Why Private Money is My NUMBER ONE Source of Real Estate Financing

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About This Episode

Episode #318b – Private money, sourced from individuals rather than traditional banks, proves to be a versatile and robust financing solution, ideal for both up and down market conditions. This has been the ONE financing technique that’s propelled my real estate investing career.


Episode Transcript

[00:00:07.560]

Welcome to the podcast, Real Estate Investing with Coach Carson. I’m your host, Chad Carson. You can also call me Coach. This is the show to help small and mighty real estate investors get out of the financial grind so they could do more of what matters. One time I looked back over all of the real estate deals I’ve done from the very beginning of my career, and I was surprised to discover that a large majority of the properties I bought were with one financing source. That financing source was private money. And so in this episode, I want to share with you why private money, in other words, going to individuals, not necessarily going to banks and borrowing money from them, is one of the best ways that you can buy properties, you can hold properties. It helps you in up markets and down markets. And I want to share with you why I think that and why it’s so helpful to me. And I’m doing this in an interview style with Michael Zuber. This was originally published on his show, One Rental at a Time, and he let me republish it with you. Really quickly before we start, if you get any value out of this show, I have a simple request that will only take a few seconds but would mean the world to me.

 

[00:01:07.750]

One of the main ways that new listeners find this show is by reading reviews. My request is to leave a review on Apple Podcast or Spotify and let people know why you like the show and why they should listen. You’ll be helping me and my mission to help more small and mighty real estate investors to get out of the financial grind. So thank you. Now let’s get started with today’s episode.

 

[00:01:26.930]

It’s one of those topics that gets a lot of attention. A lot of people are like, That’s the reason I can’t do it because nobody I know has money. And usually that’s not true if you really get into it, but we’ll talk about it. So Chad, when you talk about private money, what are you thinking about? Where should we go in this conversation?

 

[00:01:45.410]

Well, I’ll briefly tell my story. When I first started investing, I didn’t have the W. D. Job. I didn’t have the income. I didn’t have the credit to go get a loan. So private money was actually, and also seller financing were my entryway into real estate investing. And I was fortunate enough to have a network. I got early on established a network of other investors in the upstate of South Carolina. I went to meet ups. I talked to people. I went to Clemson University, where I went to school and met a couple of professors there in the business department. But the point is, I just started meeting people and I was a college student. I was trying to learn. I want to talk to people. And as I talk to people, I identified the people who seemed to be knowing what they were doing. And that led to me eventually talking to them and saying, Hey, I’m finding pretty good deals here. If I found a good deal, could you put up the money somehow? I didn’t know how, I didn’t know the mechanics, I didn’t know how that would work, but it ultimately led to first being partners with them on one deal with one particular professor.

 

[00:02:45.150]

But then we transitioned to a much simpler scenario where he was just my bank. I was the entrepreneur who found the deals. And it was so simple. And today is still very simple, that you find one person, one deal. And in my case, there were like 200.000 large chunks, $150,000, $300,000. I would find one person who had either their own money and these were typically more experienced investors, or they had a retirement account and they self directed it, put it with a custodian who could loan me the money. And so that was I would say 70, 75 % of my deals have been done with some individual who loaned me the money. So that’s my background with it.

 

[00:03:23.620]

I’ll just share. I’ve done private money two different times. The first time was 2010, ’11, ’12. I was actually paying 10 and 12 % interest. So I was paying double-digit interest only to make the payments easy. And I was borrowing the entire purchase price. Me too. Right. So it was all that. I was in that case funding the repairs or make ready, but I was borrowing the whole thing. And I was doing Burr before it was a thing. So I would buy a junker, I’d fix it up, refi with more permanent debt, cast them out, and everybody was happy. So that worked, I don’t know, for three or four years, that’s all I did. I was recycling capital just like a machine. And then obviously the market changes, that doesn’t work. The deals aren’t quite as ripe. So 12 % interest doesn’t work for me. So we did something else. And then we fast forward to 2018. I retire now. I no longer have this six-figure job. I’m no longer bankable in the eyes of big banks. And I realized that the market is still hot for flipping. And I never flipped before. I was always buy and hold.

 

[00:04:29.590]

So in 2018, I established a private money where I have my investors who are my partners, they’re still debt. I never had a JV. But this is how I structured the note. I paid 6% interest only, and I gave them 20% of the profit on the exit because these were all going to be flips. And again, I borrowed the entire purchase price and I funded the make ready. So again, this is a way for me to borrow millions and millions of dollars. It was a way for me to keep five, six, seven projects going at the same time. All of my investors, when you take the annualized return on their money were over 20 %. When you annualized my make ready money, I was over 100 %. It was just those were the profits. And I was able to do 54, 55 of these in about a two and a half year period. So private money is out there. And you can structure private money any way you want. In 2010, happy to pay 12%. 2018, not so much. Much lower interest rate gave some of the equity. There’s just lots of it. Private money is so flexible, Chad.

