AIPIS 76 - The Inside Scoop on Private Lending with Alan Cowgill

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Welcome to the AIPIS Show. Welcome to the show for accredited income property investment specialists and those who desire to be. This is your host, Jason Hartman where we talk about increasing your income, your productivity and just generally having a better life while serving your clients better with America's most historically proven asset class income property. We have a great interview for you today and we will be back with that in less than 60 seconds.

It's my pleasure to welcome Alan Cowgill to the show. He is owner of Colby Properties and president of Integrity Homebuyers. And let's talk about financing real estate deals. Alan, how are you?

I'm great and I'm tickled to be on this call.

Well, it's good to have you. Give our listeners a sense of geography. Tell us where you're located.

Yeah, I'm located in Springfield, Ohio.

Okay, fantastic. So when it comes to real estate deals in the paper side of the equation, Alan, what are some of the best ways to fund real estate purchases?

Well, my favorite way is to use private individuals called private lending. And that's what I got started doing many, many years ago. And it's really been tremendous. And that's what I teach people how to do.

So with private lending, the advantages are that, you know, you can do an asset based loan. Maybe there won't be any credit check or qualification like that. There are a lot of advantages certainly, but one of the disadvantages is the rates are higher and the terms aren't as long. You know, the US has always had its real estate market for better or worse. I say ultimately worse. Most people think it's better subsidized by the government since the Great Depression, you know, so we got Fannie Mae and Freddie Mac. It's like a government subsidy on a real estate loan, you know, so it's hard to compete with those rates and three decade long mortgages. Right?

Well, the nice thing about private lending is you get to set the rules. And so when I was coming up through my real estate education, I heard this thing about hard money lenders and private lenders. And I thought they were one in the same at first, and actually they are distinctly different. A hard money lender sets all the rules, but what I teach is how to borrow money from private individuals. And in doing that, I got to set the rules. So they're very, very, very flexible on.

What I can set up with individuals on how to fund the real estate deal.

So did you get into it from the side originally of buying and investing in real estate or. Or did you get into it from the side of wanting to be in the paper side of the business?

Originally, originally it was because I'm a real estate investor and I was funding my real estate deals going to banks and hard money lenders. And after a while I realized that I could borrow money from private individuals. And my mom had come into some money when my dad had passed away and she did what a lot of people do. She took it down and plunked it down on a bank certificate or deposit. Well, I went to mom and I said, look, you're getting this poultry low rate of return on a bank cd. I can give you three, four or five times what you're getting on a bank cd. And I can give you a mortgage, a promissory note, has an insurance lender, title insurance. I can pay you monthly simple interest only. And mom jumped for joy and she became my first private lender.

The terms that you're talking about are very, very flexible based on what you want to do and what the needs are, your company and with private lender.

So Alan, though, is it fair to say or please tell me some of these terms that you're getting? Is it fair to say that you shouldn't expect to beat Fannie Mae, Freddie Mac type agency loans?

Well, what I do is, and what I see the going rate from many of my students across the nation is, is between 6 and 8% interest. And you can either do simple interest or you can amortize a loan, you know, whatever you desire. And on amortizing, you can use the number of years that works for both parties. And so that's basically what I do. So I have some of my students that are paying 4, 4 and a half, 5, 6% interest. So. And some are paying more than 8. So it's actually whatever fits your needs in the business and you're working with a private individual and you just work out what terms works for both.

Yeah, okay. So that's the side of originating a private money loan, either as the lender or the borrower to do a real estate deal. What about trading paper and so forth and discounted paper?

Well, there's some initial restrictions on that. You can't sell it.

In some states it's a year and others you just can't sell it. So that typically doesn't happen. They aren't looking to make a marketplace for doing this. So the original private lender will keep the original promissory note.

What's the difference between a private lender and a hard money lender?

Well, with a hard money lender, I've had hard money lenders in years past before I got private lenders. And what mine did was they charged me 15% down and so on a $100,000 loan, that'd be 15% of the money. You'd $15,000, a wheelbarrow full of money you got to take into closing. And then they charge points, which is five points. So same example, $100,000, that'd be $5,000 coming out of my side of the HUD one. With a private lender.

