Intrigue, Suspense, Adventure, and Passion: The Life of a Private Lender
I’m going to warn you: I’m in a funny mood today. I’m battling an urge to write today’s article on real estate investing with a decidedly… dramatic flair.
Oh man, I want to do it so bad…
Okay, here goes:
His eyes darted nervously over the contract. A familiar sensation, like an infinitesimally small spark of heat — nearly imperceptible — burst into being just below his diaphragm.
A shudder rippled across him from his right shoulder to his left. It was followed immediately by an arctic wave of panic crashing over him.
“Had they noticed?”
As if by reflex, he rolled his shoulders, cracked his neck, and shifted in his seat, feigning a counter-clockwise pelvic stretch. He glanced up quickly — but not suspiciously so — at the others who sat around the meticulously polished mahogany conference table. Not a single eybrow was raised.
They had bought the ruse.
He needed to focus; to hold it together.
“Cool. Calm. Collected. Remember to breathe naturally… casually… In, then out. Thaaaaat’s it…”
He had been in this position before, more times than he could remember. He’d pored over literally dozens of contracts similar to this one; had sat through countless closings, cool as a hypothermic cucumber, never once suffering so much as a rumpled shirtseam from anxiety or nerves.
But there was something special about this one.
He leaned in slightly. The crisp white leaves of paper were aligned in a near-perfectly symmetrical rectangular solid, but only near-perfect. Pushing the last traces of voyeuristic guilt from his mind, he gave his eyes free reign to wander,drinking in every detail — first from the stack’s surface, then slowly down its edges toward the table. He could see the corners of random pages peeking playfully out from amid the others, imparting an almost wind-blown quality that struck him as simultaneously disheveled and… irresistable.
He straightened in his chair, inhaling slowly and deeply, as both his hands slid slowly backward, his palms squealing lightly across the table’s polished surface and coming to rest at its edge, where they gripped tensely. His reservations and inhibitions had evaporated; he no longer cared for — or was even cognizant of — the reactions of others present in the room. They now seemed to be light years away.
He had but one driving motivation now: Desire.
The contract reclined before him, wilfully. Seductively. Pressing gently under its own weight against the gleaming lacquer of the conference table. Each bright red Post-it flag sticker beckoned his pen to come nearer; begged for that secret rhythmic undulation that only his signature — and his alone — could deliver, on each and every line, over and over until the ink ran dry.
Okay, so maybe the life of a real estate investor isn’t always ultra-sexy and exciting — well, probably not the business aspects anyway (although who really knows? I try don’t pry into my colleagues’ personal affairs).
Writing and submitting offers, 98.5% of which will be refused, is not particularly rewarding.
Sitting in closings as the buyers and sellers flip through stacks of papers so fat they would choke Monstro the Whale, is not especially glamorous.
Touring properties that have been “repurposed” as… what’s the politically correct term here… “communal recreational space for itinerant freelance pharmaceutical enthusiasts,” is not sexy.
However, of all the angles from which it is possible to enter the real estate investing game, private mortgage lending is the most attractive, by far.
What makes private lending so irresistable? It’s passive income. Really passive. Sure, you’ll hear people say that owning rental properties is a passive income activity — and, done right, it can be very near passive — but there are inevitably things that owners simply must have their hands on (yes, even with rentals that are under good property managment).
There is nothing passive about coordinating an emergency HVAC replacement for your tenants in February, during what would turn out to be the coldest week of the year.
There’s nothing passive about replacing your rental property’s water damaged dining room ceiling because your tenants couldn’t be bothered to shut the shower door all the way in the upstairs bathroom.
There is nothing passive about fielding emails and phone calls from your property manager and contractor with their respective theories on how to best stop the pool of raw sewage that has accumulated on your rental’s front yard from oozing over the sidewalk and onto the street.
I’m speaking from personal experience with all three of these, by the way.
These are just three of about a zilliion examples why private mortgage lending has such tremendous appeal for people who like real estate as an investment, but don’t want to hold rentals. The capitalization rates for private lending can be just as good as — most of the time, better than — rental properties, and the maintenance and upkeep costs are ZERO. And if you are lending to a great borrower — even more so than renting to a great tenant — you’ll have little to no additional work, troubles, or headaches.
Hmmmm…starting to look pretty attractive…
But, as with most forms of investing, there is a right way to do it, and then there are all the other ways.
To be a world-class private investor in real estate, whether you have $5,000 or $50 million to work with, here’s what you should be prepared to do:
Make It Rain
Let’s start with the uber-obvious: If you want to make money, you must be prepared to put down some cash. The amounts will vary, but come to terms right now with the fact that you will have to decide on a dedicated quantity of Benjamins, and commit them wholly to your real estate investing career. Just do it. It’ll be the one of the best decisions you ever made.
If your checking or savings account balance currently contains at least five or six zeros, you’re in a good position to start lending with cash. Reach out to your friendly neighborhood real estate investment firm and tell them, “Hello! I have a king’s ransom that I’d like to invest for a great rate of return. What can you do for me?”
But unfortunately, not all of us have a mountain of unused cash at our disposal.
