328: The Best Alternative Investment No One Knows About w/Alex Breshears and Beth Johnson

Speaker 1: Welcome to the BiggerPockets Money Podcast, show number 328, very special Finance Friday edition where we interview Alex Breshears and Beth Johnson and talk about private money lending as an alternative investment vehicle.

Speaker 2: Because when most people talk about they want that financial independence, they want that financial freedom, what they’re usually truly wanting is time freedom or geographical freedom. And I kind of got stuck in this because I got geographical freedom kind of forced upon me by Uncle Sam. And that’s why I would rather do lending. And I don’t have to babysit tenants or contractors. I have the ability—I could go—my spouse currently lives in Europe. I can go to Europe and still fund a loan and still keep my business going. And Beth has a similar story to that too, because she splits time between 2 places as well.

Speaker 3: Hello, hello, hello.

Speaker 1: My name is Mindy Jensen. And with me as always is my critical thinking co-host, Scott Trench.

Speaker 3: Mindy, your intros are always a true credit to discussions around lending and finance and that kind of stuff. They generate a lot of interest. You make some great points. Okay, let’s continue.

Speaker 1: Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting.

Speaker 3: That’s right. Whether you want to retire early and travel the world, go on to make big-time investments in assets like real estate, start your own business, or become a lending mogul, a bank, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Speaker 1: Scott, this is an epic episode. We talked to Alex and Beth. This episode is probably going to run really close to 2 hours. And you know what? You are going to want to listen to every single second of this episode if you have any interest in making money. Do you think people listening to this episode, listening to this podcast, want to make money? Yes, they do. And if you want to make money, this is the episode that you want to listen to. It is an absolutely legitimate way to make money and make big money. I am so excited for this book that BiggerPockets Publishing is releasing. It’s called Lend to Live: Earn Hassle-Free Passive Income in Real Estate with Private Money Lending. And it is fantastic.

Speaker 3: Yeah, I think that when you hear the word private lending, you tend to poo-poo it or whatever.

Speaker 2: And that’s not—

Speaker 3: I’m a real estate investor and all that. Private lending sounds like a hassle. There’s a lot of paperwork, all that kind of stuff. Sure, there’s some paperwork. There’s some work to get into this, just like there is in real estate investing, but this is a serious moment for this asset class. This is one of those episodes that for me is a game-changing or perspective-widening show. I liken it a lot to the episode we did with J Scott a few months back around syndication investing, which also went 2 hours because the topic needs 2 hours to really fully digest and really get a full intro into. This is an asset class where interest rates have been rising dramatically over the course of this year. Being a private money lender—tough gig when there’s—the capital markets are flooding with capital, tons of competition. That’s all dried up. There’s a big opportunity right now to be a lender. And I think after you listen to this episode, you’re going to have a hard decision in your mind about whether you want to buy rental properties or whether you want to lend to people buying rental properties. Because I think that the balance is really healthy right now in a way that it hasn’t been in 10 years. And I think it’s a really interesting time to do that, and you should seriously consider this for yourself. This is an option available to you if you have $20K, $50K, $100K, or $500K. This is not something you need millions to do. So I’m really interested in this, and I’m going to take a serious look at this for my own portfolio, just like I took a serious look at syndications after the episode with J Scott.

Speaker 2: Awesome.

Speaker 1: I am only going to disagree with one thing, Scott. I think that there might be people who are listening who are like, I don’t want to get involved in real estate at all. This is a great way to make money in real estate without owning real estate.

Speaker 3: Love it. Let’s bring them in.

Speaker 1: You know what? Before we do, Scott, even though this is a different type of Finance Friday, I feel that the subject matter of this show makes the disclaimer and advice even more relevant for this episode. So I’m going to say the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott nor I nor Beth nor Alex nor BiggerPockets nor, nor, nor is engaged in the provision of legal, tax, or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants, regarding the legal, tax, and financial implications of any financial decision you contemplate. And as we say in just a few minutes, if you want to get into private lending, there are people that you are going to need to hire to do some work for you—some of these professionals that I just listed. But later on in the show, we will discover that your borrowers are paying the whole thing. They’re footing the entire bill. So it’s even more important to get somebody that you trust to have your back, because you’re not even paying for it. Alex Breshears and Beth Johnson are the authors of the latest BiggerPockets Publishing title, Lend to Live: Earn Hassle-Free Passive Income in Real Estate with Private Money Lending, which is a textbook about private lending—how to become a lender, how to find a lender if you need one. It is a fantastic book. And today we are going to cover how to use this method as an alternative investment. Beth and Alex, welcome to the BiggerPockets Money Podcast.

Speaker 2: Thank you for having us.

Speaker 1: I’m so excited to talk to you ladies today. I have done some private lending. I think it’s really important to acknowledge, before we jump into this, that this is going to sound a little bit scammy, but it is an actually legit way to invest your funds. The reason it sounds scammy is because you can make a lot of money as a real estate private money lender. However, if you don’t do it right, you can lose every single penny that you have ever put in there. So that’s where it starts to feel a little scammy. You have to do the homework. You have to do the research. This is not a, oh, I’ve got a lot of money, I’m just going to lend it to somebody who wants it and everything’s going to come up roses. I mean, that would be really nice, but that’s not how reality works. So I have personally done private lending. I know this works, but I also know that you have to do some homework. So I just wanted to get that out of the way before anybody’s like, nah, that sounds like a scam, I’m not going to listen. It’s totally legit. Like, what kind of returns are we talking about?

Speaker 2: I would say on an annualized basis, depending on whether you’re in first lien or second lien, anywhere between 8% annualized and maybe realistically up to 14% or 16% annualized.

Speaker 1: That kind of return sounds almost fake, but it’s real. I have fattened my wallet with those kinds of returns by doing private lending. So I want to talk about how we can make all this amazing money. Let’s jump right into this. How do you get started? I have a pile of— well, okay, let’s actually—who’s qualified to be a private lender?

Speaker 3: Beth.

Speaker 4: Anybody can be a private money lender, as long as you have an amount of capital that you want to lend out safely, securely, that can still leave you with a little bit of a nest egg so that you aren’t lending out every penny you have. Anybody can become a private money lender. And that’s what Alex and I are trying to communicate to the broader masses.

Speaker 3: What do you say to somebody who thinks that this is an activity that really you need to have a couple hundred thousand dollars in liquid cash at minimum in order to be an effective lender, because that’s how much a property costs in my local area? How do you kind of get over that for—I think a lot of people have that preconceived notion that this is for wealthier individuals who are looking to transition to a more passive form of investing.

Speaker 4: Well, I started with—my first loan was only $65,000 or so. It was a second lien position on a property that had a really significant amount of equity in it. And so, even though I was in a junior lien position, I was still at less than 40% loan-to-value. So I had a very significant amount of equity to protect my capital investment. And I’ll let Alex tell her story too, because hers is quite similar and even involved less capital.

Speaker 2: Yeah, so my first loan was actually about $32,000. Again, it was in the second lien position, but it was also in such a great equity position, the total combined loan-to-value between the first and the second was still under 60%. So it was still a whole lot of equity in the deal. But the other thing I can suggest to people, if you’re starting out with a smaller dollar amount—this might come as a surprise to your listeners in California—but there are still places in the United States where you can go and buy a house for $50,000. So if you are the type of person where you’re like, oh, I just can’t get over that hump and not wanting to be in a second lien, you can then invest potentially outside of your local market, into markets that are not valued as highly. And you’ll still be able to be in a first lien position with less capital.

Speaker 3: One question I’d have here is, why would I want to—if I have $50,000 or $100,000, why would—

Speaker 4: Why—

Speaker 3: —what are some advantages of lending versus making that first actual equity investment in a rental property? Why might I favor lending over that as a first-time investor?

Speaker 2: It really depends on your goal, your personality traits, and basically your lifestyle. So for example, both of us have done—we’ve been landlords or are landlords. We’ve done fix and flips. And for whatever reason, yes, while we’ve done them, that wasn’t something we wholeheartedly enjoyed. From my standpoint, I’m a military spouse. I’ve moved 19 times in 21 years. So I have been the long-distance landlord—buy a house with a VA loan, and then move, and then buy another one, and then turn the previous one into a rental. And I hate, I hated being a landlord. It did not fit my skill set. It turns out it didn’t actually fit my goals either, because when most people talk about they want that financial independence, they want that financial freedom, what they’re usually truly wanting is time freedom or geographical freedom. And I kind of got stuck in this because I got geographical freedom kind of forced upon me by Uncle Sam. And that’s why I would rather do lending. And I don’t have to babysit tenants or contractors. I have the ability—I could go—my spouse currently lives in Europe. I can go to Europe and still fund a loan and still keep my business going. And Beth has a similar story to that too, because she splits time between 2 places as well.

Speaker 4: Yeah, and I think it’s important to note that it doesn’t have to be mutually exclusive, right? So I am like Alex also, where I prefer private lending because it’s a lot more passive. But I do have an active lending business too, and I’m also a landlord. So I like private lending to be a form of diversification. I think we see a lot of people out there trying to get to 100 doors, 1,000 doors, trying to achieve some certain number in their portfolio. And I find that that’s kind of unnecessary in my world. I’d like to have just a small amount of very manageable doors. And then with the additional capital or equity that I have, I’m going to private lend that money out, because it’s much more passive for me. And it’s not an additional toilet or roof that I have to take care of.

Speaker 3: Love it. And let me give you another answer. One reason why I’m so interested in private lending today is because I think that in 2022, at this point in time, it’s hard to believe that we’re going to see the same levels of appreciation we saw in recent years on rental property investing. And another interesting dynamic that’s going on right now is because interest rates have risen so much, if I’m buying a property and using leverage as an equity investor, depending on what I believe about appreciation, rent growth, and those types of things, debt may actually be dilutive to my return profile in buying a property. So that leaves me with an all-cash investment option. That’s what I’m thinking about here. And an all-cash investment option, if I think I’m going to get 3% appreciation on a 5-cap property, that’s an 8% return. And I’m hearing from you, I can get an 8% or 14% return with way less—with potentially less risk—as a private lender in this market. So I think that’s a really compelling—there’s a lot there. I just went through that, it was very fast. So rewind if that didn’t make sense, and try out the analysis for yourself in the calculators. That’s really powerful stuff, to be able to get an 8% to 14% return and be in the lending position rather than the equity holder. Because theoretically, your worst case as a lender—well, your worst case is you’re tied up in foreclosure court for several years before you can get your money back. Your second worst case is you have to foreclose on the property, right, and figure it out. So anyways, I thought I would chime in there with that. You might actually get better returns lending today than you can as an equity investor, depending on what you believe and where your market is.

