Becoming a Private Lender

Today I want to talk about how to be a successful private lender. Many people think lending isn’t a great idea because of the amount of foreclosures going on right now. My response to this is that bad lending is a bad idea in any market- that’s what got people into this mess in the first place.

I know guys who were getting 110% loans. They would get money to buy the house, money for closing costs, and even some money for rehab. That all sounded great until the cookies started to crumble.

As a successful lender, I always recommend never lending more than 70% of the value of the property. That way you’ll have 30% in equity to work with. 7-10% return on investment always sounds nice until the payments stop coming. The result of this is that you’ll have to foreclose on the person and end up with a property- what banks call REO’s (or real estate owned).

When this happens to banks they don’t want the properties- they’re not real estate investors. They want their payment. Most private lenders feel the same way.

Private Lending Guidelines

It’s because of this potential outcome that you should never loan money for a deal if you don’t like the idea of owning it. If you’re prepared for this possibility and are ok with this outcome you won’t be so freaked out if that happens. As a matter of fact I have some deals where I think it would be kind of cool if I ended up with the property because it’s such a great house.

The secret is writing a good loan. Make sure you have a qualified investor- someone with experience.

Last week I met a guy in his 20′s who said he’d met a doctor who was willing to put up $1,000,000 up for him to invest with so he was looking for his first deal. I just thought how did you meet a doctor who was willing to give you a million dollars for your first investment? That’s great for the kid, but what was that doctor thinking?

Experience

When you’re a private lender you want to know how many deals the borrower has done. Associate yourself with successful people. I have a great team of successful people around me- attorneys, title companies- and you need to think that way too.

So again line yourself up with great investors and make sure the property isn’t one that you would mine owning in a worst case scenario. Also make sure your not lending above 70% of the homes value.

Vacancies

Today I want to talk about the big four letter word- fear. Ever since I started investing in real estate my friends have asked me what happens if everyone moves out? Even if this happens all you have to do is do a make ready, advertise the property, get a new tenant, and you are right back at it.

Sure it will happen. People do move. But it should be part of your expectations. What gets people upset is disappointment- but if you already expect it it won’t be a big deal when it happens.

Sometimes it’s a good thing when people move out- like if they’re not paying or they’re bad tenants. Then you can use it as an opportunity to move a good tenant in.

Evictions

But what do you do if someone isn’t paying you and they don’t want to move? Sure it’s not the ideal scenario, but it happens. If this does happen all you need is a paper called a petition for eviction. Its actually a really simple process. All you have to do is fill out the paper and take it to the Justice of the Peace and fill out some more paperwork there to evict them. There’s plenty of videos that go into detail about how to evict someone. But its really easy if you follow all the steps- you take them to court and the judge gives them a date to move out. If they still don’t move out you can request to have constables come and get them out. Once all their stuff is out you change the locks and you’ll be done in about thirty days.

That might sound like a long time but it’s really not compared to other states. There are also ways you can prevent this by taking the time to screen your tenants. Make sure they are employed, check to see if they’ve ever had another eviction, and call their current landlord to see why they’re moving. But know that even if you screen a few people are going to get past you.

What happens more than renting to bad tenants is that circumstances change- people will lose jobs or have a death in the family. It’s no big deal just move on and make sure you don’t give people too much time. You don’t want to be sitting for 3 months and wishing you had taken action before.

Cash Flow

If you’re thinking about buying apartment complexes, I recommend focusing on class C and D properties- the complexes in lower income, bread and butter neighborhoods. On these you’ll typically get $100 per unit in positive cash flow. For example, if you had a 10 plex that would be $1,000 a month in positive cash flow.

To calculate this you start with your gross income, then subtract your operating expenses for your NOI or net operating income. From that you pay your debt service, and are left with your profit.

This is a great rule of thumb but it doesn’t always work. Class A properties are the nicer ones- the ones with swimming pools and sports centers. But as they get older, and newer and nicer ones are built down the street, they become class B.

Communities

I don’t really like investing in those complexes. I like to find older properties that are more distressed, then fix them up. I like to tell my kids that we transform communities- we take run down properties and make safe, clean homes for people to live in. I take a lot of pride in creating communities for people, and I feel like for that I’m rewarded.

