How To Be The Bank | REIal Talk | EP. 64

Hey, everyone, my name is CJ and we got Ben here today to kind of talk to about what it is to be a private money lender or being the bank. And this is. This is episode 64. So we're really excited to be here today to kind of talk all different facets of this topic because it is a little different for people who are just hearing about it the first time. So, Ben, I guess maybe just take it away. What is private money lending? What is this being the bank? What does that mean?

Well, private money lending is just an amazing way to be able to invest in real estate without some of the responsibilities of owning real estate. And I think that's one of the. I think just to frame our discussion here today, if you think about, on one side, you have the full ownership responsibilities of owning a property, and on the other extreme, you have completely passive income where you're receiving income from real estate but not actually involved in the management or ownership responsibilities. This is the next step from owning real estate, but yet you are being able to be a level of more passive in your participation of that. So that is an introduction. Being able to be a private money lender is the opportunity in which you can lend the money during. From the first day that the property has been purchased through the time of renovation until the end when the property is finally resold.

Yeah, yeah. And a lot of people are using private money, right. Fix and flippers, sometimes even wholesalers. A lot of different people involved in real estate are utilizing it. And it's a big part that allows our business here at freedom to function the way it does. Because at any one point in time. Yeah, yeah. And it's like you said, it's very passive for the investor, but for us, we are, you know, buying and selling over 100 homes in a year. And they on average take six months for us to kind of from. From purchase to sale. So that could mean that at any one point we have in our, you know, ownership over 50 properties. Right. And so in order to purchase that many, when we're purchasing with cash, we utilize private money to make those purchases. So it's a big thing that allows our business to continue to grow. And, you know, they. They earn their passive interest and it's just allocated into our business model as one of the expenses that we have to pay out.

So who would you just. Again, trying to frame the framework, you've got investors that are very active, they own properties. CJ what would you say for them? How would this fit into their portfolio?

Yeah, I think it's a, you know, the way I like to think of it and people would probably disagree is it's kind of like bonds. It's a very set percentage typically that someone is earning as a private money lender. And what's cool about it is it is backed by the real estate itself that it is being used to purchase and rehab. So it's a very, you know what you're going to earn, you know, whereas the investor, there's a lot of variables at play when they are fixing and flipping a property, right? All the different repairs, time delays, taxes you have to pay, There's a lot of things that go into it. Whereas we have a lot of investors who are business owners, doctors, lawyers, just well paying W2 jobs. But they want to be involved with real estate or want to diversify into that asset class. So this is a passive way where they can say, yeah, I'd love to lend my money to you and know I'm going to get a 10% return and all I have to do is wire the money back and forth. Right.

And so what type of choice do investors get when they're looking at the property? You know, do they get to do their due diligence on the property in advance or how would please explain how that works?

Yeah, so how it works is basically you would have a call with you or myself and say, hey, I'd like to be a private money lender and I'd like to start off with like a one one off property, right. Something that's going to be a six to a 12 month loan. And then we would introduce you to Tiffany, our transactions coordinator who's going to reach out and say, hey, we have this property at 123 Main street and it is a $75,000 purchase price and a $25,000 rehab. Can we borrow $100,000 and we're going to pay you 8 or 10% on that money. And basically they can look at the deal, look at what we think the ARV or after repair value is going to be for that property and also just take assurance and it not being too risky because we've done 100 of these same deals or very similar deals in the last year. Right. We know the model. Right. It's just, you know, it's not our first time fixing and flipping a property. So we have a very good estimation of how many months it's going to take us to do the rehab and return that capital plus the interest to you.

So there's the assurance of being able to see the property upfront and be able to see what the dynamics are involved of it. There is the assurance of a company that has massive experience in the same market doing this type of work over and over and over again. There's also the assurance that we're doing the work in house because we have our own in house crews that again are working with the same materials, the same type of model over and over again and are extremely, you know, have developed great expertise in being able to do this quickly.

Yeah.

What other type of insurance would you see?