Speaker 2: Well, I’m also glad you brought that up because it’s kind of timely right now, because we’re on what, our 2nd or 3rd Fed rate hike. And I hear a lot, talking to active investors, like, oh, I’m pausing on buying because I don’t want to deal with these high rates. So they’re just letting money sit on the sidelines. And I’m like, why don’t you just pivot and use the higher rates potentially to your benefit? You’re like, okay, great, everybody’s borrowing at a higher interest rate. That’s good for a lender. Let’s go do that.

Speaker 3: I think it’s a fascinating concept. Quick question, though. One of the things that is advantageous about investing in real estate, if I’m in that position trying to make that choice, is I get tax advantages like depreciation and things to offset my rental income. As far as I know, the income from this business, with interest and points, is going to be straight-up ordinary income that I really can’t shield effectively from income taxes. One, is that true, or do you have any tips and tricks on the tax front? And 2, if true, do you recommend that folks really do this inside of their 401(k) or other kind of tax-deferred or tax-advantaged retirement accounts?

Speaker 2: So the interest component is going to be—not ordinary income, interest income. So you’ll get a 1099-INT like you would from your bank. And then Beth can run through some of the other fees, like the origination, that you were talking about.

Speaker 4: Well, that still would count as ordinary business income. There aren’t really any tax advantages like you would get, perhaps, if you invested in a syndication or if you bought real estate. And that’s why I mentioned earlier that this doesn’t have to be a mutually exclusive deal. I think a lot of people will want to use this as a diversification tactic so that they can have passive income without maybe some constraints of 2- to 3-year terms, like investing in a syndication. Or they don’t want to actively manage real estate or grow their portfolio. So it’s a definite alternative, or a supplement, I should say. And then, just in our—like, in my world, I represent a whole bunch of passive investors. I mean, I guess in practical terms, they’re considered note investors, whole note investors, and I place them directly into loans. And I have basically 2 camps there. There’s some older investors who are liquidating their real estate portfolio. They’re getting older, they want to retire, and actually they’re looking to simplify their estate planning as well. They don’t want their children to have to inherit these properties and squabble over them. Maybe some of them haven’t really expressed a whole lot of interest in being a landlord. And so this is a simplification of their estate. And then there’s a younger crowd—the 20s, 30s, and 40-somethings—who are really trying to just manage their daily W-2 and their small, growing family. And they just don’t have the time to be a real estate investor actively. And so they find advantages in the private money lending world that is not associated with having to deal with tenants and toilets. And so being able to make those great rates of return can kind of offset the tax implications associated with it.

Speaker 1: I was able to invest through my self-directed solo 401(k). I do have some self-employment income—I’m a real estate agent, among other things. And this was a really great way to kind of juice some of my returns in that account when other things were not juicing the returns. So that’s how I have invested in the past. But I also have other income that I’m already paying taxes on. I’m not looking to increase that income right now. I’m looking to increase my other investment opportunities’ income at that time. And the way that it works for me, Scott, if you’re not familiar, is that that’s just a regular investment. I’m not paying—it because it’s a 401(k), not an IRA. And here’s where I get super squidgy—if you’re interested, talk to somebody who really knows what they’re talking about. But I don’t pay UBIT, or unrelated business income tax, or any of that stuff that comes with an IRA to invest. So this is something you want to talk to—before you invest—to see if the accounts that you’re investing in is a good idea, or if there’s tax-advantageous ways to invest in different—

Speaker 4: Well, Mindy, you actually brought up a really good point, because I also invest through what I had at the time was a solo 401(k). And there are people who—I mean, when you do deal with a self-directed IRA, you cannot lend yourself money, but you can lend it to other people and there’s no tax implications. But if you were to, say, buy a property that’s levered in your self-directed IRA, you will get UBIT and you will have some implications associated with levered money within your self-directed IRA. But you don’t get that when you do private money lending.

Speaker 1: Oh, that’s good to know. Okay. And I don’t have a self-directed—

Speaker 4: Yeah. So you can’t flip a property in there. I mean, you can, but you’re going to pay taxes on it within your self-directed IRA. Private money lending does not have that sort of tax implication in there.

Speaker 1: Oh, that’s good to know. Okay. And that is—I’m glad I brought that up.

Speaker 4: I’m going to say that I’m not a CPA, so I’m not providing financial or legal advice here, that people should consult a self-directed IRA custodian or a CPA for further information. But yes, that’s to my knowledge, and that’s how we’ve handled our retirement accounts. And that’s where my first loan was through, was from my Solo 401k, lending out $65,000 out of there.

Speaker 1: Let’s look at a typical loan, a common loan. What is the length of time that you’re going to be in? What are you lending to? I’ll just start with that because I’ll ask you 50 questions on that. Beth, what is a common type of private money loan that somebody who is just getting started might do?

Speaker 3: I think you call them vanilla loans in your book.

Speaker 4: Well, yeah, we try to describe a practical scenario where we feel that new private lenders should get involved with first. And the standard scenario is lending your money out to a real estate investor, typically for a fix and flip on a single-family residence, because most of us live in single-family homes. We have experience with it. We may understand our neighborhood or our market and where the real estate market’s going. And so it’s kind of a canned, in-the-box kind of loan. But the reality is, and why Alex and I wrote this book, is that there is no prescribed path for private lending. You can do, within legal parameters, just about anything you want. So while I tend to lend out around 10 months, because I think that’s just a nice sweet spot for a fix-and-flip, I’m not going to shortchange them on time in case maybe their windows are delayed by a month or so, but it’s not too long so that a borrower can hang themselves just dragging out a project. But Alex and some other private lenders that we know within our network, they tend to have shorter terms. And so I’ll punt it over to Alex to tell you a little bit about how she frames her loans.

Speaker 2: So normally I’m in about the six-month timeframe, and they obviously have an extension that they can add to it that’s already written in the loan documents. I call it the COVID kicker if we want some fun names. But if they run into a situation where it takes them four months to round up windows, you know, there’s an open line of communication, and they could say, “Hey, look, I ordered these today. We closed on this. I knew it was going to be a problem. I’m still waiting on windows.” And we did—he waited, that poor guy waited four months for windows to come in. But because he was so communicative, gave me updates, it wasn’t any big deal. And we got to the end of that loan term, and he’s like, “Hey, the windows still haven’t come in because it was a problem.” I knew from the very get-go. So we didn’t have to necessarily hit what I call the nuclear option, where we have to do the foreclosure, because the deal was working fine. It was just powers that be above us could not get him windows in the appropriate amount of time.

Speaker 1: Okay, Beth, you just said that you lend for 10 months. What happens if I have borrowed for 10 months, but I finish in 8? That never happens. But what happens?

Speaker 4: Well, they can pay it off early. I love that. You know, my investors love that too, when they lend out their own capital and I place them in a loan that pays off early or on time. And so we don’t have any prepayment penalties—which is what it’s called—but plenty of private lenders can. And some of my private lenders that lend out the retirement plan, for example, they don’t want to keep pulling their money in and out. And so they may have some sort of prepayment penalty of a couple of months. That’s really not uncommon. But in my world, if we do 10 months and they pay off early, that’s just great for us, because I can redeploy my capital.

Speaker 3: What would the points and interest look like on these typical loans that you guys just described, for each of you? Maybe, Beth, we could start with you.

Speaker 4: Sure. We like to have our points and our interest rates commensurate with the level of risk involved. So I think I mentioned a little bit before, we’re a little bit unique in our market in Washington State, where we do first lien positions, but we also do junior lien positions as well. And that means that we can place a second lien behind typically a conventional loan, 30-year loan, which reduces some risk. And since not a lot of other people do second lien positions, I can command a little bit of a higher interest rate with the associated risk involved with that junior lien. And so I would say points range anywhere from 1.5 to 3 points. I’ve seen other private lenders command more. And then I’d say the interest rate is typically around 9.5% for really those stupid-low loan-to-value deals that you just can’t walk away from, and the risk is really just not that prevalent, up to around 12%, up to 14% in some cases. But it really needs to be dependent on usury law and other legal parameters defined by your state and at the federal level too.

Speaker 1: You just threw out two things that I understand, and I want to make sure everybody listening understands. You said second lien position, or junior position, and you said usury laws. Can you just give a quick definition of both of these?

Speaker 3: Sure.

Speaker 4: A second lien position is a loan that would be in order of priority on title behind a first lien position loan. That can be a deed of trust in certain states. In Washington, it’s a deed of trust, and in other states it’s considered a mortgage. They’re both basically the same thing. One will require a trustee for deeds, and mortgages do not. But essentially, when you get a mortgage, like let’s say with a bank, when you buy your house, that’s a first lien mortgage. And when you place a HELOC on it, for example, because I think that’s probably more common, behind that mortgage, then that’s what’s called second lien position or junior lien. And when a property is sold, the lien position is what dictates who gets paid off first from the proceeds of that sale, if that makes sense. So the bank gets paid off first because they’re the first lien mortgage, and then the HELOC or us would be in second position, and we get paid off second. And any sort of surplus of funds then would go to the seller.

Speaker 1: Okay. And then can you define usury laws?

Speaker 4: I’m going to pass that one over to Alex, because she’s good at that.