And there are some headaches- sometimes you have to deal with demanding tenants. But if you’re buying apartment buildings, most of the time you can get a large enough profit margin in there to hire a manager.

Houses

So we already talked about what kind of cash flow you should expect from apartment buildings- $100 per door. But what about houses? Right now is a great time to buy houses, and they can make you more cash flow than an apartment. You can easily get about $200 per unit. However, even though this appears to be “twice as much cash flow,” it’s really not as efficient as owning apartment buildings in the long run.

I have a 12 unit apartment building, but it would have been a hassle to take on 12 mortgages, deals, and closings. One complex, and one closing is a lot easier to take care of.

1031 Exchange

1031 exchanges are a great way to defer paying taxes because you roll the money you’re making on a sale into another purchase and you can avoid giving money to the IRS right away.

This is ok with the IRS because they know they know they’ll get your money later on. However, you’re only given a short time frame to identify the property you are going to buy and six months to close on that piece of property.

Recently I had a client who was freaked out because he had a 1031 exchange and desperately wanted to buy a deal. I told him to calm down because he did not have to buy a deal.

Losing Deals

Don’t make the mistake of thinking you have to close on something in six months. Look at it this way- if you find the perfect property that you really want to buy and it works out and you can roll your money into that deal- that’s great! Do it! But ask yourself, “If i wasn’t in a rush and I didn’t have to do this deal to roll this money would I still buy it? If I had all year to make it happen would I still want to do this?” If the answer is yes; if the financing makes sense, if the cash flow is there, if the location works, if the repairs don’t look outrageous- proceed.

But if you’re doing this out of desperation, it’s not worth taking good money and throwing it to bad. I’d rather see you pay Uncle Sam his percentage. And it’s not as bad as it used to be. In a lot of places capital gains taxes are down 15%, depending on your scenario.

Of course everyone is different and I’m not an accountant but wouldn’t you rather pay IRS taxes then go into a losing deal?

After I shared this advice with the guy, he felt so relieved to realize that he didn’t have to buy a property now. Of course he could if it made sense, but if it didn’t it would be better to hold off.

Vulnerability

Today I want to talk about being vulnerable. No one likes to be vulnerable but it’s really a great place to be. We all love it when we see people opening their heart.

When you’re real estate investing, you can be at a very vulnerable place. You’re out on the court, people are watching what you’re doing, and they’re expecting you to hold up your end up the bargain.

For example, I love to buy apartment complexes, but what I really love is people. I love to know that I’m taking care of them, and there’s a lot of responsibility that comes with that. I expect people to pay their rent on time, and they expect me to do my part and take care of things.

I met a lady the other day who moved into one of my properties. She was a wonderful lady and had a newborn, and I knew that it was really important that everything was working for her and her baby.

People

You’re going to find that a lot of people out there want to rain on your parade and say, “Yeah right. You can’t buy three properties this year.” But remember that most of the people out there haven’t done it. If they had they’d be telling you “Way to go! I did that so I know you can too. Keep it up!”

So always be careful about who you surround yourself with. My dad always says that there’s so little you can control, but you can choose who to be friends with. So choose your friends carefully- pick people who empower you, inspire you, and go for it.

Whatever you accomplish, you’re doing it for you. My son said something great last week. He said “Why would you ever listen to someone who knows less than you about something?” I thought, “Wow. He’s only 12 years old. I wish I’d known that a long time ago.”

There’s been times when I’ve looked at deals and someone has said “Why would you buy that> That property’s not worth that!” And I started doubting myself. Those people didn’t have a fraction of the experience I had or the knowledge I had, but I still let him throw some doubt in my mind. So stay confident in what you know and be careful who you listen to!

Relationships

Today I’d like to teach you how to get your phone to ring with deals. I always think it’s funny when people who are richer than me say “I have more money in the bank than you, why did you get that call instead of me?” The answer is that I know real estate investing is all about relationships.

