Unlocking Wealth: The Power of Private Lending with Joel Kraut - Episode - 559

Can it work short-term? It can, but you have to be very nimble. You have to be super disciplined to only use the money the right way. And then as you have the opportunities to pay it off, you must pay it off. You can't say, well, I'll do some now and some later. Like, that never works. You end up with my haircut, right? I can guarantee you my haircut will show up, man or woman. If it's a woman, hopefully not, but you know what I mean, right? The aggravation is gonna be there. And that becomes a real difficult thing to get out from behind.

When banks shut the door, most investors walk away, but smart capital knows that no often signals opportunity. This episode reveals how experienced investors structure financing for deals that don't fit the box and why alternative lending can unlock returns others never see. Welcome to Streams to Impact, brought to you by Studebaker Capital. I'm your host, Dr. Allen Lomax. For many high achievers, success eventually reveals a paradox. The income is strong, yet control over time, taxes, and volatility remains elusive. Working harder no longer feels like the answer. And there is another path, one where capital is structured intentionally, risk is understood, and money is deployed to support both freedom and purpose. To help you explore that path, I invite you to Beyond the Paycheck, the Financial Clarity Compass, a private educational mini masterclass created for high-income professionals, and it's our gift to you. And you can find that at www.go.stetucker.com/beyond-paycheck. Now, let's move into today's conversation, but just before we do that, a brief disclaimer. All information All information shared on Streams to Impact is for educational purposes only and is not investment, financial, legal, or tax advice. All investments carry risk, including the potential loss of capital. Please consult your professional advisors before investing. So what happens when banks say no, but the deal still deserves a yes? That's where today's guest operates. We're joined by Joel Kraut, a nationwide direct private lender and mortgage broker with more than 20 years of experience structuring hard-to-finance commercial construction specialty and fix-and-flip real estate loans. Joel works in the spaces where traditional underwriting falls short, helping investors move forward on complex deals that require creativity, Precision and disciplined. So, Joel, welcome to our show today. So let's just step in. If before we get into the nitty-gritty of lending here, tell us about how it is that when you look back on your life, looking back over your 20 years in lending, what early experiences or hard-earned lessons most shaped how you personally think about Risk, responsibility, and money, and how that led you to where you are today.

Well, first, thanks for having us on. I appreciate it. Thank you.

You bet.

You know, I think your question's a really important one because in lending, to me, there's really only 2 great days: the day you make the loan and everyone's excited, and the day you get paid back your principal, and now yourself, your co-lenders, The institution who gave you some of the capital, whomever is now satisfied. So we're a business solution for people. That's changed a lot in the last 20, 30 years. You know, in the old days, we were this evil hard money lender guy, right? And I, I pull by in my car, roll down the window, you throw the payment in the window, and I keep going. And we were going to steal your property from you. That was sort of the mentality that was out there. And then, you know, the great crash of '08 through '10 was this unbelievable you know, clean wash equalizer, reevaluator of everything, right, in the economy, not just real estate but across everything. So what happened, as you know and you've experienced and spoken with others about, as the public had the opportunity to begin to buy some of these properties and put a little bit of capital back into them to clean them up a bit, maybe not rebuild them or restructure them, but just even clean them up, keep simple stuff going on, and then sell it for a profit. Now, all of a sudden, we were good guys because now people could see we were a stepping stone. We were a business solution, a place to get capital from to be able to do that. And now it became more of a win-win industry where people were excited, the opportunities were great. And then we started having one-pagers and pop-ups and banners like behind me. And you have trade shows pop up and the whole world changes dramatically and our industry becomes infinitely more professional. So that was a very good thing. Having the experiences of the beginning, though, in the days when we used to lend for 14% interest or 18% interest, 4 points, 10 points, when it was kind of truly the Wild West, those experiences in meeting the types of borrowers and dealing with projects has definitely helped us immeasurably over time. But it's a very, very different game. It's infinitely more professional, much closer to bank-like, but just moving a lot quicker. And, you know, our industry has basically picked off the banks for a couple of their simple products. And that's what we focused on without tremendous overlays of regulatory and compliance. There's some— that's true. And each year we get a little more involved in that side of the world. But compared to a mainline commercial bank or residential-style lender, it's night and day.

