’s really squeezing the cap rate. Uh, you’re not really seeing the type of returns that you were seeing back in 2010, 11, 12, 13, 14 even 15, I noticed starting in 16, 17, 18. Now we’re in 19. The cap rates have just really got, started to become compressed. And it’s just almost impossible to find good cash flowing single-family homes in good neighborhoods.

Now you can go and target some of these slumlord type areas, but who wants to bother with those? You know, even when you hire a property management company to look after these assets, they’re just not very passive because they’re just in rough neighborhoods and the type of tenants that they attract aren’t the most responsible, right? And so then you’re dealing with a lot of vacancy and turnover and it just isn’t working out. So, you know, that’s kind of why we veered over into, uh, our private money lending model. Uh, we started raising money from investors and paying them a fixed rate of return so they don’t have to worry about, hey, was there a maintenance request this, this month on my property? Or was there uh, you know, did the tenant move out? You know, is my property leased? Uh, so on and so forth. You know, it’s just leaving you up to too many questions each month.

You don’t really know what type of cash flow you’re going to get. It’s not really predictable cash flow. You know, it could vary from month to month. You can have vacancy and collect any cash flow, right? And then you’re on the hook for the expenses and the loan payment if you have a loan on the property. So it’s just a lot of stuff that you have to consider on the single-family side. And even with multifamily, it’s the same type of deal right now with multifamily though, you have a group of doors. So if one goes vacant, two goes vacant, you still have others that are cash flowing. But still there’s maintenance, Still there’s late rental payments, still, there’s evictions and so on and so forth that can, you know, make it, uh, less of a passive experience for you. You know, the private lending model is just fully passive.

It’s just signing a private placement memorandum, putting your information in there, uh, sending the money over and then collecting your fixed interest payment each month until the loan is matured and paid back. And then your principal’s returned to you and you have the option to reinvest it in another opportunity where you can just take the money and just put it in the bank or go do whatever you want with it. Go invest in something else. So you know, that’s what my investors are really, really on board with the private lender money lending model. And that’s why I wanted to have this episode today and just find out, you know, should you become a private money lender, is this a good option for you? And if you’ve been listening to the show as well, you know that we have a lot of different private lending options. It’s not just on real estate.

I do think that right now the real estate market is very, very hot. I think it’s kind of reaching its boiling point. I was just on the Real Estate Guys radio show and podcast a couple weeks back and I think that show’s about to air this week or next week. So we’ll be on the lookout for that. If you listen to podcasts, the Real Estate Guys, a great one to listen to, you know, me and Robert Helms, we’re talking about, and Robert lives in Dallas as well. And we were talking about just, you know, the nature of the market right now and the deals that are out there, the cap rates in many cases are really, really, they’re low. Um, the deals are tight. Uh, the margin for error is very slim. And so if you’ve been following the Real Estate Cowboys and you’ve been following American Real Estate Investments, you know that we’ve also got in the CBD industry because we believe, just like a lot of others believe, that this is the next gold rush. Um, you’re talking about a industry that’s going to be a multibillion-dollar industry.

It might already be at this point actually, but you know, within the next two to three years, they’re expecting it to be a multi multibillion-dollar industry with all these CD projects starting to hit the shelves at Walgreen’s and CVS and Walmarts and you know, all the gas stations and, you know, you’re gonna be able to buy CBD products anywhere pretty soon online, everywhere. And these products really do work. Um, they definitely help with anxiety and stress and pain relief. And you know, there’s a lot of other, other research that’s coming out that’s showing that CBD helps with a lot of other different ailments; uh, seizures, epilepsy, so on and so forth. Even with autism where they’re seeing that it’s helping, um, children with autism. So it’s just, there’s a lot of, the more I, I guess I would say, the more reports and research that comes out showing what CBD can do to cure a lot of these ailments that many people in the world have, the demand for these products is just going to continue to go through the roof.