 

[00:05:40.060]

Super flexible. I know you’ve been getting a lot of these comments on YouTube about frustration with the market, 8% interest rates on 30-year mortgages, 7.5% interest rates. We can’t make rentals work anymore. I get the frustration. The math, the way people were doing it, getting 20% down, getting a traditional mortgage just doesn’t seem to make sense in most markets and most deals. I think private money, because of its flexibility, is one of those tools in my toolbox that I’m recommending pull back out, because let’s do some basic math. I look at a lot of properties that are in the $300,000 range. Back when the interest rates were 4%, you put 20% down, get a $240,000 loan, and maybe your 30-year mortgage is $1,150 or so somewhere in there. Let’s say that worked. Let’s say you had a $2,000 rental, that worked for you. Well, today you can buy a property at 300,000, put 20% down, $240,000 loan at 8% for 30 years. It’s like 1,700, 1,800 bucks. That’s the math that everybody is worried about it. But what I would put forward is the way people I know who are doing deals now, they’re doing a couple of things.

 

[00:06:50.940]

They’re changing the financing strategy. They’re also trying to buy properties at lower values. You’ve been talking about buy great deals. Let’s say you buy that $300,000 property for $240,000 instead. You get a 20% discount. You’d have to hunt. You got to look for a lot of deals, but that’s entirely possible if you really search hard. Then let’s say you put $40,000 down, which is not unreasonable in most cases, and you get a $200,000 private loan at 6%. You borrow $200,000 at 6%. That’s a $1,000 interest-only payment. Yes, you’re paying interest only. You got to figure out some way to eventually pay that loan off. But the point is, if it worked a few years ago with a 4% 30-year mortgage at 1,150 bucks, and you can figure out a way to buy it at a little below value and get an interest-only loan from a private lender at 6%, that’s in the same ballpark as the payment you were making on a loan a few years ago, and you’re able to stay in the game. You’re able to buy these deals that nobody else is able to buy. That’s just one example that’s been on my mind of the thinking you have to do to work.

 

[00:07:56.390]

Instead of saying, I can’t do deals, to say, How can I do deals? I need to find the tools I have in my toolbox?

 

[00:08:09.150]

Yeah, this is why I love our conversation. You have a playlist on my channel. It’s just called Coach Carson. We talk about creative financing. Your mindset is the thing. If you believe it’s not possible, it’s not. If you believe it is possible, it is. The other thing I would like to say nowadays is real estate investing is always hard. It’s just a different hard. You guys may not realize this, but 2020 and 2021, I wrote the most offers I’ve ever had and gotten two counters. No deals. I buy out of the MLS. It’s one of the things that I do. No deals for two and a half years. Everything I got was off market or through my network. It’s okay. Now I’m writing deals and now I’m getting counters. It’s just it changes. Believe in yourself. Understand it’s possible. I found two deals last year, same time, 30 % off list price. They were ugly properties. They didn’t look good. The pictures were horrible. They were trying to be sold in November and December. They wanted to be done by the end of the year. Guess what? Motivated sellers, 30 % off. Flipped one in January, the other one in March, made 90 grand.

 

[00:09:23.310]

It’s possible. You just got to do the work. It’s never easy.

 

[00:09:26.060]

Yeah, I love that attitude too, because I think, again, people on the internet, it’s easy to say this is easy. This is passive. And eventually, like right now in my life, I’m spending two hours per week on my real estate. So it is passive now. But man, when you’re climbing the mountain, when you’re getting up there, when you’re making offers, there’s some dues you have to pay. So I’m really glad you’re also saying that, that it’s not easy on the front end, but more than anything, I think people got to realize that it’s possible, first of all, and you got to be creative. You cannot just do these little cookie cutter. If you were a carpenter, if you only used a hammer and you went around trying to fix a house with a hammer, that’s ridiculous. We real estate investors have to be creative. We got to think outside the box. We got to study people like Michael and me and other people who are doing deals. This is why you listen to these YouTube videos is to get ideas and be creative and then go apply those ideas. I think that creativity is often missed as an entrepreneur and as an investor, is that that’s one of our secret superpowers.

 

[00:10:25.090]

The people who sit on the sidelines are moping about it and complaining. They’re very rigid in their mindset. Whereas we are like, can do people. If somebody else says we can’t do it, we’re like, okay, well, we can’t do it that way. What’s another way? What’s another way I could do it? I love what people challenge me. I’m like, no, really. Let me show you how it’s done. Let’s go.

 

[00:10:43.640]

Yeah. At the end of the day, folks, real estate investing is never easy. You believe what you want to believe. I’m not in the convincing business. I have evidence. I have a track record. I have a history. It’s all out there for you. Awesome, man. I appreciate you. Talk next week.

 

[00:10:59.720]

Yeah. See you soon.

 


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