Yeah.

Most investors are taught that leverage is inherently danger, and it certainly got me into a lot of trouble. Yet you often argue the opposite when it is used correctly. So what do you think most people really fundamentally misunderstand about leverage?

Well, for me, I'm in both camps. In my own experiences of ownership and very quick expansion in portfolio, I use leverage as a weapon. And, you know, if you're old enough to remember out there, Wachovia Bank, they used to have a program that would give you 123% of the purchase price at the closing table as the buyer. And just pray that you did whatever you said you were going to do properly to fix the property and, and move it all forward. Well, you can imagine how that went around the industry, and I know for myself it didn't work perfect. So we try to be much more judicious about the use of leverage today, and I'm trying to use leverage in value-added opportunities only, where that's providing me the opportunity to pay off my leverage quickly or bring it back down to a much more comfortable level, you know, somewhere in that closer to— as close as I can get to 65% loan-to-values. That's about my personal comfort level. So when we're working with young people in the game, and I don't just mean, you know, because you're 23 years old, you're young. It could be anyone. We meet people who have retired from postal careers and they're in their late 50s and they want to move into this space. So they're young at the game as well. We want to make sure we're laying that out and they can see the differences. And understand what really makes sense for them. I don't want to see anyone get creamed. Look, losing if you do enough deals is part of the game, but getting cremated because you didn't really understand your risks—that doesn't have to be part of the game. Now markets are going to change. Sometimes you're going to get stuck if you do enough deals. There's going to be one or two out of each hundred that are you know those G type deals. The oh my god! It's like I can't believe that happened type thing. But you're running a business and 80 of those are going to be much more normalized and you can base your business off of it. And that's what we're trying to teach people, right? People like yourself, myself, and others we know, we're trying to make sure people realize this is a business. This is not a one-off venture. You know, you're not trying to get lucky. You need to be planned. You need to have capital because after all, all businesses in America— and I can only speak to America because I haven't been overseas— But I believe it works that way around the world. Need capital to function, right? And the whole concept on Instagram and HGTV of doing everything with 0% and everybody else's money— can it work short term? It can, but you have to be very nimble. You have to be super disciplined to only use the money the right way. And then as you have the opportunities to pay it off You must pay it off. You can't say, well, I'll do some now and some later. Like, that never works. You end up with my haircut, right? I can guarantee you my haircut will show up, man or woman. If it's a woman, hopefully not. But you know what I mean, right? The aggravation is going to be there, and that becomes a real difficult thing to get out from behind.

Yeah, right. Well, a lot of people unfamiliar with private lending still are under the impression that banks are the gold standard. So in, in your experience, you're dealing with multiple different people and multiple different clients. What does traditional bank debt actually become harmful to investors in particular compared to what private capital can do?

Well, I think some of the main differences in today's world, in the traditional capital markets, you know, mainline banks, residential lenders that also do what's commonly referred to as non-QM loans and non-qualified loans that are not Fannie Mae regulated, you're going to have a limit to the number of loans you can have. And a lot of the more seasoned investors run into that limit or they run into the debt-to-income ratio restrictions. And that becomes problematic as they're trying to expand their portfolios, you know, for their long-term generational wealth. Their bigger cash flows on a monthly basis they're trying to build, and just their legacy that they're trying to put in place for their families. So people like us in our side of the world, the private direct lending side, yes, the product itself looks very similar to what a bank is offering. Sometimes banks, unless they're truly residential style, aren't lending at a 30-year fixed rate where we can. But one of the biggest differences Is for the most part, if you have the audacity to make the payments, we will not put the loan on your personal credit report. So that's a huge game changer. We have some people with as many as 50 loans, and if they walk into Wells Fargo tomorrow to buy their a new personal residence, Wells Fargo has no idea what's going on on our side of the world. So it's not affecting their debt-to-income ratio, relieving a lot of stress. That's probably the simplest, most common question we get to make sure of. And the basic answer is just what I just gave you. And people like that. Also, when you go into a bank, they're going to ask you a lot of questions if you have a portfolio about all of your properties, and they're going to take a very holistic look of the whole thing on a global basis, where in our world Even if I know Allen owns 15 properties, if Allen only came to Joel to refinance this one, we're only asking him questions about this one, and that relieves a lot of stress for Allen. And it also cuts down a lot of the time lag to get you to the closing table. It makes it infinitely simpler. So you have, you know, people are surprised, but over 80% of our clients have 700+ credit scores. People always think, well, you know, you must have the worst borrowers in the world, right? Because they're all afraid of banks. Well, That's not really true anymore. You have a lot of sophisticated people who are exhausted by the banking process, and they've had some bad experiences themselves on the bank side of the world, and they want simplicity. Our rates are the same. In some cases, they're better. So depending on where rates are for the day, we could be at or even better on a 30-year fixed rate than a lot of traditional banks. So People want simplicity. They want surety. They can come to me and within a day I can tell them they're approved. And whether I get hit by a car, I change companies, whatever it is, they're still approved. We don't have to go back through the process, find the new loan officer at TD Bank. Hopefully the chain of command is still the same and go back through that process. And people like that and they're looking for that now more than ever.