And so we’ve kind of pivoted a little bit and layered on some CBD equipment raises; private money lending opportunities where a lender could lend on a piece of CBD equipment and extractor, some refinement equipment, whatever it may be, and still get a high fixed rate of return. Something like 12% on your money fixed. And just with the business, the nature of the business where it’s at right now, we expect there to be a tremendous amount of hemp biomass on the market this year coming from overseas, grown here in the US, they’re growing it all over the world and a lot of it is being brought into the US because the US is starting to become a real big hotbed for this industry. And the demand from the American public for these CBD products is continuing to grow by the day. And I just feel like you find a new brand launching every day or you know, a new technology or a new delivery system is coming out every day to make it easier for the public to consume CBD.

Right. And so with that being said, there’s going to be a large, large demand for extraction services for refinement services because once you extract the crude oil from the plant, you then need to take it through a refinement process where you turn it into an isolate that goes in the products or a distillate, you know, which is essentially an oil that goes into the products and the demand for that type of a extraction and refinement is going to be through the roof this year after the passing of the Farm Bill in December. And so, we’ve layered on these investment opportunities as well with our private money lending program. Because I believe in this equipment, I believe in this industry. I believe in this business and I believe that we only have a short window here to really, you know, make money in this business, call it 18 to 24 months, before the big conglomerate companies come in and just kind of monopolize this whole thing.

But for right now I feel like there’s opportunities for us, which is why we got into the business and our investors to loan on equipment. Because I feel very good about this equipment being able to pay my investors back just because the loan amount on this equipment. For example, we did a t$3.5 million raise for two large extraction machines that can do up to 10,000 pounds each day. Okay. And with that being said, I mean, you’re talking about 20,000 pounds that, you know, we’re able to charge $20 to $25 in input pound, uh, to do the extraction, um, for this, for these farmers and for these other large groups that have biomass that need extraction, um, through what we call tolling, right? A tolling service. And so if you do those numbers, this equipment can literally pay that $3.5 million loan off in a matter of a month or two, you know?

And so it’s, we’re able to provide our investors with a high yield and we’re also feeling really good about being able to pay you back through the equipment, through turning that equipment on and starting the processing. Um, because that demand is there and it’s in, it’s in high, high demand. And so we’re expecting to have a very, very good harvest this year and we’re expecting to get our investors paid that $3.5 million back before the loan maturity date. Uh, because of the type of volume that we’re going to be doing with this equipment, the type of contracts, we’re already negotiating with farmers, um, to, to process their, their hemp biomass. And so we’re really, really excited about that and we’re excited about growing our business as well with our lenders. Um, and possibly looking at some other refinement equipment that we can add on, uh, to start producing more different types of active ingredients.

CBN, CBG, THC-free distillate and this is all stuff that’s, it’s a hot, hot commodity right now and we want to capture as much of this space as we can because it wouldn’t be the goal to sell the business, you know, down the line. Um, but first and foremost, obviously we want to pay the investors back through, you know, the type of money that we can generate from running this equipment. And a lot of our investors have been on board with it. You know, I mean, it’s very, very hard to see 12% returns in today’s market and it’s, you know, especially on a real estate deal and that’s a fixed return. So, but anyway, let’s get into it. You know, as you, as we talk about quite a bit, real estate is one of the most lucrative investment options today. Even with the nature of the market.

It’s still one of the most proven ways to get on the path of being wealthy and financially free. Um, but you know, for those that take the time to learn about the various strategies available, uh, you know, and private lending being one, uh, you can really see some, some solid solid returns, uh, by loaning on a real estate asset, loaning on equipment, um, and just overall buying real estate, right? And holding real estate. Um, you know, if you bought a property back in 2010 to 2013, you’re probably sitting on quite a bit of equity right now because the market’s just been so hot for the past six, seven years, right? Or better part of a decade. It’s been on an upward swing. But like I said, for right now, I just don’t know if it’s the best time to go out and buy a single-family home due to the fact that I feel like you might just be paying top of market value for that.

