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Private Lending with Keith Baker
In this episode, we have Keith Baker from The Private Lender Podcast. Keith’s podcast is about providing knowledge and insight from successful lenders, real estate investors, and other professionals that enables successful lending.
In today’s show, he talked about private lending, things he looks at when making a deal, note servicing, and a lot more.
- Who Keith is
- How he got into private lending
- What The Private Lender Podcast is all about
- On the mechanics
- Things he looks at when doing a deal
- - the people
- - the process
- - the property
- On financing deals
- Recommended RMLO
- On third-party note servicing
- Recommended note servicing
- What he looks for in a person when doing deals
- What he looks for in the process
- What he looks for in a property
- About the property
- About equity participation
- On using self-directed retirement accounts
- "It's not always win win win. Sometimes, you're going to lose money.
- "It's a business. It's a grind."
- "You got to do in real estate what you enjoy doing. Otherwise, you won't be in it very long."
- "Your network is your net worth."
RESOURCES AND LINKS FROM THIS SHOW:
- The Private Lender Podcast
- Private Lender Academy
- Quest Trust Company
- Texas Pride Lending
- Mills Escrow Company
- Moat Note Servicing
- Email Address: firstname.lastname@example.org
Larry: Welcome to the Brain Pick-A-Pro show live from Lake Wylie, South Carolina, I’m Larry Goins. I’m really, really excited guys. This is show all about real estate where we bring in people who are in the business who are dealing deals, who are having fun and making money and today we have my good friend Keith Baker from the Private Lender Podcast, the man, the legend and the myth, and I can also say a student, right?
Keith: That is correct here. I still have the Ultimate Buying and Selling Machine, my first piece of real estate education I ever bought about a decade or more ago.
Larry: Wow! That’s awesome.
Keith: So, not only yeah, a student and a fan.
Larry: There you go. That’s awesome man. I appreciate that. That’s cool. So, Keith why don’t you start out and tell our viewers and listeners a little bit about yourself?
Keith: Sure. I am very, very lucky in life, raised by parents who told me to go out and hustle and if you want something you gotta go and get it. So, through many career changes, I ended up in doing insurance adjusting for the oil field, so I handle a lot of other people’s money in my day job and I have a piece of that company, so I’m quite content to go to the office and work. But I love real estate. I’ve always loved construction and I’ve always tried since about 2002 or 2003 trying to have a hand in it. So, when Hurricane Sandy came through in 2012 and things got really busy, I shifted my focus over to private lending, that way I could still be investing, I could still be with investors but you know, I’m not running to a property to look at, to talk to a contractor or you know, measure anything and no investment should be passive, but private lending is the most passive. Really about the last year and a half, I’ve been trying to put together the podcast, trying to teach people, one, that private lending is not only legal, ethical and moral, but it is also allowed by the IRS and self-directed IRAs and if you have a Roth it is even better ‘cause it will be tax free. So, that’s really the gist. I do invest in some real estate. I have a partner who is a full-time investor and we are going 50-50 with his infrastructure and my marketing budget and we market heavily on the east side of Houston and we try to wholesale and owner finance whenever we can. I like notes, I like paper, so I tried to do the owner finance thing when I can. But I also like cash. That’s not to say I won’t turn down and assignment fee but that’s kind of the main business plan that I have and that really kinda puts us, you know, brings us up to today.
Larry: Well you know being in Texas, there is more seller finance transactions in Texas than probably all the other states put together.
Keith: I knew it was a lot, I didn’t realize that we led the nation with it. But yeah, there’s a lot of it going on.
Larry: Absolutely a tremendous amount, a tremendous amount. So, tell us a little bit about yourself and your business or your podcast and you know let’s just kind of jump right in.