Speaker 2: That one’s fun. So something that most people don’t realize is private lending—we are talking about lending only on investment property. It has to be non-owner-occupied property, and the reason that is such a big deal is because owner-occupied property is actually regulated at the federal level. There’s licensing at the federal level. There’s consumer laws that have to be abided by—disclosures, all these other things. So when we’re talking about non-owner-occupied property, we’re actually talking about it on a state level. So that’s a big reason why, when so many people will ask, “Hey, does anybody have a template for a promissory note or a mortgage?”—it’s like, please don’t do that, because what’s legal in one state may not be legal at all in another state. So those groups of laws by state are usury laws. They will outline if you need to be licensed to even do the loan, under what conditions can you do the loan, who can your borrower be, and what are those rates and terms. What if there is a ceiling? What is that ceiling? And does that ceiling include all of the fees, or just origination points, or just interest rate? It gets very complicated and off into the weeds very quickly, especially when you’re talking about 50 different states having 50 different versions of these things.

Speaker 3: So it sounds like investment properties are a nice respite from those types of issues. So that was a very bad pun that very few people will get.

Speaker 1: I got it, Scott.

Speaker 3: But on that note, with usury—you’ve talked about how you lend, in your book, to businesses almost exclusively and not individuals. Is that just one of those little tips that will help you avoid some of those problems where that can get commingled with personal things and be subject to these usury laws? Is that right?

Speaker 2: It’s more along the lines of—if you think about usury laws more like a bucket—if I am an individual lending money to another individual, that is one bucket of usury laws, versus being an LLC that lends to another LLC. That is a business purpose loan. So that is a different bucket of laws. So really, the clarification about being a business lending to another business could actually be a reflection of licensing. That could be a reflection of the usury laws they’re trying to stay in, and it could be a reflection of the type of property they’re trying to lend on. In some states, you might not need a license to lend on single-family homes, but you do on anything that would be commercial, or vice versa.

Speaker 4: Yeah, and I think it’s important to say that even if you lend to a business specifically, it doesn’t exclude you from usury law, which is in essence a consumer protection, but it is an added precaution to be able to lend to an entity so that it further substantiates it as business or commercial purpose and use.

Speaker 1: I think now would be a really awesome time to give a disclaimer that says you are entering into a legal contract with borrowers and there are lending laws that apply to you. So you need to know the laws of the state in which you are lending. Is that true, Alex and Beth? It needs to be the state that you’re lending in, not the state that you live in?

Speaker 2: That’s where it gets a little tricky. So if the borrower, the property, and the lender are all in the same state, then yes. But if the borrower and lender and property are in different states, some states will not accept the usury laws of other states. So if you’re in a situation where it’s potentially multiple states, you really unfortunately have to research both states to see which one will use the other’s laws.

Speaker 1: Well, and that’s fair. This is a great return, and great returns don’t come with no work at all. We’ve called this passive income. I believe it’s very close to as passive as you can get, but there’s some work upfront that you have to do in order to make this successful. I mean, you could technically just throw money at people and hope for the best, but that’s not going to see the best returns.

Speaker 4: It isn’t. You would be surprised how many people do that, especially because private money tends to come from within your own network. And so you think that when you have this personal relationship with somebody—I trust them implicitly, I’ve known them since I was a child—and so inherently there’s some level of trust where you tend to relax, maybe treating it like a business transaction. So I get phone calls, unfortunately, monthly from people who have lent money with either bad promissory notes without a legal advisor to draft them up for them, or maybe they’ve just exchanged money without anything in writing. And so that is where the term “scam” can come into play, because people will unknowingly get into these circumstances without the legal protection and the legal advice and support from an attorney who’s well-versed in private lending and their particular market. And then they get caught in a really bad situation and probably lose some capital as a part of that.

Speaker 3: How many hours, Alex, would you think that you put in before getting in, really mastering the subject? And how much self-education needs to go into this before getting in? For reference, I always talk about there being probably 250 to 500 hours that you really need to put in before buying your first property, to get all these mental models associated with real estate investing. What would you kind of guess is the similar investment for a private lender here?

Speaker 2: I think it really matters on where you’re starting, because if you’ve done a couple rental properties, for example, you’ve kind of already learned how to underwrite a property. So from the perspective of private lending, a big portion of that heavy lift is being able to underwrite it and do your due diligence on—you know, if they said the ARV is $300,000, do I agree with that? And then being able to kind of use your tools and your sense of the market and say, okay, I agree with that aspect. Or if you’ve even tried to go get a loan yourself in the conventional world, you kind of have an idea, as a real estate investor, what they’re looking for. They’re looking for creditworthiness. They’re looking for a certain amount of capital. They’re looking at the property itself and making sure the loan-to-values are all there. So if you’re someone who’s already an active investor, it’s actually relatively small, because you’ve been teaching yourself how to underwrite a deal, and that’s what you’re doing in private lending. And the portion that you don’t know in private lending—guess what—you can hire it out, because you’re going to be hiring a title company, the hazard insurance—you can have your hazard insurance broker look over any of the hazard insurance documents a potential borrower provides. A lot of these little places where there’s a gap in knowledge in private lending—it’s very collaborative, and you can bring those people onto your virtual team and fill in that gap in knowledge.

Speaker 1: Who do you need to have on your virtual team? You’ve mentioned attorneys, you’ve mentioned title people, you’ve mentioned the insurance broker. Who else should be on your team?

Speaker 4: A good escrow closing agent’s a really good one to have, right? Good escrow closer, somebody that can assist with property valuations. I think a lot of maybe laypeople that don’t have as much experience in real estate might feel troubled trying to figure out how to properly place a value on a piece of property. And so maybe having a real estate broker friend or a real estate investor friend that you can lean on and get a second opinion or a third opinion on is always valuable too. A third-party contract servicer is an excellent way to really make sure that your private money loan, after it’s originated and funds are transferred, is seamless month to month. That third-party servicer basically will do an automatic payment, usually in the form of an ACH, and debit that directly from the borrower’s account and directly deposit it into your account. So it not only helps manage the monthly payments if you were to have that on your loan, it’ll also typically—the contract servicer provides you with the 1099-INT at the end of the year as well.

Speaker 3: Awesome. And then attorney, of course, right?

Speaker 4: Always an attorney. Actually, in our book, we created a resource guide that has access to some private money lending law firms nationwide that can provide some additional support and some legal counsel, and also help draft up loan docs too. They’re a great resource.

Speaker 3: Where can people find that resource?

Speaker 4: The resource guide is online after you buy the book. There is a Lend to Live supplemental materials section, and the resource guide, I believe, is in the supplemental materials—right, Alex?

Speaker 2: It is.

Speaker 3: Let me go back a minute here to returns. So we just talked about, Beth, your returns of 1.5% to 3% on the points—1.5% to 3% points when you originate the loan—and then 9% to 12% interest rates over a 10-month period. And Alex, what would be your kind of comparable or equivalent on the loans that you do?

Speaker 2: So I do it a little bit differently, which is why we work so well together. I’m really laughing inside that you asked this question, because so many active investors—that’s their two buttons. They want to know the interest rate and they want to know the origination points, nothing else. So when you hear how I do it, you will understand how this potentially could be problematic. So what I do, since my loans are so short—usually about four to five months—they pay a flat interest rate. So if they have the money for three, four, or five months, they pay the same amount. And I give them two options. So if they want to make monthly interest-only payments, it’s going to be one interest rate—we’ll just say 10%. But if they don’t want to make that monthly interest payment, and roll it all into the very end when they go to sell the property, it’s 12%. And I have yet to have a borrower turn down paying two extra percentage points to not make interest-only payments while the property’s being renovated. Because for anybody who’s done a fix and flip, you are hemorrhaging money for the first three or four months. So anywhere you can put even a little Band-Aid over that hemorrhage, they’re going to take. So again, it’s just a different way of looking at it. I’m not advocating this is the best way of all, but just merely trying to point out to active investors that if you start the conversation about the interest rate and the origination points, you’re missing so many other opportunities where you could maybe change around the fee structure, change around some other terms of the loan that actually will make it better for you. And you’re just wasting your time kind of renegotiating to lower the interest rate annualized down one point.

Speaker 3: I love it. And, you know, that answers my next question, or begins answering part of my next question, which is—to get to these 8% to 14% returns that we’re talking about, to get on the high end of that with the structure that Beth outlined, it’s really the faster people pay off the first note, and the faster you can redeploy the second, now you’re getting points multiple times per year in addition to your rate. Whenever that money’s sitting idle, you’re obviously getting 0%, so you’re losing against that, to a certain extent. And in your case, Alex, it’s really just about how much of the year can you keep that money deployed with flippers, because you’re not making money on points, you’re just making 10% or 12%—mostly, essentially always 12%, as you just said—on the interest-only or the no-interest-only payments. Just the—how would you—what’s the term for accruing the interest until the very end?

Speaker 2: It just becomes part of the balloon payment at the end. So if I—because I fund fix and flips—so basically, ultimately, their retail buyer is the one paying their interest payment for them when they go to sell at the closing company.

Speaker 4: It’s called deferred interest.

Speaker 1: You’ve mentioned, Alex, you’ve mentioned flips multiple times. Do you only lend on flipping?

Speaker 2: That is what I would prefer to do, at least during COVID, because anybody who was paying attention to lending during COVID, the underwriting guidelines for investment property would go up as the cases went up and then come down as the cases went down, and then we’d go through another thing and the underwriting guidelines would go up. So we as private lenders, we get our capital back when either the property sells or the property refinances. And at least here in my market, because I’m in Hampton Roads, we have a very transient population due to the military. Housing was very, very short. They had a very minimal supply. So in my eyes, if we have owner-occupied underwriting guidelines that weren’t changing as much as non-owner-occupied underwriting guidelines, and we had a massive housing shortage, I’m going to fund a fix and flip under those conditions because I know basically as soon as they put that thing on the market, it’s going to be the crazy zaniness that many investors are familiar with over the last two years, versus potentially having to work with a borrower who’s trying to do a DSCR loan to refinance or trying to get their local community bank to agree to refinance when the viral count’s way up through the ceiling. So that was a little bit more a reflection of what was going on in the market at the time.

Speaker 1: Okay. And Beth, do you do mainly flipping loans or—

Speaker 4: No, I’m completely the opposite of Alex.

Speaker 1: Oh, great. Okay.