Yeah, the other big thing that a lot of people, you know, want to know is like what happens in the all catastrophic worst scenario. Right. And that would be that freedom goes bankrupt or goes out of business. Something along those lines. Well, in this scenario that we've been kind of talking through that person, when we close on the property with their capital, they are actually at the title agency going to have a first lien position on that property. So in that worst case scenario, they are actually able to foreclose and take ownership of that home as the collateral to their capital. Right. So you're not going to lend on a property and you know, we go out of business and you're out your $100,000. Right. That's certainly not going to happen. You're going to be getting a property that is, you know, in most situations going to be worth that $100,000 or potentially more. Right. Because we are planning to put this work in and it's going to be worth More than $100,000 when we go to sell it to one of our investors.

Yeah, it's pretty amazing. So talk a little bit about rate of return. You'd mentioned different rates of return. How will investors know what rate of return they can expect when they look at one of these potential properties for them to be able to do some private money lending.

Yeah. In this, this ranges, you know, I'm going to talk a little more broadly. Right. If you're looking to be a private money lender with anyone, some people charge points. So a percentage piece of the loan and then an interest rate thereafter. We like to keep ours relatively simple. So, you know, we pay anywhere from 6 to 12% for utilizing our rates. And it's. Once you hit a certain amount or threshold, it brings you up a couple more percentage points. So that's. And it's all paid once the property is sold. Right. So we're not paying like monthly payments. It would just get a little too hectic. And to be honest, a lot of our investors just want to know that their money's at work. Right. So we actually have a fund, right, a fixed income fund where people can put their capital in and we can just continue to cycle that money into our different properties that we're fixing and flipping and selling as investment opportunities. So that is a great thing because I would say the majority of our investors are actually utilizing their tax advantaged accounts to do this private money lending. So we deal a lot with self directed IRAs, solo 401ks. Some people lend from their business or entities that they have and some, some do personally as well. So we are able to work with all different types in that fashion. But yeah, the rates are 6 to 12% just depending on the amount that someone lends with us.

So tell us a little bit about investors. Where are they from and why is it that investors from a great distance will be investing with us in this type of investment?

Yeah, that's a great question. So we have some great partnerships with various podcasts and people just have known us. And to be honest, our best incoming private money is referral based. Right. You know, we have a lot of people who try us out, you know, and they get their return exactly as we've said. Right. We have always paid every loan or private lender back what they are due, even if we freedom have lost money on that deal. That's really important to Danny and because of that, right. That trust that she's been able to have with her private lenders over the last five years has allowed us to continue to grow our private money lending basis as the company has grown. Right. And continue to buy and sell more properties. But yeah, it's really just people are looking for a guaranteed return. Right. It's hard to come by right now we're getting a lot of inquiries because of where the stock market has gone these last six months. Right. People are just looking for a safe place that can keep up with inflation. Right. And we can certainly do that here with what we have and hopefully if not beat inflation as it settles down. Right. So it's just, it's diversifying away from the stock market, which is where so many people have all of their holdings. And this is a safe way to do it and very passive as well. Right.

And a lot of the holdings in the stock market is a lot of investors don't have a choice for a certain amount of their funds because it's tied up in 401ks at the company, et cetera. You mentioned the stock market, but also with bitcoin and crypto, a lot of People have experienced a lot of variability in their accounts recently because of that also.

Don't remind me, Ben.

We've been bottom fishing, my wife and I, to buy in as this dropped off. But for people that have been in, it's quite a new experience for them. So this is a chance to be able to take a portion of your portfolio and be able to have exact measures, have a certainty to it with a layer, series of layers of assurances that we've been talking about that allow you to know, hey, six months, eight months, a year from now, this is what I can expect to get back. And it adds a level of predictability to your investment that is very reassuring in times of great change that we're in right now.

Yeah, yeah. And it's exactly like, I mean, people are talking about interest rates right now from banks, and banks are, you know, in the 5%, 6%. Right. We are here saying, hey, we'll pay 8, 10, 12%. Right. We're. We're paying over. Right. So that is a huge, you know, churn of money. Right. People are saying how they're not buying homes because of the interest rates. Right. Like, we want that money. Right. We are happy to pay that because it allows us to continue to fuel the machine and continue to make profit from the sales of our turnkey properties. So it's just the cost of business for us. And it's a great way to be the bank. Right. That's what this episode, I think is going to be called. Right. You are the bank. We are paying you interest on your money that is backed by real estate, similar to what all these banks are doing, loaning out money.