Keith: Sure. Sure. So, the podcast, people would talk about how to raise private money for a flip or to do this but nobody was teaching people how to be the private lender. So, I decided, okay, well, I’m a big fan of self-directed IRA custodians like Quest for example here in Houston, so I just started piecing together this podcast and I really didn’t understand what I was doing. I just knew that I had to do something. On January 1st, I launched the first episode and just released episode #41 and it’s slowly but surely gaining traction and the whole point of it is to I’ll do a one interview with somebody whether they will be a lender, someone who uses private money or someone on the team like a lawyer, or an appraiser. And then I try to do a solo cast where I’ll take something for example we are foreclosing on a house that we owner financing, so we originated the note unfortunately for this guy who is a victim of Hurricane Harvey, we gave him a year, you know, look just get right, get set, he didn’t have flood insurance, lesson learned for the lender right there. Anytime you need a coast, it’s probably a good idea to make sure the borrower has flood insurance especially through national flood insurance program. If they can’t afford 450 bucks for a flood insurance policy, it’s probably not a deal and you probably shouldn’t be doing lending on it. But anyway, I’m going through this step by step process of, you know, okay we just settled on the attorney we are going to use, contact him, give me your fee schedule and fortunately rather than paying a retainer up front, our attorney is a pay as you go. So, we will pay for the letter of the fault for example the notice of the fault and go on. So, that’s what I’m doing on the podcast as well as just and going through every little thing, discussing it and you know pulling off the Band-Aid and showing people where I screwed up so they don’t do the same thing. They don’t make bad decisions.
Larry: And you know what man, that’s really, really admirable because there’s a lot of people out there, a lot of educators and gurus so to speak that all they are teaching is sunshine and rainbows and all that stuff, you know. And it’s not the real world I mean, you know, I’ve lost as much as 75 grand on a deal before, two times. Two different deals but, you know, I share those stories to people and it’s really admirable that you are sharing that and letting people know, you know, man it’s not always win, win, win, you know, sometimes you are gonna lose money and that’s one of the most expensive seminars you will ever take, right?
Keith: Those 3-day weekend seminars ended up being, you know, months’ long and thousands and thousands of dollars, they can be, so I tell people, you know, I started the podcast, I’m gonna start the Private Lender Academy hopefully in the first quarter of 2019 and right out of the gate, you know, I’m gonna do a video in front of my car that I called the Rent Collector, it’s an 06 Nissan Sentra, it is my daily driver, it’s not a luxury car, there are no bikini clad models, I don’t promise to make you rich overnight, you won’t be sipping Mai Tais,but you will learn old world methods of creating and establishing wealth and that’s the whole goal and if it means if I have to tell you look, I did a second position lien like an idiot on this property and I’m having trouble getting my money back. Unfortunately for my wife and my kids, I have no problem making a fool of myself, so if I can give that to the investing world and create an economy where we have private lenders and we don’t need banks then it’s a win-win.
Larry: You know, most people that are talking about private money, private lending, they are doing it from the perspective of how to raise private money, how to go out there and find people, but you are doing it from the perspective of here’s a way you can invest your money, and you are teaching people how to do it passively and how to be the private lender. That’s a little bit different than most people, right?
Keith: Absolutely. Most people when they talk to you about private lending or being a private lender, they want your money and there’s nothing wrong with that. I mean as long as they are up front saying, look I have deals I’m looking for private money, I don’t have any issues but nobody was showing the mechanics of that. Nobody was peeling back the curtain and saying this is how you do it. I’ve got a question at a REIA one time, you know, is it okay to use the title company’s attorney? Absolutely it is okay. I did it early on but I would not do it now because that attorney does not represent me, it represents the title company. So, I want an attorney that is going to represent me as the lender and so that’s the angle that I’m coming from is yes ultimately. Do I wanna monetize? Absolutely. But I enjoy the teaching and if I can just get it out there that look there’s a way you can do it safely and you know if I can help people avoid some of those seminars then, you know, all the better.
Larry: That’s exactly right. That’s exactly right. Now, let’s go through a little bit of the mechanics on this because firstly you are in Texas, right?
Keith: Yes sir.
Larry: Now, everywhere else except Texas, you know, it is easier to do this especially like with seller financing because you can do a land contract or like me I sell properties on seller financing and lease options. In Texas, you can’t do a lease option and you can’t do a land contract. So, you have to do a mortgage or deed of trust, I can’t remember which it is in your state.