Speaker 4: So great to have a contrarian point of view, right? I think I mentioned before, I have scaled my private lending into a full active business. So I kind of consider myself a private money matchmaker. I have capital partners that I lend their money out to borrowers who are active investors. I do flips. I do buy-and-hold investors. I’ve seen, particularly with my crowd, that the borrowers have grown up and sort of transitioned from flips over into buy-and-hold investing. Some of them maybe have gone from single-family fix-and-flips over to small multifamily value-add. And so we want to grow with them in that process. And while underwriting has changed significantly in the last couple of years, we were able to navigate that well with some of our investors so that maybe you were looking for a DSCR loan or maybe you were looking to refinance conventionally. We would pitch it over the fence to some of our hard money lender friends that offer those DSCR loans and have them prequalify us to make sure—or prequalify the borrower—because I wanted to make sure that they had a solid exit strategy. And really, the second exit strategy for any of those people would just be to put it back on the market and sell it. So that was always a secondary Plan B exit strategy for them. And so we weren’t overly concerned about it, but we might have put a larger equity buffer in place, especially when COVID hit. If somebody was going to buy a value-add buy-and-hold, I may only lend up to 65% loan-to-value or combined loan-to-value, because I needed that extra 5% equity buffer so that if they needed to refinance out at 70% loan-to-value, for example, on a cash-out refi or even a rate-and-term refinance, that 5% slush there could be used by some lenders as capital reserves required to refinance that loan. And capital reserves were something that were required much more significantly since COVID. That wasn’t really a standard requirement for refinancing prior.

Speaker 1: Oh, I wasn’t aware that that wasn’t a standard requirement prior to COVID. You should certainly have reserves.

Speaker 4: Yeah, it wasn’t as great. I mean, right after COVID, for the remainder of 2020, I was seeing across the board at least six months’ cash reserves. In many cases, with some other lenders, they were requiring up to twelve months’ cash reserves, which kind of defeats the purpose, right? Like, I’m trying to do a cash-out refi, and you’re asking me to show twelve months of reserves.

Speaker 3: I don’t have it.

Speaker 4: I’m asking for a cash-out refi. But when us, as the private lender, are creating that extra 5% equity buffer, and they’re working with the right lender that would utilize that as their cash reserves, then I still had a proper exit strategy for them in place.

Speaker 1: Well, let’s move to our hypothetical deal, the vanilla deal. I have somebody that I think I want to lend money to. How do I vet that borrower? How do I vet the deal? Which one do I vet first?

Speaker 2: Oh, you just stepped into it now, Mindy.

Speaker 1: Okay, Alex, please tell me, who would I—

Speaker 2: What—

Speaker 1: Which would I vet first, the borrower or the deal?

Speaker 2: You’re going to get two different answers out of us.

Speaker 1: Good.

Speaker 2: So we have this debate of the jockey versus the horse, and I am on Team Jockey. I’m fully kind of looking at the individual, because my general investing philosophy is that I’m betting on that person—that they can act ethically, can make decisions that are good and timely. And then the property—as long as they can deal with the property and make those good decisions, and the numbers sort of check out for the property—then I’m okay putting more of my faith in an individual. Whereas Beth goes the other way, but also has a reasonable explanation for why she looks at it the other way.

Speaker 3: Before Beth goes, Alex, do you require recourse loans in that case?

Speaker 2: Yes. And the other kind of quirky thing I do is I ask—

Speaker 3: Can you explain what a recourse loan is? And then—

Speaker 2: Sure. So a recourse loan means that they are going to be personally guaranteeing the loan. So even though we are lending to an LLC, we are requiring that the personal assets of the equity members of that LLC are basically signing on the dotted line that if something goes wrong, and the loan isn’t able to be fully repaid by the collateral, which is the property, that we have the ability to legally go after the assets to be made whole. And then I would say kind of the quirky thing that I do, since I have so much faith in people—or lack of faith in people, depending on how you look at it—is I will actually ask for three professional references. I want to know three people in the market that you have done business with. I don’t care if it’s a broker you bought a property from or listed a property with. I’m going to call those people and I’m going to talk to those people. And then when I’m talking to those people, I’m actually going to ask them for another professional reference. I’m going to say, hey, do you know anybody else that’s done deals with Borrower Bob? And they’ll go, yeah, you know what, Sam did a deal with him two years ago. And then I’m going to call Sam. And that secondary ring is where you get the real information, because that’s not the borrower-supplied references, if you get what I’m saying. So I’m going to dive into that way more than I’m going to dive into the property. It’s not to say I’m ignoring the property, but most of my focus is going to be on the individual, and do I have faith that they’re going to take accountability and do everything they can in their power to make me whole?

Speaker 3: Sounds very similar to good tenant screening.

Speaker 2: Absolutely. Very similar.

Speaker 1: Yeah, I am going to say anytime somebody gives you references, call all the references. I was hiring a contractor, and I called a reference, and they’re like, they’re great. And I called the next reference, and they’re like, I have no idea why they put my name on the list. I am currently in a lawsuit against them because they did such a bad job. And I was like, oh, well, I’m sure glad they put you on the reference list.

Speaker 2: Yeah.

Speaker 1: Call all the references. You’re probably not ever going to find the guy I talked to, but you might.

Speaker 3: Alex, last question before we hear Beth’s typical deal. What is the typical volume that you do for a loan? How big are these loans, these projects?

Speaker 2: Most of what I do is going to be in the second lien position. So they’re anywhere between about $20,000 and about $50,000. And it gets turned over two to three times a year, just depending on what projects are going on and what investors that I choose to work with are. Some of them have actually moved out of the market because they’re in the military as well. So they have moved on to other markets that I do not want to lend in.

Speaker 3: Beth, can we hear about a vanilla deal for Beth and your philosophy? It sounds like you’re a horse bettor. You bet on horses.

Speaker 4: I bet on the horse because people disappoint me. Properties don’t. I said that on just about every call and podcast. But the reality is, equity buffer in my world protects all. And when you have equity in a property, no matter how trustworthy that borrower is, sometimes there are circumstances and variables that are outside of their control. I don’t think anybody, really, holding a property or a project in the middle of March 2020, really expected a shelter-in-place. I certainly didn’t. And so when you bet on the horse and not necessarily always on the jockey, you have that level of protection in the value of the property to protect you in case things go sideways, even when you’re not working with a bad player. So that’s the approach that I take. And again, I do this at scale. So the average loan size in my market is about $350,000 to $375,000 in my world, and that’s a blended mix of first and second liens. And so if you want to scale your private lending business beyond just your own capital, you have to kind of streamline your underwriting and choose where you’re going to place a heavier emphasis. And that’s not to say that we don’t underwrite the borrower—we absolutely do. But when you are dealing with multiple loans and inquiries a day, and I have a team now, I really need to streamline it to be a little bit more focused on a hard asset as opposed to the borrower themselves.

Speaker 1: Okay. You have both said that you lend in second position as well as first position. I’ve never done a second-position lien. I like first position. You mentioned high equity when you were talking about a particular instance where it made sense. What sort of equity are we talking about? I want our listeners to know that the second position is a bit more risky, so you need more of a buffer. If there’s no equity in there, or there’s barely any equity, you should not be in the second position, in my opinion. I’m not a risk-taker.

Speaker 4: Well, absolutely. I mean, I think second positions got a really bad rap in 2008 because there was a lot of mortgage fraud going on, right? And so second lienholders weren’t necessarily being notified when there were modifications of first lien positions. But the reality is, second lien positions, if done carefully and within the confines of what is allowable in your state, they can be an effective private money loan. And so for us, no matter what loan position we’re in, we like to be around 65 to 70% loan-to-value. That means 30% of the value of that property is an equity buffer to protect me in case things go sideways. So if it goes into default and I get default interest, or if there are late fees, or if I have to engage a legal attorney to help get them to perform, that 30% will help cover those expenses or those costs, right? But I think that sometimes people assume that second lien positions are the same thing as gap funding—in other words, I need a down payment and rehab money, so I’m going to go into a second lien position behind a hard money loan that the investor got from a local hard money lender. And if it’s done behind a conventional loan, like we do, because we don’t want some borrowers to have to rewrite their conventional 30-year fixed first-position loan at 2%, 2.5%—I don’t blame them, as an investor I wouldn’t want to do that either—and so there are some safeguards that you can put in place in terms of lower loan-to-value, putting it behind a conventional loan that is 30 years and doesn’t have quite the default penalties associated with a hard money loan that’s a short-term loan, then you can sort of manage the risk a little bit better. But not all second lien positions are created equally. So there is a way to do it effectively and safely, but just not do gap funding at 100% loan-to-purchase price or 100% loan-to-value.

Speaker 3: I love that. You’re saying, I’m going to be second position, and the reason why that’s such a good move in today’s market is because I don’t want to refinance my first position, just like you said. And everyone has all this equity because property values have shot up so high in the last couple of years. So this is a great source of capital. This is solving a number of problems.

Speaker 4: Oh, it’s created a great amount of deal flow for us, because I’ve got a lot of buy-and-hold investors who are sitting on a ton of equity, but maybe they’re a self-employed investor and they can’t obtain a HELOC. So what’s the next best option? Well, I’m going to be a private money loan for them in second position—they’ve got several hundred thousand dollars in equity in there—and I’ll cross-collateralize it with a new purchase so that they can use that equity essentially as a down payment replacement or supplement. And then all of a sudden I’ve got the ability to fund up to 100% loan-to-purchase price for this new property that they want to BRRRR or that they want to turn into a rental. And then when they go to do their takeout financing, now all of a sudden they have a higher loan amount, and so they can actually do a rate-and-term refinance at 75% loan-to-value, or maybe even 80%, depending on the lender, and their fees are lower because they’re not actually pulling cash out. So for us, it’s been an extremely effective strategy as a lender, but it’s also a great opportunity for a borrower to get what they need across the finish line with less money out of pocket and to reduce their refinancing costs afterwards, when they go to put it into permanent financing.