It'S a cash deal and I'd have roughly $875 coming out of my side of HUD one. And then with a hard money lender, you gotta, they will escrow some money for repairs, which is nice, and that's why a lot of real estate investors go to them. But you gotta cough up your own cash renovations. As a, as a real estate investor. If you do business with a hard money lender, start now and then once you have done what you said, you put some money into it and then you've done the demolition work and build it up to a certain level, then you can call up the hard money lender and they'll send in an appraiser, typically that you'll pay for. And if you did what you said, they'll start giving you draws. One, two or three draws, depending on how much money they held back. And then with a hard money lender, they'll put a balloon on it and so I have to pay them back in 12 months. But with a private lender there is no balloon. So.

It'S distinctly different now. I prefer to have my students become hard money lenders, to be honest with you. I mean, in years past, locally I loaned out money.

As a, you know, and treated it like a hard money lender to folks that I knew. So there's a, there's a benefit of being, of getting private lenders because if you get enough money you could also.

Get licensed and be a hard money lender. So there's a win, win there in.

Terms of the private lender deals. I mean, like for example, what are the longest terms you've had on those over the years?

Well, you can go 30 years on that. But typically what I do, Jason, is I will set it up to where you have to have terms in the promissory note. And what I'll do is set it up for five years or until the house sells or is refinanced. And so that's typical, but you can actually set it up for any length of time you want. I've got one paying off here in May that I've had out there around seven years. So some of my students will amortize the loan, pay a lower interest rate and they can stretch these out for 20, 30 years if they want.

Any techniques on getting someone to accept those 20, 30 year terms though, typically.

You'Ve got someone that.

They might be an older person that wants to get that steady income coming in every month and that would be the type of person that you would work with. What you can do with borrowing money from private individuals is you can just establish what terms you want to pay, let folks know. And with some of the rates out there, it's not going to take very many asking very many people till somebody's going to say yes in terms of.

The rates they're getting in the bank.

Yeah, that's right. You know, it's when you take a look at that, if you look at USA Today and look at the money tab there on Thursday or Friday, you get annual or you get national rates of CD rates and the rates are just really low. So you come along and you offer somebody 5, 6, 7%. Interesting. It's very, very appealing, you know, compared to the.0026% that they're getting on a bank. Bank CD.

Yeah, yeah. No, no question it is. It's just the length that I think, you know, people run into getting the objections for, you know, they, they won't do these longer term loans. And so that's the thing. What tips do you have, Alan, on finding those private lenders that'll finance those longer term buy and hold deals?

A couple ways to go about it. One is you can have a group meeting, you can preferably invite people that you know to a meeting. And what I like to do is put on a PowerPoint slide presentation and I tell them about my business and I tell them about the, the terms and I show them that they get a mortgage, a promissory note, has an insurance lender title insurance on the property and then just flat out Ask them to loan me money, and it works. The other one is one on one is same thing. I do it with a PowerPoint presentation, put it on your laptop, and meet them at your office or a neutral location. I don't like going to people's houses to do it because of the interruptions. You can get people coming to the door and the phone ringing and the dog running through the house and interruptions from kids and things like that. So I prefer to have a neutral location and do it.

Yeah, but you've got to find the people to invite to the meeting. Are there lists of these people? Do you have any recommendations on finding them?

Sure do. Yeah. There's a couple different ways. Starting out, preferred way is to work with people you know, so your circle of influence, and I call it family, friends and associates. And so you would ask them to meet you for a luncheon or have a meeting and do your presentation. The other thing, if you want to work with strangers in every single state in the United States, there are.

Rules about that. You can ask people for. For money from strangers, but you have to fill out some paperwork with the sec. In fact, many years ago, what I did was I hired an SEC attorney to research every state in the United States and Canada. And when he got done, he came back to me and he said, hey, I want to thank you. And I said, why is that? He said, well, I got done with that project, and I'm. And you bought my new house, and I'm moving into it today. I gotta tell you, Jason, that's not what you want to hear from your attorney. But.

It gives you an indication of my moral obligation to my students to make sure that they were safe. And what I found when he did that is there's five areas that are controlled in every single state, and they're all the same. Number one is advertising. There's times you can advertise to find strangers to loan you money. There's times you can't. And you can do it if you just comply with the laws within the state.

And fill out some paperwork and pay a fee, and then you can go ahead and advertise to find private lenders. The other rules are commissions. You cannot pay commissions to private lenders. The third rule is pooling. And it's just like advertising. You can't. Pooling would mean putting more than one private lender on a promissory note. And so you can't do that unless you fill out the paperwork, just like advertising, and pay the small fee, and then you can do it. And the other two are thresholds. One is the number of lenders that you can have in a state.