Larry: Yeah, okay. But you have to do that, so to me it’s kinda ironic that there’s more seller financing done in Texas than all the other state when Texas is a little more difficult to do it in but quite frankly it’s probably a good thing because now everybody make sure they do it the right way. So explained a little bit about the mechanics of it.
Keith: Sure. Sure. And it’s absolutely true. Lease options after the great crash, things changed quite a bit and we can no longer do sandwich lease options in Texas and there are ways that you can do it and I’m certainly not the expert and we don’t do land contracts. We will have a promissory note, which is the mortgage and then that promissory note goes along with the deed of trust that’s filed at the County Courthouse and so that deed says, okay Larry Goins is buying the property, Keith Baker is the lender, he has the first position lien and that’s my security that if anything goes sideways with your deal, I can go back and foreclose and get the property back and recoup some if not all of my funds kind of worst case scenario. So, when we do a deal, we will look at the numbers, I look at three things, the people, in your case that’s not a whole lot of research that I need to do there, you are pretty well known; your process, are you a flipper, are you a landlord who is gonna start flipping or vice versa, you know what, are you getting outside of your wheelhouse basically or out of your comfort zone. I wanna see that and then I wanna look at the property ‘cause it is asset based lending and I’m not so much concerned with your credit report or your W-2. I wanna see that if the property if there’s something goes wrong with the project, I can get my money back. I can recoup it and I just wanna see that you have, if you have to take a 6-month loan, I wanna see that you have 6 months in reserves that you can pay my payments.
Keith: That’s it. Then we go to the lawyer. Say, okay lawyer draft up the promissory note. Here are the conditions I want, here’s the deed of trust, here are the triggers for the faults, nonpayment or if you know, for example let’s say somebody wants to go Walter White in Breaking Bad and start cooking drugs or something in the house and there’s a trigger in there for me to get out to get by investment back and to get my hands free of anything like that. And then we go to closing. Then we close, the borrower signs the paperwork. I do 95% of my lending out of my self-directed IRA account with Quest, sometimes it is cash, but I’ll just send the wire instructions over to the title company and then I get the executed documents and I start looking for those payments on the first of every month.
Larry: That’s awesome. That’s awesome. Are you typically financing these deals to fix and flip investor or somebody who is gonna move in the house long term or maybe a long term landlord, short term loans, long term loans?
Keith: The answer to all of that is yes. So, I have a bit of a mixed bag. When I started off, I’m the type of person that I wanna get into get my hands dirty and get into it. So, when I was 16 and my car broke down, I had no money for the mechanic, so I had to learn how to do it. So, early on, I said, okay, I’m gonna do fix and flips. I wanna do 90 to 180 days, 3 to 6 months; one, because I get higher interest, I could get more points. But then I realized that I was working an awful lot in between those loans trying to make that money work. So, I do the fix and flips. I’d also do what I call acquisition money where I have some investors who they are loved by their banks, the commercial lenders, loan officers but a bank won’t touch a house that is valued at about 45 cents on the dollar.
Keith: So, they use my private money, acquire the home, rehab it, refund me out. And they’ve got lower interest. But I also provide loans for people who would like to do seller financing or owner financing. I will allow, I’ll take a lower interest rate for 3 to 5 years and they can then wrap my mortgage to the end buyer and the difference in between and once they pay me off then the payments are all theirs. I’m comfortable with that as long as the end buyer knows that I have a first position lien and if something goes wrong, I can still reclaim my property and foreclose if need be. I found that most people who are taking advantage of owner financing are more than okay with that as long as everything is above board and the payments get made, there’s no issues at all with that. I will sell or I will loan to people who go into the property to live, an owner occupant. But as you know, at that point, it is no longer a business loan and that is a consumer loan and I’m not gonna cost the government for trying to protect people who are unaware, but it does become more and more difficult, so we will have to vet the end buyer through a residential mortgage loan originator or RMLO to make sure that we are compliant with Dodd-Frank and all the state laws that we are not taking advantage of anybody because there are some unscrupulous people out there. So, I’d prefer not to do the seller financing, but I will do it if everything is disclose and everything is above board then I don’t have a problem doing it.