Speaker 3: Okay, we’ve just created—we just solved a trillion-dollar problem here. That’s fantastic. I love that. That’s it, right? I mean, right now it is 2022, and traditional investment property lines of credit have just dried up. You aren’t getting a line of credit at 2%, 3%, 4%, or 5% anymore on your investment properties. And there is nobody who offers it. I’ve put the call out several times on this podcast: anybody has an investment property HELOC company, let me know. This is the solution—private money lenders for this type of stuff. And there’s a good solution on both sides of that, right? If you’re an investor and you actually have a good use for those proceeds, there are private lenders out there who may be willing to lend to you at a 60%, 70% LTV, depending probably on the risk profile, at 8% interest with a point or two in there. So this is not going to be free money, but you have a chance to use that money and put it to work on that next project, if that’s something that you’re interested in doing. So there’s a huge solution here that’s been a missing link for me for a long time in this space.

Speaker 2: I don’t—

Speaker 3: I honestly don’t know which side of that I’d rather be on—the lending, or getting that line of credit on my properties.

Speaker 4: Well, it doesn’t have to be a choice. We do both. My husband and I do the same thing. Sometimes we’ll cross-collateralize our investment properties to take down new rentals, and it’s very strategic in nature. There’s a balancing act between borrowing levered capital and paying costs on that, but also keeping some capital reserves and some cash reserves in hand too. But at the same time, if I’m going to refinance out after I have done my value-add, then it’s going to be less expensive for me, and I can actually refinance it at a higher loan-to-value—well, that’s kind of worth it right there. And then I also don’t have to get an appraisal the first time around with my private money loan. I can defer that and do my appraisal when I’m doing my takeout financing. And that’s really meant for conventional—commercial doesn’t really have those kind of stipulations, but there is a big significant difference when you’re doing a rate-and-term refinance conventionally versus a cash-out refinance. Investors appreciate the ability of not having to rewrite their low-interest first lien position, which is what hard money lenders are going to require you to do.

Speaker 3: Okay, so before we get into the next thing—how do I go about doing this, right, in a practical way—but before I do that, I want to ask one more question structurally about liquidity. So I put this money out, I lend it out, and I now have a project or a use for that. Is there a secondary market for these notes that I can sell? Is there someplace, is there someone—can I have this mortgage out on this second lien position, and I need the money quickly? Can I sell it to, say, Beth, and get out of that mortgage and get my money back in some way?

Speaker 2: So in that case, it’s going to be the perpetual “it depends,” because, you know, it’s very popular in real estate—there are note buyers. There’s even people in BiggerPockets that talk about note buying, and they potentially would be someone interested in buying the note. But what you’re going to run into is they’re probably not going to want to pay 100% of the unpaid principal balance. So you may end up taking a bit of a haircut. There are actual companies out there, loan aggregators, that are basically purchasing these loans in their own secondary market. But the downside of those is they are going to want something that’s traditionally very conforming. They’re going to want a full appraisal. They’re going to want a credit check. They’re going to want to see the entire underwriting file. So if you are someone who thinks, like, oh, I can lend this out for six months, but I’m going to actually need it back in two or three, and I can just sell the loan and get recapitalized—that is true, but you might not get the entire principal amount back.

Speaker 3: Okay, I lied, I have one more question on this. And this is kind of separate—states. I imagine that, Alex, you’re in Virginia, is that correct?

Speaker 2: Yes.

Speaker 3: And Beth, you’re in Washington State, right? I’d imagine that there’s a significant difference in foreclosure potential between those two states, and that there’s going to be even more dramatic differences between a state like Texas and California. How does that factor into interest, points, risk tolerance—those types of things—for a lender like yourselves? Maybe we can start with Alex.

Speaker 2: It really depends on the usury laws, because in some states, default interest might not be possible. They might have a very low ceiling for what that upper interest rate and fees can be. So that part, as long as you’re trying to price in, hey, if this goes to foreclosure, it’s going to be about $2,400 in legal fees, it’s going to be maybe 6 months of waiting until I can get through the court system. And again, everybody kind of goes for that default nuclear option first, when in actuality there’s lots of little stages you can potentially help along, modify a loan, open communication. So it’s rare for it to kind of get to that point, that nuclear option where we must foreclose. It does happen. But like Beth mentioned earlier, if you have that equity buffer built in, if it takes a year to foreclose on something, but you have 30% equity buffer and the property has been appreciating just with the whole market as a whole, that’s just building in your favor. But yeah, you have to build in and at least have some sort of knowledge on what the timeline is, what those upper limits are for usury, for interest rate, any sorts of fees, anything like that. You can kind of work your way into it backwards and go, what LTV am I comfortable with? Knowing I have potentially X amount of months of default interest and X amount in legal fees coming my way.

Speaker 1: Okay, Alex, let’s get out of the hypothetical and jump into reality. How are you finding these deals? How is somebody listening to this show going to be able to find deals?

Speaker 2: This is probably the easiest part, and it’s probably one of the reasons why I love lending. Everybody’s first question is, how am I going to find potential borrowers? And I’m like, all you got to do is stand in the middle of a REIA meeting and say you have capital. That’s literally all it takes. You will become the most popular person in a room within seconds. But the real problem is how do we kind of funnel down to the person or people that are going to be our ideal borrower? So normally the first thing I tell people, before you stand up on your chair in the middle of a REIA meeting and say you have capital, get very, very clear on what you are willing to lend on, and just a good rough guideline of what you’re willing to lend under what conditions. So for example, if you stand up in the middle of this REIA meeting, it’s a local REIA, they might pitch anything from a horse farm to an apartment development to a trailer park to a 3/2 that needs to be updated from the 1990s. Especially as a beginning real estate investor, that’s very hard to kind of fit and parcel out, like which one’s the best deal for me to fund, because they’re all so different, versus if you stand up and say, hey, I’m going to lend on single-family fix and flips, 3 bedrooms, 2 bathrooms. They’re going to be within about 10% of the median home price for my area. I want them roughly between this age and this age. And it sounds kind of weird to kind of narrow it down that much because they’ll be like, nobody’s going to bring me a deal. I guarantee you, as long as it’s appropriate for the area, somebody’s going to bring that deal to you. So as long as you have a pretty good picture— and that’s even something for the active investors: if you find a private lender in your network, don’t ask them about the rate and terms. Please don’t do that. Ask them what are they willing to lend on. Because saying something like that, you can start procuring your own private lenders instead of the general question: hey, do you want to invest in real estate with me? Well, that could be an elephant farm in Texas, or that could be a condominium complex in Florida. Versus the conversation of, hey, I’m buying 3/2s in this particular city, in this particular state, and I’m going to turn around, fix them up, and then sell them to families. Is that something you’d be interested in lending on? And that’s 2 completely, totally different conversations. So that’s what I would say: finding is the easy part. Kind of chiseling it down to the appropriate person is going to come from establishing what your loan criteria and standards are going to be.

Speaker 3: But let’s pretend that we’re a complete novice in this. And I hear you, I go to the REIA meeting and say I have capital. And then I’m flooded with people who— I cannot, you know— are there other tips or tactics for literal sourcing there? Because I’m sure it is as easy as you say. But are there other things I can do to prepare myself mentally to go out and find these potential offerings?

Speaker 2: I would say, realistically— it’s gonna sound kind of strange— figure out what the lending criteria are for maybe some hard money lenders in your area. And there’s a reason they have those criteria, and there’s a reason it’s pretty uniform across the entire country. Up to 60-65% loan-to-value, they’re going to do, you know, 100% of purchase price or 90% of purchase price plus some renovations. If you can kind of see what your lending market as a whole is doing, then you could either position yourself competitively and say, look, I will go a little bit above that, but under this guideline. I will do a second in a very specific box, those types of things. The other thing I normally recommend for brand new lenders is do not start with a brand new real estate investor, because then you end up with the blind leading the blind. So if you have someone in your market that is a very avid fix-and-flipper, they’re very well known, or they’re a landlord that has lots and lots of units— even if you’re a brand new lender, they will, at least should, be imparting some of their knowledge and experience and saying, look, I’ve done 100 of these properties. They can have some sort of sleep-at-night saying: their borrower’s very, very well connected in the real estate community, their borrower has borrowed money before successfully and repaid it because they still own property, and their borrower has a ton of experience doing that particular business model. So I would almost kind of say, if you’re a brand new lender, look for a more experienced borrower. Yeah, you might get lower rates, but you’re not going to be 2 new people doing this transaction together and nobody knows what’s going on.

Speaker 1: I’m so glad you said that, because that was going to be a question of mine. And I would love to be able to take a chance on somebody, but not when it’s your money and you have the opportunity to lose all of it. Don’t lend money to somebody that you’re not willing to completely lose in the first transaction. But you can mitigate a lot of your issues by just doing your homework.

Speaker 3: You mentioned a great point here: hard money lending and private money lending. These terms are used interchangeably. In your book you have a great breakdown between the two of those. But could you provide that at a high level here for folks who maybe don’t really understand the distinctions?

Speaker 2: So what we are calling private money lending is we are lending capital that is secured against real estate, and that capital is capital we somehow directly control. So it’s our capital from our actual bank accounts, retirement account, whatever it happens to be. Hard money lenders are going to fall more into that sort of institutional-lender feel. They’re going to have normally very formalized application processes, rates and terms. You have to make sure you check all the boxes. You have to have above a 680 credit score. You have to have 6 months of PITI in the bank, or else they won’t talk to you, because the capital that they’re lending out actually comes with strings attached. They have a business warehouse line of credit from a bank. Maybe they have a fund, and so they have passive investors that they’re obligated to. All those things come with strings attached, like: we will give you this money for you to lend out, but you have to stick within this lending criteria. Whereas when you’re talking to a private lender, like I mentioned earlier, we have the ability to just kind of throw the criteria out the window if we really wanted to. We can make it within the confines of the usury laws. We can make it pretty much anything we want, as long as it works for us as the lender, works for them as the borrower, because we are trying to set up a situation where it’s a win-win, because we are pretty much reliant on each other. The reason I didn’t go out and buy this 3/2 ranch is because I don’t want to go out and buy this 3/2 ranch. I would rather remain passive. So it’s in my best interest to make sure that my borrower performs, and it’s in their best interest to perform because they want to keep their property. So you’re forming this kind of symbiotic relationship, whereas anybody who’s trying to get a hard money loan— not that I’m trying to besmirch them, they have a place in the market— but it’s just a very different experience from a borrower’s perspective, where it’s very transactional in the hard money loan sense, and it’s very relationship-based in the private lending sense.

