Vegas or Bust
You have assets of $250,000. Do you use $100,000 of your savings to open a stock brokerage account, or do you take $10,000 and live out loud in Vegas with a couple of friends? Of the two options I presented, which one gave you the least amount of inner resistance? Most people will say the Vegas trip, even though the entire point of the trip is to blow ten grand. They buck at the chance to make millions of dollars by investing one hundred grand. Why is that?
I was finally able to convince my cousin to invest $30,000 as a private lender to cover the down payment and the cost of repairs for a property I planned to flip. I already had a commitment of $130,000 to carry the first loan from another smart investor I knew. Now, I didn’t need my cousin to invest. I wanted him to invest because I wanted him to understand what I understood:
The rich and the wealthy put their money to work for them, not the other way around.
The investment opportunity gave him a greater return in just a few months than he would have ever earned over his lifetime if he had kept that thirty grand in a savings account.
My cousin is very educated and involved in real estate to an extent. Even still, he had to be convinced that the deal I was offering would provide him a better return than he got with his bank.
FYI: Using a few bucks to open a lemonade stand on the side of the road would have delivered a better return than what the average bank offers.
What many people don’t understand about real estate investing is when you loan your money against a property, the government guarantees your investment by allowing you to recover the property if the borrower defaults on the loan. Now imagine if you loan money on a property that is worth 50% more than you the amount you loaned out. You don’t ever have to worry about getting your money back because if the loan isn’t repaid according to the terms of your lending agreement, you get the property back and the property may be worth TWICE the value of the debt. Where else can you get that kind of return?
If you have ever heard someone complain that they lost their money by loaning money for real estate, you can bet one of two things has happened: 1) Either the property in question was already over-leveraged, or 2) the lender and borrower didn’t have a contract in place that would allow the lender to repossess or put a lien against the property. I would bet that in most cases, the property is just over-leveraged.
By becoming a private lender on a real estate transaction, it is your job to determine the maximum loan-to-value that will make you comfortable and keep your principle safe. If the borrower defaults, you can quickly liquidate the real estate and recover your money because you have a protective equity of 30-50% depending on the loan to value.
Long story short, I enticed my cousin to become a private lender by offering an unheard of return of 15% with guaranteed 6 months interest plus $5,000 bonus, regardless of when the loan is paid off. The reason I guaranteed 6 months interest payment was because I entered an agreement with another investor on the same property, so I had to pay off that loan first, but I knew I would still be able to repay my cousin within ninety days.
My cousin wired his $30,000 to escrow. I closed the deal and 72 days later I exited the deal and repaid both my cousin and the other investor. For his investment, my cousin got back $7,500 in addition to his initial investment in less than ninety days. That’s an annualized return of almost 120%. The offer I originally made to the seller of the property was $160,000 and I knew the property was worth at least $240,000. I sold the property for $273,000 for a total profit of $113,000. The two investors that came in on this deal were well-protected, having at least $80,000 in protected equity.
The Moral of This Private Lending Story
The moral of this story is that ignorance may be bliss, but that bliss comes at a pretty hefty price tag. I buy houses and I don’t have to beg lenders to grant me the benefit of having access to their expensive money. On the contrary, private lenders are tripping over themselves to fund my deals because I am in this business to make money. My deals deliver the kinds of returns that beat all returns, and my investments are safe. In fact, one of my lenders made a whopping $1.2 million just from investing in my deals. That lender has loaned me more than $20 million.
By now, you must be wondering what I am selling. Nothing. I’m just ticked off at banks and tired of watching friends, family and the unsuspecting hard-working Americans take their money to thieves for charlatans for safe-keeping.
Above all, I’m alarmed by the number of people who simply don’t know the benefits and protection they miss out on by skipping over real estate investment as a vehicle for amassing wealth. People mistakenly think real estate is a risky investment, which it’s not if you know what you are doing.
Is it time for you to learn how to become a private lender?