Larry: That’s really good. So for the most part, your borrower is gonna be an investor.
Larry: Fix and flip or maybe they are going to seller finance the deal and deal with the consumer so they have to comply with Dodd-Frank not you.
Keith: Correct. Correct. But then I have to manage or I have to monitor their compliance. I don’t have to comply. It is my due diligence that I will monitor their compliance.
Larry: Good. So, you make sure they are using RMLO and comply with Dodd-Frank.
Larry: Do you have a good RMLO that you would like to use?
Keith: I do. Sarah Montes, a Texas Pride Lending out of Dallas.
Larry: Yeah. I love those guys. They used to do it all over the country and man they could get one done in like 4 hours, right?
Keith: Yeah. You give them all the information and the borrower would pay down the deposit and then we are getting an email. Here you go. Here’s your package. All the documents that you need for closing. It’s like woah!
Larry: It’s like a document just like 4 feet long like 20 or 30 pages or more.
Keith: Yeah, exactly. The printer is gonna be working overtime when you print that out but yeah I’ve always used them and my partner and I have always used them when we’ve originated our own loans with seller financing. Yeah, we like them a lot.
Larry: That’s really good. I love it man. I love it. So, even with the… you wanna make sure that your borrower is in compliance with Dodd-Frank ‘cause they are dealing with consumers. What about servicing because now they’ve got their borrower that’s making a payment and part of that payment they are getting the key, but the other part comes to you to pay you. So, do you service it? Do you have a third party servicer?
Keith: I used to service all my notes myself. I had a spreadsheet that I would track. Of course I was only doing, you know, I only had 2 or 3 loans out at that time at that point, so it wasn’t that much work. But I have come to learn to demand third party servicing for several reasons. One, they handle the amortization schedule, so I don’t have to do the math. I like very simple math. I love interest only loans. If you borrow 100 grand from me, at 12% annual you are gonna pay me $1,000 a month and at the end of that note, you are gonna give me my 100 grand back. That’s easy. Simple math. Don’t even need to go to junior high for that. And by the way, for disclosure I failed business math 4 times in college. Dropped or failed 4 times. So, I’m a bit of a slugger liberal art student. Anyway, I like the third party because they do the amortization. They send out any notices if they are late. They’re the ones that take care of the 1099 at the end of the year telling the borrower how much interest they paid versus how much principal but more importantly, let’s say I get into a buying and I’ve got this note I’m gonna have to sell it at a bit of a discount, if it is serviced with a third party, note servicer, it’s got more value. It is easier for me to dispose that note than it is, hey, here’s my spreadsheet that I’ve kept together over the last year or two.
Larry: It’s more credible.
Keith: Absolutely more credible. It’s usually, you know, somewhere $15 to $35 a month or $50 if they want credit repair. I let the borrower decide on that, but I do demand that it is service by a third party.
Larry: Good. Do you have any specific ones that you could recommend or share?
Keith: Actually, I’m in between right now. Rather than sharing who I wouldn’t use, there is a few… I will tell you this, there’s a few that I have used and I am going on the one that I am going to now but in my community there’s Mills Escrow out of El Paso, there is Note Servicing out of San Antonio and I’m totally going on the guys in Louisiana that we are using, I apologize ‘cause they have been great. Not that Mills and Note aren’t great, but these guys have really stepped up for us. And then there is Jeff Skilling. If you have someone who needs credit repair, if they are getting into, you know, they wanna be able to refinance out of my note then it is more expensive, it’s $50 a month; however, he reports every month to the credit bureau so that borrower is gonna get, you know, the benefit of that increased credit worthiness.
Larry: Right. That’s good. That’s good. We just had a guy that specializes in credit repair as well on this show. So, that’s good. That is really good. So, I understand where you are at with being in between servicers because doing a lot of seller finance and myself, you know, the servicers in my opinion are a necessary evil and I tried to find the best of the worst.
Keith: Yeah. And then their defense in the way I look at it, I can’t keep up with all my notes and I have a handful, you know, I don’t have a database full of notes and everything. You know, if I can’t even keep up with mine then I feel like I should be a little understanding with the servicers but at the same time that’s their job.