Speaker 3: Could I put it simply that, Alex, you are a private money lender, and Beth, you are more of a hard money lender at this point? Is that one way to think about this?

Speaker 4: I liken myself to a private money matchmaker. In the true sense of the word, I guess you could consider me a broker, a private money broker, because I’m placing capital directly into private money loans. Again, to what Alex said, I don’t have any institutional capital requirements. And so we have a lot of leeway and some flexibility that a lot of hard money lenders don’t. But yes, I place some of my own capital, but a fair amount of my business is placing other people’s capital. But beyond being just a broker, we take care of our clients beyond the loan just originating— which most brokers, they’ll put a fee on there, and then the loan closes, and then they disappear and try to go originate more deals. For me, I need to take care of every single capital partner that’s within my circle, because it’s all been strictly word of mouth for them coming into our group. So I don’t just lose professional reputation if something goes sideways, I lose the seat at the dinner table, and I don’t want that to happen. So, you know, yes, I’m considered a broker, but really, for all intents and purposes, I’d like to call myself a private money matchmaker, because we provide full concierge service to both sides of the house, to our borrower and to our lender.

Speaker 1: Okay, so Beth, I have found somebody that I think I want to lend to. How am I going to take this information and actually put it into practice?

Speaker 4: Well, for starters, you’re going to have to start doing some conversations with the borrower. You want to make sure that you have a full understanding of the scope of work, what their intentions are, what their experience is. And you’re going to capture a lot of this information through phone calls, emails, in-person conversations if you can. I often like to try and meet some of our borrowers at the prospective project or property that they’re trying to acquire, and that way I get a better sense of what they’re trying to accomplish. And moreover, I also get a sense of maybe some of their nonverbal cues too, right? So a lot of things can be masked in an email to you, or in presenting it, like a presentation— a lot of investors like to provide an overview of themselves and the project. And then you’re going to get to the point of coming to some sort of agreement in rates and terms with the borrower, like what will work for them, what will work for you. And then when you have some consensus on that, then you’re going to go and vet it out. So I’d want to look at documentation like a purchase and sale agreement. I’d want to look at maybe a bank statement showing their proof of funds for their down payment. I might want to look at a schedule of real estate if they hold real estate, or some of their project experience if they’re an experienced flipper. And maybe I’ll take those addresses and punch them into a website and see if they have any tax liens, and just validate that they’re actually the vested owner of that property, or that they were the vested owner and seller of a property they flipped. So there’s going to be a lot of validation of some of these conversations that you have in place. And so there’s a fair amount of legwork that’s done before the loan gets funded. So it’s not 100% passive right at the onset, but once you’re able to get to funding, that’s when it becomes mailbox money for you.

Speaker 1: How long would you say typically elapses between the first time you meet somebody and the time you fund their deal? Because it sounds like you’re taking time to get to know them, which I’m advocating for. I’m not trying to say rush through that part. But if somebody comes up to you and they’re like, hey, I need money tomorrow— it’s, you know, when you’re a landlord and somebody’s like, I need to move in tomorrow, that’s a super red flag. Why do you need to move in tomorrow? Why didn’t you make plans ahead of time? Like, when somebody needs funding right away, I would think that that’s a red flag. Why? What happened?

Speaker 3: I had a tenant come in and say, I’m being evicted, and so I need to— I will need to move in immediately. In one of the applications.

Speaker 4: We get those too, Scott. It’s like, my loan is in default, I need to refinance immediately. And you’re like, okay, thanks for telling me that. But to answer your question, Mindy, there’s really a balancing act, because people need to use private capital or hard money because they want to be able to create a favorable offer. So oftentimes the pitch is, I’m going to pay extra in interest because I want to be able to offer a quick close to the seller. And so there needs to be some sense of urgency to act quickly, but I also can’t necessarily fund a deal tomorrow, because I’m still required to— well, in my world I’m required, some lenders may not be, but I prescribe getting a title commitment to make sure title is clear, ordering a lender’s policy to protect your loan from a title insurance perspective. And that takes time, and that requires resources outside of my control. So there’s a fair amount of time involved, maybe a couple of days. Sometimes I get title turned around in 24 hours in metropolitan markets, but sometimes it can take up to a week or longer. And so there has to be some sort of balance between speed and being able to do your due diligence on the loan too.

Speaker 3: Does your book contain a checklist for these items, like these policies that protect title insurance and hazard insurance and those types of things that protect you as a lender?

Speaker 4: It does. We have a whole section on underwriting. In the conventional lending world, we call it loan processing and loan underwriting. When you’re a private lender, you basically do everything yourself with the help of a virtual team. So we created a step that’s called, I think, “collecting conditions,” so that you’re collecting all of the documents that you need, both some from the borrower, some from the title company. Maybe you’re collecting some forms that you want them to fill out, like Alex wants the letters of reference and things of that nature, or a project pro forma. In that section in our book, we create a list of a number of documents you can collect, but with the caveat that you really need to be able to collect and review documents quickly, and you need to have the acumen to inspect what it is that you’re collecting. So I’m not necessarily going to order a full-on credit report unless I really know how to evaluate that and understand what that credit risk might mean to me. So I don’t necessarily prescribe getting a credit report, but other lenders may choose to collect that, and they understand what they’re evaluating because they’re maybe a landlord and they’re used to doing those kinds of credit and background checks. So we do list out a number of different documents that you’d want to collect to substantiate the borrower, to substantiate the project, to substantiate the property itself and the valuation of it. But we want to make sure that there’s really some critical thinking around what it is that you’re collecting and how you’re actually going to evaluate that, and how that might impact your overall approval or denial of a loan.

Speaker 3: So significant time and money goes into getting these documents, in some cases purchasing policies like title insurance and those types of things. I assume that all of that is charged to the borrower in some capacity as part of this. Is that right?

Speaker 4: I think for Alex, for both of us, it is. Yes.

Speaker 2: Yes. I mean, it’s really funny that people that are wanting to lend, it seems like their big hangup is, I don’t want to pay $1,000 to an attorney to draw up documents. And I’m like, but you’re willing to give someone $100,000, and the only thing you’re getting back from that transaction is legal documents. And you’re okay with, like, a free template you found online? Like, that’s where your line is when they don’t even realize that is a cost that you can very easily pass on to the borrower. So you’re not even paying for it. Private lending is one of the few ways that I’ve ever found where someone else pays for my protection of my capital. I mean, where else are you going to find that? The borrower pays for a lender’s title policy. The borrower’s paying for hazard insurance. The borrower’s paying for flood insurance if required. And the borrower’s paying for my legal docs to be prepared. It just really boggles my mind whenever new lenders come to it and they’re like, why can’t I just use a template online and get it free and get it done? I’m like, well, here’s why. You don’t want to do that. And it’s not a cost to you as a lender.

Speaker 3: Okay, so this is awesome. So the process seems— you go into the middle of the REIA and you say, I’ve got money, and then people come back to you. They then pay for all of the fees associated with underwriting that mortgage, pay you a boatload of interest, and you’ve got first or second position notes there. So that’s all great. What happens if things go south and they stop making payments? How does that work?

Speaker 2: That can depend on— yeah, I would say Beth’s got a ton of experience in this. You got to tell them about the story where the default actually ended up making more money, because I think that story is very poignant for active investors to hear, and for people that want to get into lending to hear. Like, default, oh my God, the loan is defaulting, this is a huge problem. When in actuality, as a lender, it could be a money-making opportunity for you.

Speaker 4: It absolutely is. I mean, to Alex’s point, the nuclear option really is the last resort. So when a loan goes into default, there’s so many different ways to cure it. And of course, it depends on each individual state, so I can only use mine as an example. In Washington State, if a loan goes into default by nonpayment, I should say, right? Because there’s other ways for a loan to go into default. But if they were to go into default for nonpayment, on day 31 is the official day that I could file what is called a notice of default. And it doesn’t get publicly recorded, but it basically puts the borrower on notice that they have 30 days to cure that loan and bring it current, or you will move forward with the next step. If they cure it within that 30 days, your loan is current and it’s all fine. If they don’t cure it, then you can move on to the next stage, which is called filing a notice of trustee sale. That’s a fancy way of saying a foreclosure. And in my world in Washington, you have to set an auction date no less than 120 days out. So really, from end to end, you’re looking at, at best, about a 5-month process. Things never go smoothly, as you know, and so I’ve had some of these things drag out probably close to 18 months in certain circumstances. Fortunately, I have less than a 4% default rate, which is fantastic. I can count on one hand how many times I’ve actually had to take a loan all the way to auction. But to Alex’s point, even if it does go to auction, if you do have a healthy equity buffer, it can work out favorably for the lender. So I actually just wrote a blog for BiggerPockets entitled “Loans Gone Wild: What Happens When a Borrower Defaults?” And we really felt it was important to highlight a real case where a borrower did default. I had to work with my lender to start the foreclosure process, but in the end, it really worked out well in his favor, and it just took a little bit of time and effort. So what really happened was that the borrower defaulted within a couple of months. So we started with the notice of default. We had to move on to a notice of trustee sale. She tried to stifle our progress in moving forward with this trustee sale by filing bankruptcy. She’s required by law, after she files, to follow up with some specific documentation. And each time she filed—once under her own Social and the second time under a false Social—she never followed up with the appropriate documentation, and so that BK was dismissed. So that put a few speed bumps in there, but then it finally went to auction. And at that point, my lender placed a bid for the minimum amount that he would be willing to take the property for. And that amount effectively is his principal capital investment, any interest and default interest still owed to him, including late fees, and then of course the legal fees that he had collected and paid for upfront as well. So he put a minimum bid in, and he didn’t even have to be at the actual auction to be able to put in a bid. And then, for some random reason, no other person bid on that property, which is a great single-family property—actually had 2 buildings on it, was right on the river, no flood issues with it, and it was stabilized too. So he ended up taking the property in his name. Now, that’s the first time that’s ever happened with us, but he was able to take the property. And because we have a wide network of borrowers, we found a couple investors that were willing to pay an assignment fee just to take that property off his hands right away. So he had a lot of options, because at this point he could have made a, you know, a 5-figure assignment fee and still walked away with his full principal, interest, and legal fees recouped from that as well. And so, because he was a seasoned investor—he is a passive buy-and-hold investor with some small multifamilies around the Seattle area, and he’s retired, he achieved FIRE quite early, so he’s in his mid-50s—he was bored. He’s like, “I can only play so much tennis.” So he’s actually going to flip this property himself and make some more money on it. And so he did. And this was right in the middle of COVID. He hired his general contractor, he flipped it, he put it on the market. It went pending within, you know—this was last spring—so it stayed on the market a little bit longer just because he had some GC delays, but he ended up having a 6-figure return on there. His cash-on-cash was stellar. And so this is a perfect example of when, you know, we think default is just like the nasty D word, but at the end of the day, he really ended up looking real solid on paper with this investment. And it took about, I would say, about 16 months of his time from the time that he originated the loan until he was paid back through the proceeds of his sale.