Real estate is a simple business- it’s people that can be difficult. When I talk about people, I’m not just talking about tenants although they are a big part of it. I’m talking about the people you buy property from and the people who are bringing you deals.

What I do is I set up a lot of little “hooks” or contacts everywhere- attorneys, realtors, and wholesalers. Although wholesalers can sometimes have a negative connotation, they are actually a great resource. I’ve bought several houses and apartments from wholesalers.

Be Real

When talking to these contacts the first rule is to be real. There are a lot of people out there who are BS’ing. They’re saying “I’ll buy anything!” However, their contacts quickly find out that they won’t. So you just have to be real. That may be hard for some of you, but you’re going to have to work on it, because if you get a reputation of being a closer, people are going to call you back.

Another simple trick is to just remember the golden rule- treat people how you’d like to be treated. Tell people right away if their house isn’t a good fit for you. Be nice and say, “I hope you make a lot of money, but call someone else on this one.”

A lot of people don’t do that- they say it’s great and sign up. By doing so they tie up the deal and make the seller and the broker loose time when they didn’t have their money together or they didn’t have the desire or the ability to close. That’s not cool. If you’re on the other side, and someday you will be selling a deal, do you want someone to do that to you? Of course not. So remember that.

Realtors

Here’s something funny to tell realtors. A lot of you are beginners and that’s great- I’m glad you’re getting started. But one of the things you guys like to do is say “I’m a real estate investor, when you have a deal call me.” Then you give them your card. What do you think they do with that card? They put it in the stack with all the others, because everyone is saying the exact same thing. You’ll say “When you have one with owner financing and no money down, call me.” And the realtors saying “Yeah right. Join the club.”

But because I want to stand out from the crowd and I want people to remember me, I say, “Hey I’m a real estate investor, and when you get one of those deals where you are like who would be crazy enough to buy this- like the roofs caving in, it’s half empty and it looks terrible, and there’s no way you can have an open house because you have to clear a path to get into the house- call me! I love that stuff! Those are the kind of deals I want to buy.”

And they’ll say “I’m going to hang onto your card. I had one of those last month, I wish I had known you then.” So you want to stand out from the crowd. The good news is that there’s a lot of lame people out there so it’s not that hard to stand out. You just have to be real, keep your word, and treat people the way you would want to be treated.

One House

People ask me all the time how I got started in real estate. In the beginning, I was very fortunate to be taught a really simple system. It was the idea of buying one house a year for the next 30 years.

It was a funny concept because I was in my early 20′s and I was told that if I bought one house a year for the next 30 years and they were all on 30 year mortgages, 30 years from now my first house would be free and clear and I’d get a bonus. Then each year after that I’d have a new house that would be free and clear and a new bonus.

So if you’re 30 years old and getting started, when you’re 60 years old you’ll own 30 houses. This seems really simple, but the reality is that it can even get a lot better than that.

Simplicity

The beauty of the system was that it was so simple that it enabled me to start. So many people don’t start because the system seems overwhelming, but I thought this system was something I could get my head around.

It was pretty miraculous after that- I got one house and then a second house, and then a third house. After three years I had three houses and I said to myself “Why didn’t you do two a year? You would’ve had six by now!” So I said “This year I’m going to do two. I’m going to change the system and do two a year.”

New Plan

So I started on my new plan, but before I knew it I was doing a house a month. Then I got turned on to buying multifamily deals. So as the saying goes “There’s no right way to get there. The key is to get started and go from there. Right now there are more deals than you can ever imagine being able to buy, so get rid of that scarcity mentality. There’s plenty for everybody and prices are at an all time low.

The message here is to just get the first one. Who you are today is not who you’re going to be after that first closing. Then your mind will expand to think about what else you can do, and what you can do better or different.

Single vs. Multi Family

Today, I’m going to answer a very common question among new real estate investors- “Where should I start?” A lot of people are trying to figure out right now what’s better for them- houses or apartment complexes- and if they choose to buy an apartment complex what size should they get?

These questions can be answered by a few quick guidelines. Right now lenders are expecting people to put 30% down, so let’s assume that and look at what you have to invest. Let’s say you have $100,000- you don’t want to use it all up on your down payment because then you’ll have nothing left for repairs, back up plans, or emergencies.