Larry: That’s true. That’s true. I wanna dive a little bit into the three categories you look at. The people, the process, and the property. Let’s go down a little bit in there. What do you look for in the person, the people part of it?
Keith: I look for doers, action takers. I tried to avoid the tire kickers if at all possible. I’m happy to talk to anybody but when it gets down to that series to talking terms, I wanna see where they are, how advanced they are, are they getting their ducks in a row and I said earlier, is this person a landlord who wants to be a flipper. It is very popular right now to take rental properties and convert them into seller financed homes.
Keith: So, that’s not a red flag for me because that just tells me this guy or this gal is getting wise. Does not wanna do toilets, does not wanna deal with the calls at 2 a.m., does not wanna hear about I’m a little short this month, you know, they take a lot of the headaches out by converting that property from a rental into a seller financed property. So I looked at them, I looked at their background. I tend to like people who would be a great engineer had they had the desire to be one but never took that path. They are detail oriented, you know, dots their i's and crosses their t's, I like to look for that. Also like to look for track record. How many deals have they done? How many deals of this particular type have they done? If this is their first flip, I’m happy to recommend a few hard money companies. Let’s go out there until they got 5 or 10 deals under their belt that are successful they can build their portfolio because that hard money company is gonna look at that deal a lot harder than I am. And that does an extra benefit to the borrower that have an extra set of eyes on top of their deal. However, they are more expensive. They are gonna be more points. There’s gonna be more interest rates and if they have to modify the loan or extend it, it’s gonna be a little bit pricey. However, that’s just a cost of doing business especially when you are starting out and so that’s what I look for in the people.
The process is it goes back to the people, are they landlords? Are they flippers? Are they newbies? Does this guy got 200-door single family rental portfolio and now he wants to get into commercial or multifamily or whatever the deal maybe. I look at that person okay if you are doing a big multifamily deal you are probably not doing it alone, so now I go from the individual to the team that’s putting it all together. I look at them to see what their comfort zones are. What they are comfortable doing. What they have done in the past. What they built their portfolio with. And then after I’m comfortable with the people and what they are gonna do with the property then I’ll go look at the property. Well, you don’t have to but I like to teach anyone starting off as a private lender, go touch and see every single property that you are gonna loan on. If they say there is a house on the land, make sure there is a house on the land, make sure that the address is correct. Get permission from the owner, just don’t show up and say, hey, you know, I have a right to be here ‘cause you really don’t. But you know get it through whoever owns it. Set it up. Make your trip legal but I would like to say walk it, see it, touch it, taste it, smell it and then if you are comfortable with that, the people, the process and the property, so basically when you are looking at the property, if everything goes to hell in a handbasket, am I okay foreclosing and owning this property? If you are not, walk away. If you are, then proceed. But if you are not comfortable with owning that property in the shape that it is in right then and there before any rehab, any repairs then that’s your litmus test, that’s the final green light so to speak to go ahead and look at the loan, make sure the numbers are good ‘cause I’ve loaned on houses, I’ve loaned as little as $15,000 on house that I told the buyer just stick a match to it but don’t file it on insurance because that would be fraud but this thing needs to go and he turned around, owner financed it and it is one of the better looking houses in the neighborhood now.
Keith: Absolutely amazing. He borrowed 22 from me and sold it for 45. So, from a loan-to-value that was pretty good numbers there for me. I was comfortable being well under 65% to 70% and that borrower, the end buyer, I should say the owner occupant never missed a payment. The last time I drove by, he’s got a new roof, brand new siding, new landscaping, brand new carport. It just looks great. That’s the collateral from my investment. It is just being improved little by little.
Keith: It’s great. I mean God forbid if something happens to that guy yet, do I want that house? Absolutely, I’ll take that house back in a heartbeat. The only problem is my investor who borrowed the money from me to seller finance, he is gonna take it.
Larry: Right. Right. Right.
Keith: He is gonna make sure I get paid so I can’t default on him. So, that’s kinda what I look at the people, their process and then the property.