Speaker 3: Betting on the horse.

Speaker 4: Betting on the horse, always.

Speaker 3: All right, so I think that’s super helpful. And I think that Washington example is super powerful, because Washington State is clearly one of these states where it’s going to be harder to foreclose on a property and slower than many other states in the South and Southeast, for example, you’d imagine. Is that right? I’m guessing, I’m making an assumption there.

Speaker 4: Well, I would say that we’re probably better than California, but we’re not as good as Texas and some of the states in the South. Yes, it is very, very state by state. Of course, the coastal states are probably going to be a little bit lengthier transactions—up in the Northeast too, I believe. And that’s why it’s important to consult with a real estate attorney that deals both in private money as well as foreclosure. You’re probably going to have to hit up a couple of different attorneys for that, because most of the time they don’t practice in both.

Speaker 1: Okay, so we talked about red flags. Alex, since you’re lending to the person as much as the deal, “I need money right away” is a red flag. What are some other red flags to watch out for? I mean, besides the “oh, I’m in default.”

Speaker 3: Like the obvious things—”didn’t work out with my last lender,” so yeah.

Speaker 4: Well, it wasn’t even in default. They said, “I’m in the middle of negotiating a reduction of principal with my second HELOC, so it’s actually going to be this kind of payoff when we go to fund my loan.” And you’re just laughing, you’re like, “Okay, so you shortchanged your creditor, but you want me to fund a deal for you?”

Speaker 2: Yeah.

Speaker 1: So there’s one red flag: when they don’t have enough money to pay their current creditors. What are some others we could talk about?

Speaker 2: I would say for me, I’m very much about accountability. So if I’m listening to some of the conversations, I’ll ask very open-ended questions. So, “Tell me about the last couple deals you’ve done. How did they go? What happened?” And if I constantly hear, you know, “the contractor ran off with half the deposit,” “my partner wouldn’t answer my emails”—everything is someone else’s fault—to me, that is not my borrower. I want a borrower that’s going to come and say, instead of saying “the contractor ran off with half my deposit,” they’re going to say, “I hired the wrong contractor,” or “my partner and I could not agree on this particular aspect of the deal, and that’s why we are not moving forward with another property. We just learned we don’t work well together in that capacity.” I want to hear some self-accountability, because ultimately, that’s what, in my mind, is very important with executing a business plan for a property. Because it’s very easy to just stand on the front lawn and point at all the contractors doing everything wrong, when the person that made the contractors be there is standing in the front lawn yelling at the contractors. So I’m very much about self-accountability. If I see a high degree of that, I’m good. But if I hear a lot of blaming, not so good. Being from Louisiana, there’s a thing called the Cajun Underground, and it might feel like everybody’s involved in real estate, but the circle is actually really small. So one of the reasons I do those professional phone calls is because real estate is a small circle. If somebody has burned someone else in the circle in your market—because most private lenders are hyperlocal, they lend in their immediate area—like, somebody in there is going to know that, in the Cajun Underground, and somebody is going to tell what actually happened. So that’s why I say, if you’re a private lender and you’re kind of worried about a borrower, go find one of the more popular people in the room. Because if you stand up as the squeaky wheel and say, “Hey, Mr. Dude has not been paying me for the last 6 months,” in the middle of a REIA meeting, I guarantee you he’s going to find a way to get you paid off real quick, because you need to be quiet.

Speaker 3: Another good tip there is probably go on to the BiggerPockets forums and find the most active power users, the people who have posted thousands of times in your local area, because they’re out there hundreds of thousands of times. And those people will potentially be, at least, entry points into that Cajun Underground. If you’re having trouble finding that in the physical world, the digital BiggerPockets world might be helpful as a starting point there. What about you, Beth? Any red flags?

Speaker 4: Yeah, I mean, aside from some of the common, you know, “oops, I said this too much” or whatever, I would say that there’s a lot of context that’s provided that’s unspoken. For example, one of the things that I was just talking with my team about is that we often have borrowers that are really engaged upfront and they approve terms, and then, as soon as you need to get documents back, they go dark. And then they come back and they say, “Okay, we’re sorry about that,” and this and that, and they send you maybe a couple documents, and then they go dark again for another week. And you’re trying to understand if they’re really interested, if they’re really engaged. If it’s that difficult to get them to meet you halfway so you can give them money, only imagine how much harder it is to collect on that after it’s funded. So the ones that kind of come in and out of your frame of consciousness are the ones that we tend to not want to work with. And then, on the flip side, if they’re lighting up my phone and my email at 10 o’clock at night, and calling the next day and asking—there’s a certain level of responsiveness that almost reeks of desperation, meaning they may be in some really turbulent times, or they’re desperate for that money because they’re in hot water. And so that’s another sign that we typically tend to look for. You want someone that’s really communicative, but you don’t want them dipping out all the time and just excusing it because they’re too busy. And you don’t want them lighting your phone up all the time in the middle of the night, because you have a life, and, you know, I already have kids, I don’t need to take care of them too. So trying to figure out these issues upfront, before you fund, is very important, because you don’t want to deal with it after it closes.

Speaker 3: So these are very qualitative things that you guys are highlighting here. I presume that’s because your quantitative—the hard yes, check the boxes—are just defined in a policy upfront. Outside of that, so really much of your time is spent looking for these qualitative things, or much of the skill or the art that goes into this is going to be the qualitative side.

Speaker 4: Oh, absolutely. I mean, to the point that a borrower can actually articulate their project, and then they’re talking about it in terms that are extremely conservative, that show that they have an acumen and a level of experience in these types of projects, or that they’ve done their due diligence, is great. I mean, I have had some borrowers where I’ve asked them for a project pro forma or a rehab budget, and it’s literally written out on the back of a napkin. Or—I mean, it’s happened—I got a business strategy letter scribbled out on a piece of paper, and it wasn’t even, you know, a lined piece of paper, but they just wrote it out on a Post-it note or something of that nature, and then they scanned it in or took a picture of it. And so it kind of shows a level of effort and a level of organization in just coming through for the requirements—the very minimal requirements we have as a private lender—that’s kind of going to showcase how they treat their project, in my opinion. Is it going to be loosey-goosey? Are they really going to be, you know, on it and buttoned up and really thorough, really organized? Or are they going to scribble it out on a Post-it note and think that we’re good and we can move on from there? I don’t really prefer that.

Speaker 1: They’re going to forget stuff, they’re going to go over budget, over their little napkin budget. It sounds like dating, almost, when you’re vetting people. If you wouldn’t date them, don’t lend them money.

Speaker 2: I’m laughing so hard, because I’ve had the opposite happen, where they might not be getting enough information to Beth. I’ve had borrowers—like, I was on vacation with very low cell signal, and they sent me 74 photos and 16 videos to my cell phone. My cell phone spent the entire weekend trying to download stuff, and I was so mad. I was like, “Why? Why would you do this to me?”

Speaker 4: So it’s like a sign of trying too hard, right?

Speaker 2: Right.

Speaker 4: You don’t want a boyfriend that tries too hard and smothers you. You want him to be just right, you know?

Speaker 1: Exactly. Okay, let’s say that I’m interested in being a private money lender, but I am so busy with all the things that life is throwing at me, I don’t have time to do this myself. Beth, you have mentioned a couple of times that you invest other people’s money for them. How do I vet a broker? How do I find a broker? How do I make sure that they’re well-respected and they’re going to be the best option for my money? And, like, give me the overview—how do I find somebody and what I’m expecting from that relationship.

Speaker 3: Mindy, it’s not a broker, it’s a private money matchmaker.

Speaker 1: Private money matchmaker. I’m sorry, I’m sorry.

Speaker 4: Thank you, Scott.

Speaker 1: Everybody’s a broker—private money matchmaker. Where do I find one?

Speaker 4: Well, you can find them in every market. Fortunately for me, we’ve really grown organically. Just a little backdrop on our story—my husband and I, he was my boyfriend at the time, we really started lending out our own—

Speaker 3: He didn’t smother you?

Speaker 4: Oh, my boyfriend didn’t smother me. We started lending out our own money, and then that grew from 2 of our investors. One was a golf buddy of my husband’s, and the other was a school dad. And it just kind of grew from there, because once people hear that you’re passively investing and it’s easy and it’s relatively low risk, and somebody else is doing a lot of the legwork for you, but you get to choose which deal that you like, it kind of grows. So word of mouth is one way—ask around at those REIA meetings, like Alex was saying, you’ll find other private money lenders that are experienced in this and might want to actually lend your money. You can Google—I’ve had people locate us through Google and web searches, “private money lenders,” and see if they do whole trust deeds or private mortgages. There’s kind of 2 schools of thought here. Some do private individual whole notes—that’s what I do, where I individually place the lender in a loan with—they’re individually named on the promissory note, they’re individually named on the deed of trust. So everything goes in their name, and no money is passed through us. It goes strictly through a third-party escrow, and they don’t transfer any money until they’ve had a chance to review and approve the legal documents that have been drafted on their behalf. And then the other part would be like a pooled mortgage fund, which some private lenders do that too. And, in essence, it’s kind of like a syndication, but it’s not private equity, it’s private debt. So you’re taking people’s money and you’re pooling it into this private debt fund, and then you’re originating loans that way. So you can search for “trust deed investments” or “private money lender in my area,” and then you can call down on them, or search for them on their website and ask for references. But really, we’ve grown our circle strictly through word of mouth. So chances are somebody within your network is doing it and might be able to refer somebody, or a business, to you that is doing the exact same thing that I’m doing in my state.