…or DO we…
Retirement accounts — specifically self-directed Individual Retirement Accounts (IRAs) — are fantastic for real estate investing and private lending. As with many other retirement accounts, investors can accumulate gains for decades, tax-free. Yep. There are very few other ways to (legally) avoid paying taxes on investments that you actively direct.
I can’t tell you how many people with whom I’ve spoken who, when asked if they have an old 401k from a previous job just sitting there, tell me, “Oh yeah, I had completely forgotten about that.”
“Completely forgotten” about tens of thousands of dollars, just sitting there for years, invested in whatever underlying basket of funds their retirement plan provider chose for them, totally exposed to the ups and downs of the U.S. stock market. I recall some recent unpleasantness in — oh, 2008 or so, where that strategy didn’t work out very well for a whole lot of people.
So go ahead and roll it on over to a self-directed IRA, and you’re ready to rock. Need help with this? Just ask.
If you’re not sitting on a small fortune in a savings, checking, or retirement account, you may think that real estate is an investment vehicle that is out of your reach. What may come as a surprise to you — it does to most people — is that it doesn’t take as much cash as you think to get started.
While the prime positions and best rates of return are generally going to those investors with enough cash to fund all or most of the acquisition and/or renovation costs for a rehab project, there is absolutely room for smaller fish in the pond. Private investors with as little as $5,000-$10,000 can still “get in the game” by pooling their funds with other investors and essentially “crowdfunding” a project. By co-mingling funds, a group of investors can reach the funding threshold for a large, lucrative project, wherein everyone enjoys the same security and preservation of capital that a single investor would.
The simplest and most direct way to do this is to join forces with a real estate investment company that in in the business of linking lenders with reliable borrowers.
Be Ready to Act. FAST.
A considerable number of real estate professionals sumbit their information to us each and every week in the hopes of getting funding for their renovation projects. We work hard to narrow that list down to the very best-of-the-best; the most qualified, most reliable, most ideal borrowers that an investor-lender could hope for.
They are professional. They are responsible. They are reliable. They are willing to pay a premium rate of interest to our investor-lenders.
But they also expect to get something in return:
After all, our ideal borrowers have immaculate credit, outstanding personal financial history, and a stellar reputation for meeting their personal and professional obligations. They could walk into any bank and get a mortgage at a terrific rate of interest.
But, that would take 30–60 days on average, and our ideal borrower isn’t willing to wait that long. They are buying properties from sellers who want to close in as little as one week. That’s how they buy properties at discount prices; it’s the entire foundation of their business model.
Our borrowers are willing to pay outstanding interest rates to our lenders, because our lenders can fund their development projects fast. They provide the means for our builder-borrowers to bid competitively on distressed properties with huge profit potential.
That’s why they will pay out double-digit returns to lenders.
If you’re serious about generating passive income through private mortgage lending, you must have the ability and the willingness to move quickly.
If you are investing with cash, keep it in a dedicated account, and know your bank’s procedure for wire transfers.
If you are investing in a self-directed IRA, know your IRA custodian’s process and have their required paperwork at the ready.
Know Where To Look
Castellar Investments, LLC was founded and grown on the simple philosophy of lending to the “ideal borrower.” Ideal borrowers have a great professional reputation for doing good business, they have a history of honoring their personal and professional commitments, they have significant experience in their field, and they have the individual net worth — and the willingness — to personally back up the loan, in the event that the worst should happen.
When it comes to lending money for profit, you can make mistakes in a lot of areas and still come out okay. You can botch the background research, the property valuation, and the paperwork, but if you lent the money to a good borrower, you’ll be taken care of. If things go wrong unexpectedly, this borrower will have the ability and the willingness to keep his/her word and honor the agreement between you.
But lend to an unreliable, inexperienced, dishonest borrower, and you’re hosed. All the paperwork in the world won’t save you if they suddenly decide they can’t/won’t repay you as agreed.
Avoid making mistakes in general, but at all costs when it comes to selecting your borrowers. Either A) invest your full-time effort in finding highly qualified professionals in whom you can consistently invest, or B) partner with someone who can do it for you.
In the end, it comes down to trust. Can you locate and work with a pool of well qualified borrowers whom you can trust to do what they say they will do?
“Three Cheers for Relative Boredom!
So what if the life of private investor isn’t the stuff of trashy romance novels? I say, “good.”
In our search for potential borrowers, we aren’t looking for a mysterious someone who is equal parts danger, intrigue, passion, action, and intensity. We don’t want or need flash, dash, and fantasy in our business dealings; they only lead to the kind of “wham, bam, not-gonna-pay-the-loan-back ma’am” encounters that end in regret and tears, as we’re left alone to sorrowfully nurse our broken… portfolio.
We seek the ideal borrower, a steady, reliable, drama-free business companion with whom we can grow old, sitting in our rocking chairs on the front porch, shouting at the neighborhood kids as they speed past the house on… whatever futuristic vehicle the next couple generations of kids will be riding for fun.
As investors, the borrowers of our dreams are practical, methodical, systematic, predictable, and — dare I say, downright boring.
Now THAT’S hot.