And the other is how much money you can raise within that state. Now you can go unlimited amount of money, but here again, you got to fill out the paperwork and comply with the rules. See, the SEC controls this piece of it, this piece of business.

Have the laws in terms of private lending, how has the JOBS act impacted that? If it has in any way? I mean, certainly the crowdfunding people are looking for gold at the end of the rainbow. There's no question about that. But what about just doing straight, regular private lending?

Well, with the JOBS act, what it does is it talks about owner financing. And so this is not what private lending is all about. Private lending is all about borrowing the money from a private lender to buy, fix and sell the home or, you know, and someone can come along and get a, get a bank loan or a hard money loan to buy the home, whatever they want to do. And so, yeah, the JOBS act and with the Dodd Frank piece of it, yeah, that's controlled on owner financing, but that's not what this is about. This is about funding.

Would it be better to just restrict oneself to lending to investors only? You know, is it just a lot less fraught with problems around Dodd Frank and so forth?

I think so. I mean, to private. Yeah, I mean, I love it. And, and my students are extremely successful doing that, you know, and you talked about crowdfunding. You know, everybody's interested in that. And, and I've done a lot of studying on that. And the thing about crowdfunding, I mean, there's a lot of positive things. Number, number one is, you know, if you really hit it off, you can get a lot of money. The thing I heard though was about 70% of the folks setting up crowdfunding don't get them funded. I don't know if that's an accurate percentage or not, but that's what I heard.

The other thing, you mean the deals or the businesses? The websites?

Yeah, the websites.

Right, okay.

Yeah. And the, and it takes a little bit of time to set up the website and, you know, you're part of it and to, and to do your video and to attract people to that. My students, they can raise money in 24 hours. In fact, we've done that at my live events and been incredibly successful.

What else should people know? Just anything I haven't asked you so far.

Well, the biggest thing is to get the techniques down on how to do it right. You don't Want to go out and stumble and bumble and ask somebody for money and let's say they got money to loan, but you can't answer their questions. And if they say no, you know, you could be dismissed as a fly by night. You know, you need to have to know the right answers to answer their question. You know, the answer to questions or you're not going to be successful. So you need some training on that. The other part of it is on how to manage the money. It's very, very easy, but it's kind of like riding a bicycle. When you first get your very first private lender, you might not know how to. How to handle the paperwork and do things like that. And so it's important that folks get an education on that. And then the other piece of it is, what I talked about earlier is the laws is it's kind of like a sporting event. Jason, you. You know, the sporting event. I was an offensive defensive garden in football, and I, the coach would teach me the fundamentals of the game, how to block and how to tackle and how to play the position. He also handed me a rule book which said if you're carrying the ball and you go 10 yards, you get a first down. If you're carrying the ball and you step out of bounds, play stop carrying the ball and go across the goal line, you get a touchdown. It's the same with private lending. There are the fundamentals of how to acquire private money and how to manage it. And then there's also the rule book which is set by the sec. It's not the Wild west, even though people would like to have it be that way. And a lot of real estate investors don't understand that there are some rules and they go out and borrow private money and they make mistakes.

Why is it the SEC that we're talking about when we're not doing multiple investors or fractionalizing a deal or, you know, doing a private placement memorandum? And these are just two parties, the lender and the borrower. I mean, wouldn't that be the Department of Real Estate or the, I don't know, the Federal Trade Commission or something? It's sec, huh?

Yeah, it's sec. You know, they were. Oh, they were created back in 1933 and.

Yeah, the Scoundrels Encouragement Commission.

Well, look at Wall street, the modern version of organized crime. How they doing there?

Yeah, I've never heard it called that before. That was pretty good. Yeah. What had happened was when it was created, this was put underneath their domain. And so there's the federal sec, and then each state has a division of the sec. So I live in Ohio and so I've got the Ohio division of the sec and they control the commerce within the state. And then the federal SEC covers when you go across state lines. Now you talked about the Reg. D, the ppms and private placement memorandums. You know, that's part of it. My students use those. I get about 40% of my student base is commercial folks and balancers, residential.

That's when they're raising money to have multiple people create a loan on a. Maybe a bigger deal.