Speaker 3: I was just going to ask, just to be clear, your business, for example, makes money from points on the origination, essentially?

Speaker 4: So my business makes money both on origination points, as well as we do take a small spread on the interest. So if I lend it out at 12%, for example, I might take a quarter percent up to a whole percent off the top and pass through the rest to the investor. And this really helps me cover some of my overhead, because I do have a large team that helps provide, like I said, that full white-glove service from the time that the loan inquiry comes in to the time that the loan is paid off. My team is there to help out every step of the way. So we do take a small interest spread on there as well—that’s called a management fee.

Speaker 2: And the one thing I would add to that, which is something Beth does, is she sends out copies of the loan documents. Obviously they’re redacted, so you can’t identify people or properties. So a potential new investor can actually see the documentation, the legal documentation that’s going to be safeguarding their capital. And they should be able to call up that person and have a conversation, say, “Hey, I don’t know what this paragraph means, why is this in the document?” And if they can’t spend the time or accurately explain that, that might be a red flag too, if you’re looking for someone to broker your capital.

Speaker 4: Yeah, we have a pretty prescribed onboarding process for investors. So once they come to us, of course, they’ve had some sort of referral to us, either through email or on the phone, and then we’ll get on a Zoom call. We want to make sure that we’re a right fit for them. As I mentioned, since we’re in the Seattle market, the average deal size for us is around $350,000 to $400,000. So unfortunately, since the market has appreciated so much over the last 5 to 10 years, we really can’t take smaller amounts of capital. Otherwise, you’ll be sitting on the sidelines waiting for us to find a small loan for you. And really, we’re not going to be able to do that. Loans under like $100,000, even in second position, really don’t help a Washington-based investor in the Seattle market get across the finish line. And so we’ll make sure that we’re a right fit culturally for the investor and that they have enough capital and have enough understanding of how we operate before we move forward. And as Alex mentioned, we give them a prospective investor package with a redacted set of loan docs, but we also give them a 2 to 3 page investor overview that we give them for loans to show them how we package it up. Because it has, you know, a borrower overview, it has a business purpose strategy and an exit strategy defined in there. It also gives some specifications on the property itself. So we’ll give links out to an online valuation report. We use a company called HouseCanary to do that for us. And it helps us pull comps without having to have access to the MLS. We’ll do links out to Zillow and to Redfin just so they can, you know, go online and sniff and smell the property and check it out online and do a little due diligence on it. And so we give them a sample of that so they can see how we present it, and then we get them back on a phone call or a Zoom call or meet them for coffee again, and we talk through any additional questions because invariably it comes back with the what-ifs. What happens when my loan goes into default? We talk about that because it’s really important for our investors to understand what the risks and rewards are before they move forward with the deal, because the last thing I want is for them to not be able to sleep well at night. They come to us to be able to passively invest, and if they’re really concerned about their deal after it funds, then I’ve got some problems, right? And that takes me away from revenue-generating activities. So we go through a really prescribed process, and that even includes afterwards sending them some previously funded deals so that they can evaluate them, you know, from a wide swath of investors. I have some that have really high risk tolerance and they want double-digit returns. I have some that want really lower risk, and so they’ll concede on interest rate a little bit. We want to give them some sample loans that we funded and see where they fall into. So it’s kind of fun because they get to come back and say, “Well, I like this deal and I would take this one, and here’s why, but I don’t like this one that you gave me because I don’t like the location of the property,” or “I don’t like a commercial mixed-use building used as collateral,” something of that nature. Or, “I like this deal, but I think the terms are too long,” or “the loan amount was too high, maybe I would have wanted it a little lower,” or something like that. And so that’s a really iterative process for us to go through so that they can vet us and that we can vet them as well at the same time, and make sure that we’re really submitting deals to them that are going to be a right fit, because we don’t cattle call our loans. That’s a pretty poor customer experience. So we really want to earmark the right kind of loan for that particular individual.

Speaker 3: I love this. I think a clear picture is forming in my head here. If you’re trying to lend $20,000, $50,000, $100,000, in that ballpark, then I really like Alex’s approach here — going into these areas maybe with lower property values where you can really, you know, get to network and be gritty in the area, get to know these people and, you know, find the — what was it, the Cajun Underground?

Speaker 2: Underground, Cajun Underground.

Speaker 3: In these local markets. And if you have a lot more capital, perhaps sitting around your 401(k), and you don’t want to invest all this time trying to find a private money matchmaker or broker, a debt fund like this might be a really good alternative. And either way, you have a really good shot at earning 8 to 14%. There is risk — you can, if property values do decline, we will see some risk in this market — but perhaps less than what you’d see as an equity investor in real estate in a lot of cases. But I think it’s a really interesting asset class that we have not touched on here at BiggerPockets, or on the BiggerPockets Money Podcast, before. And this was absolutely fascinating. So we really appreciate it, guys. Thank you. This was a fantastic show. We’re at 2 hours, but it was all super valuable and we’re very grateful.

Speaker 1: And if you found this episode valuable, we’ve got more. Alex and Beth were on the BiggerPockets Real Estate Podcast discussing a different aspect of this book — how to vet a private money lender. So I think it’s a really good exercise to listen to episode 642 of the Real Estate Podcast if you’re considering doing this, just from a different standpoint — from the investor standpoint — so you know what people are looking for when they’re looking for a private money lender. Also, they’re on the Rookie Podcast, the Real Estate Rookie Podcast, which airs tomorrow. If you’re listening to this episode the day that it comes out, that’s episode 210 of the Real Estate Rookie Podcast. We’ve got a lot of podcasts. They’re all amazing. And on that show, they talk about the five things every borrower should do to expedite their loan closing. This is a way that you can send your lenders or your borrowers to that episode as well to help them help you make money off of them.

Speaker 3: But before we get out of here, Alex, Beth, where can we — can you one more time tell us about the book and where we can find more, learn more about each of you?

Speaker 2: Beth is going to have to tell you the title of the book because it’s 15 words long. But we have an email address that we give out to people. It’s alexandbeth@lendtolive.com. That comes to both of us, so you can reach us. We are both on BiggerPockets. So just search for our name. We’re happy to chat with people on BiggerPockets as well. And then our website is lendtolive.com. And then Beth, I’ll let Beth do her website and her stuff.

Speaker 4: Our book is called Lend to Live: Earn Hassle-Free Passive Income in Real Estate with Private Money Lending. Of course, you can get it on biggerpockets.com. We were just released at the beginning of August on Audible, and it comes out on amazon.com, Barnes & Noble, and a handful of other retailers as well in mid-August. And you can find me on BiggerPockets. You can also find me on Instagram @lendtolive.beth. And I’m also on Facebook as well. My company is Flame Family Lending.

Speaker 3: Awesome. We will link to all of this stuff. And I highly, highly encourage you to go there on the show notes at biggerpockets.com/moneyshow328. There’s a wealth of information. And this show should be the tip of the iceberg in the private lending space for you. The next stop obviously is Lend to Live, the book by Alex and Beth here. And then I think that’s the beginning of the rabbit hole. There’s hundreds of hours of more learning there, but also a large amount of wealth to be harvested and made in this space.

Speaker 1: Alex and Beth, thank you so much for your time today. I’m so excited for this episode. I think that people are going to be inundating you, so clear out your inbox.

Speaker 2: Thank you.

Speaker 4: Thanks for having us.

Speaker 1: We will talk to you soon. Okay. That was Alex and Beth. That was one of my favorite episodes that I think we’ve ever done. This information is so fantastic. I do want to circle back to the very beginning where I said this is going to sound like a scam, but it’s not. I have made a lot of private money loans in my life. I tend to side with Alex, who lends more to the person than the deal. And I will say that I have never had somebody default on my loan. I have never had any negative consequences from making my loans. And I have made 10% and 12% interest when I’m making these loans. It is absolutely a legitimate way to do business. It is absolutely a legitimate way to make money. And if you are at all interested, pick up a copy of this book, because you are going to learn so much. It is like a masterclass on paper.

Speaker 3: Yeah, this is, I think, a special set of information. It’s a perspective changer for me. There’s no way that private money investing is not a part of my future unless interest rates drop back down to zero and the markets flood again with ridiculous amounts of capital in the space. But that’s not going to happen. This is an opportunity area. This is a way to generate serious passive cash flow and income in the form of interest in a way that is hard to get in real estate, as rental property investments today, without going into the short-term space, for example. And we also heard Beth say how she can cash flow her short-term rental without having to have any guests by doing private money lending in this space. So I think it’s a great opportunity and something to seriously consider. And I hope my excitement came through, because I’m thrilled. And I think these two were the perfect pair of perspectives to show that — the jockey and the horse perspective. If you’re like Mindy or Alex, you have to bet on the jockey, right? And if you’re like Beth, who is managing larger pools of capital and doing many more loans, she can’t bet on the jockey — she can’t get to know all these people — she has to bet on the horse instead. It makes perfect sense. Different strokes, different approaches. So I was blown away and will definitely be trying to learn as much as I can from Alex and Beth over the next couple of years.

Speaker 1: I could not have said it better myself. And we ran super long. So Scott, we should get out of here.

Speaker 3: Let’s do it.

Speaker 1: From episode 328 of the BiggerPockets Money Podcast, he is Scott Trench and I am Mindy Jensen saying let’s make lots of money.