And for a lot of people, it's great to be the bank. Yeah, a lot of people been. Most of us are usually on the other side of the bank equation. And this way you have a chance to be able to become the bank.

Exactly, exactly.

So now you mentioned inflation, and this is a key thought. Also another level of assurance for people when we talk about the Freedom Homes. Our business model for our investors is not depending on appreciation to be able to make their money. We're set up in terms of cash flow. And that's a whole other podcast and a series of podcasts have already dealt with that. So it's good to check those out. The previous podcast. But the assurance for you is, as a private money lender, there's always a great demand by investors for homes that create this ongoing cash flow, and that's what we provide for them.

Yeah. And at a reasonable price point, Right. These homes that we're buying are in the, the bottom 10, 15% from a price perspective. And so, you know, those are going to be least likely to go down in a recessionary period. Right. Because they're already so low. There's always going to be demand for that lower, lower price point of housing.

C.J. tell us when, when a person investor does private money lending during the course of that project, what are some of the choices they have about the amount of reporting that they would receive on the project as it's taking place?

Yeah, so we do a varying level of reporting. If it's a one off investment, we will update you monthly actually saying, hey, it's now been vacated, renovations have begun or renovations are finishing. We're getting ready to list it for sale. So each month, Tiffany, our transactions coordinator, will provide an update for our fund that we have set up that we utilize private money for. Those people are looking for a little bit more passive of an approach. Right. They don't maybe want to hear from us. So we are paying them, you know, every six months and they're hearing from us every quarter, just an update on the properties that we're purchasing, the properties that we're exiting and just letting them know that we're keeping their money at work and able to pay their interest.

So this is an ideal way to have investments for people, especially suited for people who are very busy right now. And I'll give you an example. In addition to my investor relations work, which I started off with freedom as an investor before I came onto the investor relations team. And right now my wife and I are designing a house that we're going to be building. Tremendous amount of energy goes into meetings. We had, we had a two hour meeting yesterday with our designer and we think we're almost done and then we're not. And we still have several layers of design to go once we get this into the approval process. So with that, and the same is true when you own property. So if you are interested in real estate investment and yet your profession, your other work is very demanding. You don't have the time to put in, you know, hours of time to be able to work with that. This allows you to be able to lend money without being involved in the day to day processes that you have that are required for ownership.

Yeah, and it's a great way to learn too. Right. We have investors both for our private lending and syndication that may join us because they want to get more involved and understand just being from the investor perspective. Right. Learn the processes that you have. And in the future. Right. They like, they like feeling like they're owning something, but they don't want the headaches that come with it. So this is that perfect medium. For sure. For sure. But yeah, I think, Ben, I think the final thing I have to say, and if you have anything, is, you know, if you are at all interested in private money lending or how that works, Ben or I are happy to get on the phone, talk with you, talk about what options we can offer, interest rates that we can provide, and just look, I'm sure we'll in the, in the details, have a way to get ahold of us and book a call. So that'd be great. Ben, do you have anything else you want to add?

Just that in times of change, and we're in a time of change right now, generally speaking, as long as, you know, we have in the last couple of years is sometimes, sometimes the easiest action in times of change is to do nothing. And yet also within times of change, there's the greatest opportunities. And for us, as we're talking about private money lending, in the particular model that we have here at the Freedom Companies that we're offering you, this is a very consistent pipeline of opportunities. So it's a great time to be able to have an investment that provides a level of certainty that you might not have in some of the other investments in your portfolio. And as CJ Just said, we welcome, both of us welcome the opportunity to be able to talk with you and answer your questions about private money lending, some of the other offerings that we, we have as well. And we look forward to that.

Yeah. All right. Well, as always, invest smart, live happy. Thanks for being here on episode number 64 and good luck and let us know if you we can help in any way. Thanks, you guys. Nothing on this show should be considered.

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