And so like I said, you’re not really capturing the six ways that real estate pays you, right? Because cash flow right now is just, it’s not one of the big ways that real estate’s paying you, especially when you have a loan on a property, right? So what is private money lending? So if you, if you’ve been hearing more about private money lending lately, it’s because you’re paying attention right? To my show and other people’s shows. And just honestly, it’s, it’s really just becoming uh, another way for people to seek alternative finance, right? Instead of going through the institutional banks out there, you’re able to go to just a group of investors who have access to capital, have capital sitting on the sidelines. It’s not really doing much for them and they want to put it into something and start seeing double-digit returns, well private money lending is a great option for you.

But in the past, real estate developers and other investors usually had to rely on traditional financial institutions for real estate financing. And so restrictive lending guidelines made it challenging for some of these investors to get the financial backing they need to get their projects off the ground. So private lending operations grew out of an organic necessity for more accessible funding for nonstandard borrowers such as developers and private real estate investors. Today, private money lending is valued resource that makes it possible for both borrowers and lenders to reap tremendous gains in the real estate market. And like I said, with the imminent market correction looming, um, it’s definitely on the horizon – lending to sponsors like us now that have good opportunities can build strong relationships for future possibly equity opportunities down the road. So for example, you build a relationship with a sponsor, you start lending money on the debt side, right?

And then we go through a market correction and now more lucrative deals start to pop up for cash buyers. Well, if you build up this private lending database and prove out on the investment opportunities and get their principal paid back, when we start to see a decline in the market and we start to see prices start, they come back to reality, well then we can go in and really vulture some really good deals and good opportunities and we could let you come in on the debt side or you know, structure it a debt deal or on those opportunities that have a large equity upside, perhaps we could do an equity raise where you as the investor come in as our partner and we sit on that property and renovate that property and do whatever we need to do and sit on it until the market starts to rebound.

And then we sell it off and we see tremendous returns through the equity that the property gains over time. But you’re only going to see that by being, being able to buy cash in a down market. Right. And also you need to understand that when in a down market or a market correction or you know a bad economy, banks start to make it a lot tougher to get loans. So if you’re an investor who’s cash-heavy or has a group of investors behind you who are cash-heavy, that gives you the opportunity to get opportunities that many others can’t, right? Because they just don’t have the cash and the banks aren’t loaning like they used to. So we saw this coming, we were forward thinkers and you know, we just believed that hey, we need to start building up a group of lenders now because when the market does shift again, we want to be cash heavy going into that market.

We want to have a solid relationship with a large group of investors that we can then, like I said, either have you come in on debt again or we can have you share it on the equity. And so I think we’re going to kind of do a mix of both. That’s the plan. But uh, that’s the best time to get a good equity raise and a good equity opportunity is when the market is kind of at a low right? Because you can go in and steal the property, buy it well below market value. You know, real estate never goes to zero and you know that it always rebounds, especially in a market like a Dallas Fort Worth. We sit on that property for a few years, let the market come back, you know, fix it up a little bit, do some value add stuff to that, to that property.

And then we sell that property off and we let everyone share in on the profits, right? Now you’re seeing larger returns, probably somewhere greater than 10 probably closer to 30, okay. So that’s kind of the goal here. And that was my forward-thinking. That’s where I just decided that, hey, we need to start building up a group of lenders now because I want to be able to have access to capital. When the market starts to change, when the market starts to shift, when you start to see a decline, because it can’t be hot forever, nothing lasts forever, especially in real estate. Um, you know that it’s cyclical, you know, that it’s kind of like a roller coaster. It goes up, it goes down. Um, right now we’ve been trending up for so long that I do believe that a correction is imminent.

And like I said, I think we’re going to be well prepared and well-positioned for when that time comes. And, but for now, even though the real estate deals are pretty tight, uh, we have the opportunities to invest in basically the cannabis industry, right? And we only deal with CBD. We don’t deal with THC or anything like that, although that’s a growing, um, market and growing, uh, big, big opportunity as well. But for right now, we’re just focused on CBD, uh, because it’s legal in all 50 states. And, um, so there’s opportunities there to loan on this equipment, hold lien to that equipment, first lien position to the equipment. Um, either we’ll be the borrower on the equipment or one of our strategic partners will be a borrower on the equipment. Someone that we properly vetted out. I would never lend money to somebody that I didn’t fully trust and didn’t vet out and believe that they were going to be a solid borrower and get that loan paid off.