Right, exactly. And they just changed those rules here in September of 2013. Before, with a private placement memorandum, you could not advertise, you know the words private placement. So you couldn't advertise. But what happened was Congress passed some laws in the first quarter of 2012, and in September 2013, the SEC had birth to the new rules. And there's, and there's now a 506 Rule B, which you cannot advertise. It's handled like it did the old way, where you just had to ask people to loan you money, but not strangers. But now there's also a rule C, as in cat. And with the Rule C, you have to have 100% accredited investors and you can advertise. So with the rule B, you can have 35 non accredited in the balance, have to be accredited investors. So a lot of my students use those.

What we do is we find private lenders to fund those deals, private individuals to fund them.

At this stage of your career, you probably got a lot of cash, probably able to do deals. I assume you do lending as well as borrowing. But you know, is it still wise to use a private lender even when you're, you know, in the more advanced stages of wealth creation and you know, you've got, you've got money.

Oh, I would use it forever. Yeah, I find it the cheapest, best, easiest, safest way to go fund your real estate deals. And it's fast. You know, I can get an offer accepted on a Monday, I know, in the property on a Friday. You know, commercial deals, it's different. But on, on, you know, single family homes, it's that fast. You call up somebody and you know, frankly, Jason, it's like ordering pizza. I mean, you know, you order private money like you order pizza. You know, obviously there's some rules to follow, but you can, you can order money that quick and people are glad to do. In fact, when you pay somebody back, they'll call you up and they'll say, hey, I got my money back. I didn't want my money back. How do I get this money back?

Right, I want to, I want to keep it out so I get the interest on it.

Yeah, exactly, exactly. But you don't want to keep the money if you, if in what I call the gap, which is when you sell the property and you're ready for the next property because you've promised a private lender that the money is secured by real estate and therefore you got to keep your word. And so if it's not secured, the money needs to go back to the lender and then the job is to crank up your buying machine and get it working again.

One of the things I say to our private lenders is that you should get the money back at the end of every deal and then try to reloan it again as soon as you can, because, you know, then that's, that's one way to ensure that you're not in a Ponzi scheme. You know, if they keep giving you your money back, then it's, it'd be pretty hard to operate if you had a Ponzi, you know, a Bernie Madoff type of situation going on, which is probably very rare in this world. But, you know, it could happen, you know, you know, you really have your money if you got it back, even if it's just for three days and, you know, before you do the next deal. I think that's just a prudent idea to get your money back each time.

Yeah, I agree with you. I agree with you 1000%. And that's exactly what I do and exactly what I teach my students to do is give the money back and then, and then their job is to crank up the buying machine and get the money working again.

Yeah, absolutely. Are there any states you would really avoid that are, I mean, you know, New York, California, they're always a hassle. It seems like everything I do when I deal with California, it's this whole set of special laws, you know. Are there any states that you would just kind of shy away from?

Well, there's 13 states that you have to fill out a piece of paper before you get your first private lender. For an example, in my state, I can go out and get a private lender tonight and I don't have to fill out any, any paperwork. And I can get up to 10 lenders in 16 months. Here most states are 12, and there's an, in the lowest state on the number of lenders in a 12 month period. Is New Hampshire, which is four. And the. And the highest is. Is New York, which is 40. And all the rest of us are somewhere in between. Most estates, around 15 to 25 lenders. But like I said earlier, Jason, if you want to go unlimited, you could, you could do that now on the 13 states. Just because I got to fill out a piece of paper and send in a small fee. I'm talking 100 bucks or what, you know, 200 bucks fee. Then you can go get private lenders just like the rest of the states.

There's some states that the SEC is more aggressive than other ones. And so I wouldn't. I got a lot of students in those states, and so I obviously would just be very, very aware in any state to follow the rules. And you want to make sure in those states that you. You got an SEC attorney to help you out, not a real estate attorney. Because this is different. This is. You're following SEC rules, so you want an SEC attorney. Just like doctors have different skills, so do attorneys.

Any tips on finding an SEC attorney? And then I want to ask you, you know, which. Which are some of those states you.

Would avoid that are harder, they're a little tougher on finding an SEC attorney.

The best would be the kind that has actually worked within the division of that state. Okay. And they've been in there that you find that. What I hear is I'm not an attorney and I don't give out legal advice, but I hired that attorney, and so I can. I know the laws and can teach it. But he told me that someone would come out of school and get into the division of the sec, stay there a few years, and then spin out into private practice. Those are the best because they've been in the inside, they know the rules, and that would be the best. They're probably also the most expensive. The other kind are ones that go into the SEC division and stay there, so they end up staying there the rest of their life. So the ones that spin out into private practice is the best. The other thing that.