So let’s take a third and set it aside, and take two thirds at most for your investment. In this example that would be $60,000, which is going to be the down payment on your property. You could also buy 6 houses and put $10,000 down on each house. That’s a great idea if you have 6 good deals but that means you’ll have 6 mortgages, 6 deals to find, 6 closings, and 6 rents to collect at different locations.

Start Anywhere!

That $60,000 could also be used as a down payment on a multi family property, where everything would be in one place. Now you have one mortgage to pay and one closing. If you don’t have the money to do that, then start with what you can afford. If that means one little house, that’s great. You can start anywhere.

A big problem is when people have more money than that, and want to go buy a 50 unit complex. A 50 unit complex at roughly $20,000 a unit would be a million dollars. A third of that for a down payment would be $300,000. A lot of us don’t have the money to do that- but for those who do I suggest you get as large of a complex you can from the very beginning.

Due to economies of scale you’ll have a lot less headaches, because you’ll have a larger place with a manager and maintenance man on site. You’ll be a lot happier because economies of scale allows you to have a crew taking care of everything for you.

Remember, “different strokes for different folks.” What’s right for one person might not be right for the next, and you have to do what’s right for you.

If you’d like some more help getting started, feel free to contact me and we’ll help you get there.

All the best information in the world won’t help until you put it into action.  We all know that already.  However, how do we get ourselves into action and how do we maintain the correct actions consistently?  Well, I believe that is all about having a powerful enough “WHY?”.

What’s yours?

I want to know!    Feel free to share it with me by email:    Chuy@AskChuy.com

Hope you enjoy this short video.

Tu Amigo Chuy

If you and all of your loved ones are already earning 10% or more on your IRAs and savings accounts then…

PLEASE  DO  NOT  WASTE  YOUR  TIME  READING  ANY  FURTHER!

Seriously, if you are truly making 10% or more on your money then I am fairly certain that you must already be a successful real estate investor. 

Congratulations! 

In fact,  I would love to hear from you.  Please share with us the fun ways that you are being good to yourself and the great things that you are doing to help others with your prosperity and blessings!

For starters….

• What’s stoping you?
• What are your greatest fears that are holding you back?
• What questions do you need answered to feel empowered to move forward? 

This BLOG was created exactly for you! 

Feel free to send me your real estate questions.   Actually, not just real estate questions.  Send me your questions about living the kind of life that you yearn to live! 

The funny thing is that I really do enjoy landlording.  However, what I love most about it is that it has been a successful vehicle to provide financial freedom, peace-of-mind, free time to enjoy my family, and the opportunity to pursue things that really allow my soul to sing!

I am committed to sharing my experiences and wisdom with you.  You see, I believe that we all grow together. 

REAL answers backed by REAL  EXPERIENCE.   I  began investing actively in real estate in 1990 and have been investing 100% full time since 2000.  Chances are pretty good that I’ve asked many of your same questions and had to find the answers the hard way.  I want to make it easier for you. 

Why would you want to learn it all through hard knocks?!? 

OK, perhaps you are a bit  like me and just have to touch that burning stove yourself even though Mom and Dad said not to.  Some things we need to learn the hard way but seriously… not when we are dealing with thousands of dollars of our hard earned dinero!

Lastly, this promises to be a no BS Blog.  I promise you that if I don’t have a REAL answer to your question I will admit it.   No classroom theory.  No pretend “guru” preaching what he learned out of books right back to us. 

Best of all… This valuable information is 100% FREE!   Yay!!!  

It’s funny in a sad way how many “experts” are taking money from folks claiming to be experts with only a few years of experience under their belts.  I know of mentors who have mentored without ever having purchased investment properties themselves.  Even more scary is the number of so-called “Lead Investors” who have taken money from “Passive Investors” even though they have little to none of the experience needed to succeed.  I’m going to do my best to not let that happen to you!  

My aim is to share experiences and wisdom to empower you to take action. 

Let’s get started!   I look forward to connecting and helping  you achieve your real estate investing goals! 

Tu Amigo Chuy