Lending

The Hard-Money Mindset that is Weakening Your Portfolio

• by Charles Sells
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With hard money so cheap, more investors should be using it. By Charles Sells The real estate industry stigmatizes hard money and private money lenders. Unfortunately, that is preventing thousands of investors from generating the wealth and returns they are fully capable of creating. Although private money was once (justifiably) considered expensive and sometimes predatory, those days are long gone. Before you lose one more cent, isn’t it time to change your mindset? What if you were told that it is you preventing yourself from really experiencing growth in your real estate portfolio and business? You would probably be annoyed and shocked. However, the odds are good that some long-held misconceptions about private money are creating barriers between you and the success that today’s real estate market holds. Getting Beyond the Misconceptions Here are three mindsets about hard money that are just plain wrong in today’s lending environment. If you believe any of these, take a minute to adjust your thinking and get ready for some serious growth in your portfolio.  1. Using hard money means giving up returns. So many investors think about hard money this way: “Why give up 8-10 points (or more) if I have my own capital?” But, why wouldn’t you do that? Consider this example: Investor Bob took $500,000 and invested it into five different opportunities at $100,000 each. Each deal was worth far more than $100,000, but Bob was able to spread his money out and dramatically multiply his returns by using leverage to make up the difference on each deal. Investor Bailey, on the other hand, took $500,000 and invested it in just one deal equivalent to any one of the five Bob invested in. Both investors made money, but Bob’s buying power and returns were nearly five times greater—even after he paid back the loans. 2. Private lenders want me to fail. Probably one of the biggest hurdles you will face in terms of accessing hard money is experience. If you don’t have it, you may have trouble getting a loan. But that is precisely because your private lender does not want you to fail. Furthermore, if it appears likely you will fail, a private lender probably will not want to be part of that process. When you work with legitimate private lenders, they will likely know even more about your investment area than you do. They will request appraisals (which they will expect you to provide at your expense). They will demand that plenty of equity remain in the deal after financing, and they will require you to prove real estate is not just some new hobby you picked up last week. In fact, if your private money lender pitches you on taking out a loan using verbiage resembling this familiar refrain, “Invest today, using other people’s money, in your spare time,” then run! With an experienced, reputable hard-money lender, your loan rate will often depend on your ability to prove you have experience in successful investing and liquidating. In most cases, three successful deals will get you in the door with a pretty good rate. Does this mean less experienced investors are out of luck? Not necessarily, but usually you will need to partner up with a more experienced party or work with a third-party servicer who has already established relationships with hard-money lenders. 3. My market’s hard-money lenders are too picky. I’ve tried to finance dozens of wholesale deals and they won’t bite. One thing that will stop investors in their tracks is trying to finance wholesale deals. If you have been finding yourself against a brick wall as you attempt to finance one wholesale deal after another that you found in your meetup, then the problem is likely that you are trying to convince your lender to fund a deal that isn’t worth doing. The heart of your problem is likely your source of inventory: wholesalers. Now, novice investors, pay close attention: There is a type of investor called a wholesaler, but you will probably never meet a truly legitimate one. In the past two years, the concept has invaded our industry that absolutely anyone can be a wholesaler and make a fortune at double-closings. Most wholesalers have no legal right to offer, list, sell or negotiate on behalf of the legal owner of the deals they are trying to do. What that means is the contracts on these deals are so convoluted and have been assigned so many times that often neither the wholesaler nor the seller has any idea which way is up anymore. Good news: A private lender is not going to want any part of that “ghost inventory.” Private-money lenders seldom loan on wholesale deals, but that does not mean those lenders are unreasonable. They could be saving your skin. Where Viable Deals are Located and How to Acquire Them Inventory is a hot topic these days because it is very tight in many markets. How can you achieve consistently high margins on investments? Stay off the beaten path. Keeping clear of the latest, greatest investing fad will give you the best odds of finding good deals and gaining high returns. Here are three “Inventory Truths” to follow to ensure that you’re spending your time looking for leads in markets that will work for you and your investors. 1. Being the big fish in a small fund is better than the alternative. You will hear a lot of investors say they like to operate in really big hot markets because there is more success in the market and they feel that increases their odds of being successful. The idea is not without merit; you’ve probably heard the saying, “A rising tide lifts all boats.” We have different rules in real estate. For nearly all investors, the best option if you want to be in the business of flipping is to get out of your own backyard. Choose your market based on metrics rather than on geography. As you consider a market, make sure