And guess what? Even if they didn’t get the loan paid off, we’re going to go repossess that equipment. We’ll stick it in our facility, we’ll run it for you and we’ll get you paid back. You know, I’m almost kind of like, hey, if you, if you, if you default, that’s going to be terrible for you, right? Because then you’re going to lose that million-dollar piece of equipment that can make you multi-millions of dollars, right? I don’t think anybody really wants to do that. That wouldn’t be smart. But even if they did, we’re going to repossess that equipment. We have facilities that we can stick the equipment at and turn it back on and start running bio-mass through it and start selling off oil and isolate and so on and so forth. And we pay the investors back that way. Or just through, like I said, just the tolling contracts that we have with farmers where we’re charging $20 to $25 an input pound to uh, you know, to process their hemp.

And so I just believe that it’s a great, great opportunity. It’s auh shorter terms like the one that we’re doing right now is a 12% return for six months, you know. So shorter terms, a lot of the investors like that, they like to get their principal back quickly and all investors like to see double-digit returns fixed, right? It’s just like you’re collecting a dividend just like you would from, that a bank would, you know, collect. So it’s, it’s, it’s been a very, very, very solid investment opportunity that a lot of our investors have gravitated towards in the past year. But when you invest as a private money lender, you’re lending money for things like commercial or residential real estate developments, business asset acquisitions like these CBD-equipment raises, individual real estate ventures and many other, uh, options. You are essentially the bank right along with the other private money lenders on the deal.

So it’s a multilevel deed of trust. So you’re going to have a group of lenders on a deal and not just Chase bank, right? And as the bank, you’re going to hold first lien position, which is like having insurance on the money that you loaned. That’s how your loan is collateralized. And if the borrower defaults for any reason, you and the rest of the lenders can take possession of the assets just as a bank would foreclose on a property if a borrower failed to make payments. Now it’s not our goal to fail on any of our projects, but listen, I mean, it’s an investment. They all come with a certain amount of risk. I can’t dictate the market, I can’t dictate outside things coming in and messing up a deal. But if that was to happen, you as the investor hold first lien on that project and you would be able to then repossess that project, basically foreclose on it and take full ownership.

So, and like I said, real estate never goes to zero. So you didn’t lose all your money, right? Whereas maybe a gamble in the stock market, you could see that money be evaporated within a day. Uh, you’re not gonna see that on a private lending opportunity. And so why would you become a private money lender? Like think, think to yourself about that question. Why would I want to become a private money lender? So why would you choose private money lending over any other types of investments? First, the interest you earn on private money loans usually far exceeds what you’d see elsewhere in the stock market. Right? My uncle, who’s a big stock market investor, typically sees about 6% per year. Um, we have private lending opportunities that pay up to 12. Like I said, private money borrowers, pay handsomely in the form of loan interest rates for the privilege of gaining funding for non-traditional projects, right? So even the CBD industry, banks are kind of wary to loan to CBD companies or loan on CBD equipment, but we’re able to provide loans for ourselves or for our strategic partners on equipment. Right. Um, because we’re going to private lenders for that funding and not going through the institutional route. Right. And because of that, we’re willing to pay returns of 12%.

The next thing you should consider become uh, you should consider becoming a private money lender because of the terms in which you capture those high returns on your money are much shorter. Like I said, some of our terms are as low as six months. So you’re not locked in for five years or whatever it may be. You’re going to get that principle back in six months. Most times it’s like a year. But we have terms, like I said, that have gone 18 months, but we’ve had some lately, one right now that’s six months. And finally, should you become a private money lender. Well, you should consider private money lending, if you meet a certain criteria.