Well, that's a big difference certainly between what you're doing and what banks do. So you primarily work with BRRRR, or the B-R-R-R-R. Can you explain to us what the BRRRR is and what the B-R-R-R-R is for those who are unfamiliar with that term?

Absolutely. So many years ago in 1996, I bought my first rental property. And somebody came to me, a mortgage rep came to me about a year later and she said, Mr. Kraut, I think you bought your property really inexpensively and you have this small mortgage relative to what I think it's worth. Well, I kind of— I got nervous. You know, this is the '90s. I was a very unsophisticated investor and I didn't realize that all the mortgages were reported and recorded public instruments. So I was wondering, how could she even know this? Now, that was my first thing. I was nervous she had stolen information or somehow. But she explained to me that as you get through month 12, a bank would then let you refinance the property and cash out based on the market value. I didn't know any of that. So her name was Maria, and Maria explained that to me. I called the original real estate agent that sold me that property. And I asked her, you know, please don't laugh at me. But I explained the situation. Of course, she started laughing and said, yes, it's legal. You know, it just seemed too easy. I was a Wall Street trader. We're trading options, derivative products. Seems kind of sophisticated to most people. And this just sounded too easy. Like, how could this be? You're telling me somebody is going to give me a check back at closing? I'm going to get all my money out of the deal and I still own it. So that was my first experience with buying Renovating, renting, refinancing, and then going on to repeat it. Because I thought Maria, the mortgage rep, was ingenious.

Hmm.

Instead of going around and finding the Alexes and Joel— the Allens and Joels, excuse me— that buy a house once every 5 or 7 years for their primary residence, she went to find Allen and Joel the investor, someone she could see online that already had 2 or 3 mortgages. And went and spoke to them as those mortgages became 10 months old and aged, because there was an opportunity to refinance you in the next 90 days. And she could do a lot of mortgages that way without fighting with every realtor in the world. So I thought she was ingenious. I thought she was so smart. I was so impressed. We went on and did 22 more mortgages in the next 3 years together. So she really got me to open my eyes. And then working on Wall Street, access to the monies you needed for down payments, if you didn't have it all yourself, was was pretty easy to be able to get to through your friends. So we we really liked that, and we worked forward on that. Hence, twenty years later, twenty five years later, I never knew that they create a fancy acronym for it on the BiggerPockets platform called burr.com. And we had the opportunity in 2018, one night we're in the office late, we just Googled it to see who owned BRRRR.com. And well, the people at BiggerPockets who had spent tens of millions of dollars making this acronym and making it very popular and well-known forgot to buy BRRRR.com. We did. And the irony is we were at their event in 2021 in New Orleans at BPCon. And we met Brandon Turner, the guy with the beard who at the time was really the face of BiggerPockets. And we went through the whole story. He was, you know, it blew his mind that, you know, they hadn't done that. And from that event, we really went viral and went from a small company doing 200 loans a year to one doing 1,000 loans a year. So it was an unbelievable opportunity for us. And, you know, the whole concept started from very simply in 1996, buying my first rental property and Doing what then, unbeknownst to myself, was something that I'd be fully entrenched in 20, 25 years later.

