In the previous chapter I mentioned
that I rescued the desperate couple from foreclosure by using money loaned to
me by 2 friends. This is private money. There is a lot of money to be made in
the world of private money whether you are the lender or the borrower.
Let s start first with the lending
process. If you have ever been to a bank recently to borrow money then you know
there s a series of guidelines the underwriters at these lending institutions
have to follow. They pull a credit report on you to examine your payment
history. Bad credit, no matter the reason, is good enough for them to turn you
down. If your credit is good or meets their criteria, they then look at your
income to determine your DTI (Debt to Income) ratio. They want to see your 2
years of tax returns. They want to see your last 2 paystubs, to make sure that
you are gainfully employed. Lastly they want to see your bank statement to
determine your ability to pay the loan you are going to take out.
Have you tried taking a loan these
days? I bet lenders learned their lessons well. Judging from the past mistakes
during the bubble, they have become pretty cautious nowadays. Not only are
loans taking longer to be funded but the stress factor has multiplied many
times over. You may have good credit, excellent income and a good job but still
be subjected to numerous conditions.
This is not the case with private
money lending, which is asset and relationship based and not credit driven.
You can make tons of money acting as
a private money lender or using private money lenders to fund your deals.
Let s first talk about how you can
make money as a private money lender. There are 2 ways you can make money as a
private money lender. The first way is to use your own money and the second way
is to use other people s money which you lend to borrowers.
Using Your Own Money
Talk to any CPA, Financial Planner
or anyone else who manages other people s wealth and you will find out that
some individuals have a ton of money. Maybe that s you. I remember bumping into
Frank the other day at a restaurant across the street from my office in Newark.
I had not seen Frank for ages since I stopped attending the Newark Rotary Club.
Frank was having dinner with his wife at the Japanese restaurant. He told me
had retired from the insurance business. He asked me how my business was and I
replied that it was going just fine. I said this was the best time to buy real
estate. Frank said he owned a few apartments free and clear and was not looking
to buy any more real estate nor make more money. He was wealthy enough and had
ample wealth to leave o his grand kids.
would be a good private money lender," I said to myself later. He could
lend me money solely based on the merit of the assets I was buying instead of
gauging his decision on my personal or even business credit. He could lend me
money at a rate way higher than the going rate at the bank and I would not bid
an eye lash because it'd be a win-win for both of us. In fact, I could give
Frank as much as 18% especially if he'd lend me 100% of the acquisition and
even rehab cost.
possible?" you ask.
I say. As a matter of fact, I can assure you that this is happening right now.
Companies like Aegis are offering 100% financing on acquisition and rehab and
then share equity with the borrower. For Aegis, the borrower does the leg work
of finding a great deal. The borrower pays for the appraisal that determines
both the current AS IS value as well as the ARV (after repair value). If the
numbers make sense, the company funds both the acquisition and rehab costs and
in the end both the private money lender or in this case the equity partner and
you, the deal originator, make money.
previous chapter I mentioned that I saved a couple from foreclosure using
private money. A friend of mine wired $100,000 to Wachovia and every month
prior to the couple buying back the property from me, Judy collected $1000 per
month from me. That's a whopping 12% return on her money at a time when you'd
be lucky if the bank offered you 2% on your money. What's more, Judy had the
peace of mind that her investment was secure.
One way you can
make money in real estate as a private money lender is what we call arbitrage.
The term is borrowed from the stock market where a trader buys securities in
one market and then immediately selling them in another market to make a profit
on the price discrepancy.
happens in many ways in any given community. You see it in small villages in
Africa where petty farmers take their goods to the local market where these
goods are sold to bigger players who come from cities where these goods are
sold to city dwellers at higher prices. Arbitrage happens in the world of
manufacturing where, in order to compete aggressively, the manufacturer must be
able to sell his goods to marketer at significantly low prices, sometimes at
prices as low as ¼ of the price sold to the end-buyers.
happens every day in international trade and most especially in the import and
export business. It is the name of the game between the US and China. Most
goods we see at Walmart, Macy s and other US megastores are made in China at
prices way below what we pay for them in these stores.
get in the game as well in the world of real estate and private money lending.
How? you ask. Glad you asked.
Do you have
equity in your property? If so, how much money can you pull out? Today s home
equity rates are the lowest they have been for years, decades. At the time of
this writing the fed rate was still at zero and the chief said the rates were
going to remain this low for the next 2 years, which means that, depending on
your credit (FICO score), your LTV (loan to value) of your home as well as your
DTI (debt-to-income) ratio, you can get a HELOC (Home Equity Line of Credit)
below 4%. You can then turn around and lend the same money to a real estate
investor like me and others like me at rates as high as 18%. You will secure
your loan on the real estate I buy at 70 cents on the dollar minus the cost of
repairs. You will have the first deed of trust on the property. This is a very
secure way of minting money. You are making money with very little or even none
of your money. Let s say I saw a killer deal in San Jose. An REO, Short Sale or
Probate. The price is $200,000. The property needs some work and no first time
homebuyer would go near it in its current state. The seller is very motivated
and needs a cash buyer to liquidate it. And let s say that I think this is a
great buy and I am very interested in it. However, my cash is tied up elsewhere
and there s no way I can lay my hands on $200,000 right now. You, on the other
hand, have the equity in your home. Like Frank, you take pride in the fact that
your home is paid off. However, unless you sell your home you can t realize the
potential. Having money sitting in your home and not making money is like
having a truckload of cash and instead of depositing it in the bank you dig a
hole and bury it. Stupid idea! Instead of compounding, your money is
A smart way
would be for you to take out a HELOC of $200,000 and give it to me, securing
the loan on the killer deal. The deal is so sweet because we are getting the
house for only 70 cents on the dollar minus the cost of repairs. If that cost
constitutes 10%, that means we are actually buying the house for only 60 cents
on the dollar.