Uh, this first means that in many cases you need to be an accredited investor to become a private money lender because there are multiple lenders going on one deed or one-note, money’s crossing over state lines. Um, and if you’re being publicly solicited, like listening to this podcast, and then you decide that you want to do private money lending, you need to be an accredited investor. That’s because we fly under the 506-c rule, which gives us the opportunity to publicly solicit our opportunities, but everybody must be accredited to jump into those opportunities because of that. Okay? You should also consider being a private money lender if you have liquidity in the amount of $50,000 or greater, and you can reasonably accept that risk for investment purposes. Most private money lenders, uh, and most of our private money lending opportunities, it’s a $50,000 minimum. I

In order, if you’re accredited, you should have 50,000 liquid that you wouldn’t lose sleepover. Um, so that’s typically the minimum investment on our opportunities. Um, but most investors typically come in more so around a hundred and upwards of uh, $200,000 on these private money lending opportunities. So 50 as I said, is the minimum. And you should consider a private money lending investment if you’re seeking passive income. Private lending is 100% passive. The only effort you really need to make is funding the project and then accepting your interest deposits into your account. Other than that, we don’t really have any expectations for you. You know, we don’t have to reach out to you every month. I mean we provide updates on the projects periodically, but really it’s just a deal where you gave us $100,000 and you make 10 and a half percent or 12% fixed on your money for a year term and we just send you a payment every month and that’s the only time you have to hear from us.

It actually makes it into a very, very good business relationship. And so if this episode has piqued your interest in the idea of making money by becoming a private money lender, you’ll definitely want to work with a trustworthy sponsor, um, such as us, American Real Estate Investments and the Real Estate Cowboys. But there’s many others out there. You don’t have to just work with us, I’m just giving you your options. But there are a lot of other companies out there that do that syndicate money or on the debt side and on the equity side. A lot of our investors like the debt side because like I said, you start receiving immediate payouts. But on the equity side, you can see higher returns and you’ll also be able to take advantage of a lot of the tax write-offs that are available to you. Because on an equity syndication, you actually own the property.

Okay? You’re just syndicating funds. You and a group of other people own the property, so you’ll be able to use or, uh, you’ll be able to take advantage of the tax benefits that are available for holding real estate. Whereas with a debt, a syndication, you know, you don’t actually own the property, you own first lien on the property. But you do not own the property. So you can’t take advantage of the tax benefits that are available to you for holding property. But like I said, the benefit is it’s a great cash flow stream and it’s really great. They’re really great uh cash flow stream for uh, for a self-directed IRA or 401k investor because those dividends are going to go back into your IRA or 401k tax-free or tax-deferred. So you really, really, really can’t beat that. So if you found this episode interesting, you’d like to learn more, you’d like to learn how you can get involved in one of our private lending opportunities. Just go to AREIUSA.com or RealEstateCowboysDFW.com put in your information, download some of the free information that’s available to you on our websites, like our passive income starter kit, which gives you details on all the different investment opportunities that we have in American Real Estate Investments. We have some market reports, some good literature for you to read and just get more and more familiar with the markets that we’re in and the investment opportunities that we have available. And from there you can make an educated, educated decision if you’d like to move forward or not. If you’re accredited, we can get you the private placement memorandum. You can read over the deal, see if it’s something that you want to take part in. I know that we’re almost fully funded on this deal. I really don’t expect it to be available past the end of July.

I think we’re almost close to $2 million raise and I believe the total raise is $2.3 or $2.4 million, so we’re very, very close to that number. So we have limited positions available. But if you are interested in learning more or jumping in on this deal, we’ll have other deals in the future. If you’d like to take advantage of this deal, start earning interest on your money as early as, well really, right when you place it in escrow. You’re going to start earning interest, but to start to receive your first payment as early as next month, then contact us as soon as you can to take advantage of this great opportunity before it runs out at the end of July. But that’s all we have for this week. This is your host, John Larson signing off. Once again, always remember, what’s your return on life? Have a great week everyone, and get ready to take some action, right? Get your money working for you so you’re not working until, you know, the day you die, right? You got to get your money working for you. Get your money making money for you, and you’ll just see your life change for the better. Okay, so everybody have a great week. Be active, make moves, and I’ll see you next week with another episode of the Real Estate Cowboys. This is John Larson signing off. Have a good week.

Announcer: All opinions expressed by the host of the show are the opinions of American Real Estate Investments LLC and do not reflect the opinions of guests or sponsors. No personal or professional advice 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.