Yeah, and it's interesting how that concept has become so popular. I was doing it before, before there was a term for it. I suppose a lot of us were and was surprised later to understand, oh, I was doing a barre.

Exactly.

I didn't know that. So anyway, you've worked with a lot of BRRRRs, and I'm sure that not all of them have been successful, and many quietly unravel after the refinance. So what typically goes wrong, and what those that do go wrong, and how should investors be structuring their deals and their opportunities so they don't find themselves in an unraveling situation?

Well, I feel like people need to really be honest with themselves and spend less time worried about what everybody else thinks and more time worried about what really works for them, honestly works for them. People need to understand— we talked about it for a minute or two earlier— leverage. And having too much leverage can really be very difficult. Our industry makes it super easy to borrow the money and to borrow it very aggressively to very low Debt service coverage ratios, meaning your free cash flow from your rents less your expenses leave you with very little to cover your mortgage. And as that number gets tighter and tighter, if anything hiccups, you're negative.

Hmm.

So if I was starting over, that would be something I would pay more attention to. I know it sounds really cool to use the BRRRR method. and really put a lot of doors on your plate really quickly. I've done that before. It ended very poorly for me. And truthfully, this time around, being much more judicious about how I use my leverage, understanding my risks better, and making sure I have the proper cash flows to support whatever money I'm going to borrow has worked out very well for me. And I believe The more time you spend focused on that and less on Instagram, the better off you'll be, right? Because it all starts with being honest in your evaluation and how you're really looking at that. Does it really make sense to add that new property to your portfolio? Is it really accretive to you? So is it adding value? Is it adding cash flow? Does it debt service really well so that if it's a 3-family and one of the units is vacant for 3 months, Am I still okay? I might not be great, but am I good? Can I get through? Right. Because in the end, positive cash flows are what get us all through these ups and downs and making sure you are taking care of that and not just borrowing money because it's easy to borrow is really important. We've seen too many young investors borrow a lot of money at low interest rates, which is great, but they've never spent a minute thinking about Okay, I put $40,000, $60,000 into this deal. What am I earning on that money? They're too focused on I could borrow it back then 2.5 years ago at 4.5%, 4%. That now as things have slowed down and you're 30 months into owning a property and now something breaks and you have to replace it and you don't have any reserves built up to handle that, you know, you left yourself in a bad spot even though your mortgage rate is at 4.25%. You're not making a nickel where other people have borrowed money at higher rates. But because of where the rents are now and what they made sure they did in due diligence review to understand how strong are the mechanicals, how old is the hot water heater, how old is the roof, is the foundation in good shape, right? A lot of the basics that as a seasoned investor like yourself, you would take for granted that people are checking. You know, quite frankly, when rates were 3.5, 4, a lot of people didn't check anything. That's the truth. They said, yeah, we did due diligence. Well, they're going into a car, an auto store armed to the teeth to go fight all day for $9 a month. But here when they're spending $200,000 to $400,000, you know, their friend said it was a good deal, so they did it right. It doesn't make sense. And you're paying the price for that 24 months later. To your point, you know, now cash flow is really tight. It's hard to make your mortgage payments. That's what we're seeing is the biggest problem out there. It's not necessarily that the properties aren't good. It's the money that they put in place. They took too much and it made it difficult for them long-term.

Well, that was exactly what got me into trouble was the fact that as long as, you know, the mortgage was being paid and the minimum expenses were being paid, I thought everything was cool and fine. And well, it was until 2008. Big wake-up call.

Absolutely.

And so, yeah, I appreciate you sharing that because people need to hear that. After everything you've seen, both wins, failures, the pressure, the responsibility of deploying capital, how has this work changed you as a person, not just as a professional? And what do you now believe really matters when building wealth over a lifetime?

