Private Money Lending

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.

"Frank 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.

"Is this possible?" you ask.

"Sure," 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.

In the 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.

Arbitrage

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.

Arbitrage 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.

Arbitrage 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.

You should 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 compositing.

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 professionals.

By you 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 call/email.

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.

We are 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 your ears.

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 You Rich

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 partner.

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 partner.

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 better informed.