I d have
absolutely no problem paying you 18% on your money if you d fund 100% of the
acquisition price, which in this case is $200,000. What s even better for me is
if you d fund the rehab cost as well. With that, I could even give you a piece
of the equity. Do you see the power of arbitrage? You are taking out $200,000
from your home at a rate that s lower than 4% and giving me a rate as high as
18%. You make the difference. Do you see how you are capable of outsmarting the
banks? The banks use the deposits consumers make at their branches. They offer
these consumers rates as low 1% or even less and turn around lend the same
money to others at slightly higher rates, say 3-6%. But you, you are in a
better position because you are dealing with more sophisticated individuals who
truly understand the value of money. You are dealing with real estate
lending me $200,000, I am now capable of acquiring a killer deal where I stand
to make as much as $100,000. I may be able to rehab the property very quickly
and resell it to one of the many end-buyers who will be swooning to get it. I
may receive as many as 5-10 offers on it and just one phone call to all of
these buyers and/or their agents asking them their highest and best offers will
skyrocket the price. I could make as much as $30,000 more from that one single
Do you see
this? Do you see why the rich keep getting richer and the poor well, they just
keep staying poor? One call makes another extra $30,000 for me and creates
another $30,000 debt for the poor.
talking about arbitrage. We are talking about you, the home equity man or
woman. You can make money out of thin air. You only need to open your eyes and
And did I not
mention that if you decide to fund my acquisitions as well as provide the money
for the rehab, I will allow you to share some of the equity as well. You lend
me the money. You get the house as your collateral, and you are in first
position. You get a low interest rate from your bank, you turn around and give
me a hefty rate, making a spread of over 10%, you get up to 3 points from me
the moment you write that check, you sit back while I do all the work, every
month that I hold onto the note, I pay you. You may choose a higher rate if you
want me to defer payments until the house is resold. You get the spread on the
interest rate and you also get to be a junior partner on the equity share. What
a wonderful world you will live in. This is the designer lifestyle many crave
to live. Are you living it? What are you waiting for?
How Your IRA and ROTH IRA Can Make
I have dwelled at length on how you
can use arbitrage to make yourself rich as a private money lender. Now allow me
to talk about how you can use your IRA and ROTH IRA to enrich your coffers as a
private money lender.
As you may know, your IRA is pre-tax
money. You do not have to pay taxes on these funds until at the time you are
legally allowed to start withdrawing the money at age 59½. Many hardworking
Americans have seen their IRAs erode in value as the stocks they were invested
in went down under. Right about everything eroded in value between 2007 and
2010. If you happen to still substantial value in your IRA, you can use the
funds as a private money lender and begin to enjoy the benefits I have
mentioned above. You will now be able to
lend money to real estate investors like me at high rates of return and secure
your IRA with a deed of trust giving you the first position. You can charge points up front thus making
instant profits that go back to your IRA. The interest that you are paid
monthly goes back into your IRA tax deferred and should your custodian allow
your IRA to share equity, you can make even more money by become an equity
Do you have money in your IRA?
What s your yield right now? Are you satisfied with your return? Are you in
control of how much you make? If not, you can change all that right now by
becoming a private money lender and using your IRA as the source of funds.
And for those of you who are 59½ and
have the ROTH IRA, I have even better news for you. Whereas for the traditional
IRA you get taxed after you hit 59½, for the ROTH IRA, on the other hand, you
do not get taxed because ROTH is a post tax investment vehicle and it is
tax-free. It is tax-free forever. Yes, you heard me right. When you use these
funds as a private money lender you will never be taxed from the gains you
make. How sweet. Whereas there are always limits in other arenas, there are
absolutely no limits as to what you can make with your ROTH. You can lend your
funds and make money. You make even more money when you become an equity
My question to you is, do you or
anyone you know have a ROTH IRA account? Are you 59½ years old or older? Are
you happy with the returns you are currently getting? If not, it s time you
started using your money wisely. It s time you started lending it to real
estate professionals who can be the key to you doubling your funds. You can be on your way to total financial
independence. You can live the designer lifestyle you have always craved. Time
to live in opulence and abundance. Time to give your time to the causes you
have always wanted to spare some time for. Money will no longer be something to
worry about. This is true financial security. The life the rich have always
lived. Now it is your turn.
Disclaimer: I am not a tax attorney, a CPA or a financial
advisor, so I advise that you seek advice from any of these professionals to be