Well, I think wealth means different things to different people. First off, you know, I've been in a room where one woman was very, very excited to the point where she got emotional about it, and she had finished figuring out and executing how to eliminate $800 a month of credit card debt. To her, that set her free. Another person had told me, well, if I could figure out how to get $1,500 more a month in free cash flow, that would be the ticket for me. You know, you're, you're in environments, I'm sure you're in them too, and someone will blurt out, I want to make $100 million. It sounds great, but you have no plan. So it's really disruptive to the room. It's not constructive, right? And we're looking to help people with the process, things that make sense. How do you put this in place so that You have more freedom. I was speaking to one of my really close friends a few months ago, a Tuesday or Wednesday afternoon, and I remember talking to Anthony. I'm like, I don't know, the noise or whatever in the background on the phone. Where the hell are you? What are you doing? And he was actually out taking a walk with his wife, probably like 1:30 or 2:30 on a Tuesday afternoon or Wednesday afternoon in the middle of the workday. Like, to me, that's being wealthy. That didn't mean he had, you know, the largest Lamborghini in the driveway, but he was able to control how he was living his day. And that is significant because very few people get to experience that. So again, it's going to mean a lot of different things to a lot of people, and that's okay. Again, you know, getting honest with yourself in what you're trying to map out for what your future should look like. You know, for some Having nine to five jobs, and they want to get rid of the nine to five jobs. For others, you know they want to do charity work. For others, they want to be with their families more, be around their kids, be active in kids' activities. Whatever it is, you need to create a plan to get there, right? If you have a goal and you write it down, and you create action steps, an action plan, and you keep working your way through that, you have the best odds of getting there, right? Most of the people. You know, we're at an event, we're starting off talking, and we'll ask them, why don't you write down the single most important financial goal for yourself for the next 12 months? And you can see in the audience some people are struggling to write that down, yet they've paid money to be there. They have set aside time from their normal life calendars to be there. They're actively listening. So To me, I don't understand how you're not planning and setting your goals and understanding a process, that this is a process. You know, you can't go about it ad hoc and then look back 20 years and go, you know, that, that other guy got lucky, that other woman got lucky, and it didn't happen for me.

Right.

They planned, they had a budget, they lived within their means. They didn't worry about what other people thought, even though it was annoying. You know, they drove a 3-year-old BMW, still had the same body shape, but it had 8, you know, 48,000 miles on it instead of zero when they pulled off the lot. And they used those $500 or $700 a month difference and put it into automatic savings, or they started buying income-producing businesses or real estate. You know, simple things, that's true, but they did it, and that was the difference versus people who kept hoping. Well, hope is not a strategy in life. You know, it's nice. I hope it's really nice out tomorrow. I hope it doesn't snow this weekend, but I don't hope I make $1 million a year, right? That doesn't work. There's a huge disconnect. And again, I'm not trying to be a mean or bad guy when I'm out talking with people at all, but I want to help and be honest and show them where I went wrong, what I've done to change the process with the simplest tools available. Most of which cost zero, by the way, and help them get 2 or 3 things that are actionable out of it so they can go do that and begin to see a change. Because as you know, once you start to see changes, it's a lot easier to stay the course. It's a lot more positive situation and things are starting to swing your way. Well, once they start to swing your way, it's easier to stay motivated. And that's what we want to help people with.

Well, thank you, Joel, for being with us today. So in today's conversation, we're reminded that success in real estate isn't about avoiding risk, but it's about understanding it. So we explored why leverage itself isn't the problem and how traditional bank financing can quietly work against investors rather than for them, and why strategies that look solid on paper often fail in practice. So drawing from his experience as a lender, broker, and owner, Joel Kraut shared how disciplined structure, honest underwriting, and respect for leverage separate portfolios that scale from those that unravel. If you'd like to go deeper, Joel has just released a new educational course, And you can learn more about it at www.training.brrrmasters.com. And this information will be in our show notes. And to continue your own journey, I invite you to Beyond the Paycheck: The Financial Clarity Compass, a private educational mini masterclass for high-income professionals ready to move beyond earned income and structure their Wealth Within Intention. So you can access our gift at www.go.stetucker.com/beyond-paycheck. Thank you for joining us on Streams to Impact. Until next time, may your capital be thoughtful, your risks intentional, and your impact lasting.

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