But how do you find those people?

You got to do some research, because the fees are all over the map. And for an example, you talked about PPM a little bit ago. Well, those fees can be. If you had some big corporate company, SEC company, and they're dealing with some big corporation, you know, they're charging $50,000 for a ppm, you know, and that just puts my students out of the realm of doing that.

They're all over the map on pricing on PPMS and you can get them for 15,000 or 10,000, but I know attorneys that you can get it for $5,500. And so that, that puts it in play for my students. And so to answer your question, you got to shop around and just get on the phone and shop and get some pricing on the attorneys and make sure that you got the best price that you can. Now back on the states, the tough ones. Well, you mentioned one. New York's tough, Pennsylvania's tough, California's tough.

On the hard money side. Right. Well, the thing I find in California is even if, even if you're going to say it's not, which would be amazing from a regulatory standpoint because California, I mean every year they got 8, 900 new laws, as if, as if we're supposed to know those laws.

Right.

You know, the rates are not competitive there for the lender, for the borrower they may be, but you know, you just don't have, there's just too much competition. There's too many hard money lenders in California. You know, they push down the rates.

Jason, it's interesting you bring up California because when I was paying that attorney to do the research in the United States, he uncovered the fact that in California they have a unique opportunity on their books to where the folks in California can pay $600, fill out a two page form, turn in their advertising, their disclosure statement.

And they are able to raise $5 million and advertise to do it in California.

What's that called, that program?

The name is really long, so I had to make up my own name. I call it the California Loophole. So I don't, not that it's illegal, but it's just a.

It'S just different from what the other states are doing that we did the research on. And so you can raise 5 million the first year and on second year you can raise an additional 5. So then you got $10 million. So you think about somebody that's doing a multi unit apartment complex, I mean they can cookie cutter those and borrow $5 million a year and each year get a new, new complex. So.

But it's, it's a very, very simple way to borrow money from an advertise to do it and pool money and you can cross state lines. So I have heard that I've got students in Canada that they're using it. So you can, you can easily use it in other countries too. You have to take the first step though. If you live in Ohio like I do, you have to take a step to where you File as a foreign corporation. Like you're in a different country. Foreign. But you only have to pay $100 to do that. And once you, once you get that paperwork processed, then you can go ahead and use the program to go ahead and raise $5 million. Fill out the two page form, 600 bucks, and you're good to go.

Okay, so in other words, what you're saying is California is actually pretty beneficial from that perspective.

I like that one, I'll tell you that. Yeah, yeah. Because most states, most states are capped at a million. And unless you fill out the paperwork and then you can go, you talked about the ppm. You know, you can go unlimited with that.

But when you talk about that, I mean, there's a difference between raising the private money for debt versus equity.

Right?

Which one are you talking about there? Or are you talking about either one?

Well, I'm talking, I'm talking about debt. I'm talking about debt. But some of my students, they, you know, they, they team up with the private lender and, you know, it's equity. So you can go either way.

Yeah. Okay.

Okay, good.

What else did you want to say about that?

Well, the different states, those are the ones that come to mind that we just, we just talked about. Pennsylvania's got a real aggressive division, the sec, New York also. And those are, those are two of the states that you got to fill out a piece of paper before you get your first private lender. And there's 13 total.

What else should people know and get out your website tell people where they can find you?

Okay, yeah, my, yeah, my, my website is Private Lending made easy. And just spell the words are all the way out. Private Lending made easy dot com. And if they, Jason, if they go out there up in the top right hand corner, I've got some free stuff for Everybody. I got 35 E coaching lessons. I brought up a foreign country, you know, borrowing money from a foreign country or vice versa. There's a, the top box there will get a free report, white paper on that and some videos. So just got a tremendous amount of information out there for folks on private lending. So the biggest thing that.

I teach is not only attracting private lenders like a bead of honey, but also how to be safe in doing it and following the SEC guidelines. So I think that's the biggest thing.

Yeah, yeah, I think you're right. Alan Cowgill, thank you so much for these insights today. We really appreciate having you on the show.

Well, thanks, Jason. I appreciate you having me. Take care.

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