Larry: I love what you said it’s so important I mean we do a lot of private lending as well. We used to broker it in other words, we would find other people that wanted to get a return on their money and we would loan it out and we would keep the points, but now we just used our own money like you are teaching and training as well and we always look for experience number one, you know, I want somebody with a track record. I don’t care if you have been through bankruptcy because of a downturn market or you went through a horrible divorce. I want somebody ‘cause I know bad things happen to good people, right? You know that well. So, we want somebody that has some experience. We will not loan to a first time flipper. Absolutely we will not. And I’m sure you are the same way.
Keith: Yes. Go get some hard money and I don’t get any money or referrals or affiliate links, you know, fees.
Larry: Right. Right.
Keith: Because it is what is best for that investor. That first time flipper. You better off going to a hard money because they are gonna tell you, this is not a deal. Stay away.
Larry: Right. Right. And if a hard money lender tells you this is not a deal, you don’t need to buy that property, you don’t need to look for another lender all you need to do is look for another deal.
Keith: Yup! Or modify that deal and say look I can’t get financing. The numbers are too skewed can I get a lower price? Can I get within that loan-to-value range? If you can, you are right. Absolutely right. You will move on down to the street, find another property.
Larry: That’s so true. That’s so true. You know, a hard money lender is a good mentor, coach to let you know whether or not you got a good deal.
Keith: Absolutely. Absolutely. And it’s such a great way of putting it. There’s no boot camp, there’s no funnel. It is automatic. You have a property, we have money. Is this the deal? Yeah, we will loan on this or we won’t or we will loan on it but you need to bring an extra 5 or 10 grand to the table to make sure that loan-to-value is in their comfort zone. So, that means it is a pretty good deal. It is just the numbers are a little high. So, if you are willing to put your own cash into it then maybe you proceed. But if they are saying, you got to bring 15 grand to the table, might wanna reconsider whether or not you have a deal there.
Larry: And that’s a really, really good point because if they are telling you you need to bring more money to the table then that’s a good sign that you are paying too much for the property, right?
Larry: That’s exactly right. Now, tell us a little bit about the property, what are your terms, what kind of LTB, interest rate point that sort of thing do you do?
Keith: Okay. Everything is, not to be vague or to sound like a CPA, but it depends.
Larry: Right. Right.
Keith: So, I’m a fix and flip, I basically have two prices. I have my friends and mentors that I’ve grown up within the real estate investing world, I will go as low as 10% with them, no points. But I usually get a little something on the backend. I still keep my triggers in place. I require monthly payments, not full, but I require some payments ‘cause I wanna make sure everything is moving along smoothly and if they do get in trouble I have an out. But a normal fix and flip, you know, 12%, 1 or 2 points give or take, I will go down as low as… I’ve gone down as low as 8% on some owner financed deals, but I have some verbiage in the contracts to where when they get refinance, I’ll get a little something…
Keith: Yeah, a little kicker on the backend there. Not to take anything away from anybody and look 8% is you know most stock brokers they have to get their clients 6%. That’s how they are judge. If they can, you know, and most of them can’t even meet with the market is doing, what the dollar is doing, so well I’m getting 8% a year, it’s not crazy money, it’s not great money but I don’t have to work that money.
Keith: I know I’m getting consistent returns for the next 3 or 5 years or whatever the terms are. I tend to keep my notes anywhere from 3 to 5 years on the owner finance side. I love fix and flippers. I love those people. They are the craps and the blackjack players at the table. They are in, they are out, boom, boom, boom. It is a business. It is a grind. You know, I tell them if you watch Chip and Joanna, oh by the way, go Astros! You know, Home Garden TV and it just looks great. It is a business. It is a grind.
Larry: It is.
Keith: It is and I mean you of all people can tell I mean ‘cause you are in the trenches day in and day out. I mean I consider myself a dabbler because I go in the morning, I put one hat on and the afternoon I got another hat and in the evening I got my headphones on with the podcast. It is a grind. It is not easy doing that method. I’d like 6-month loans anywhere from 10% to 12%. I’ve gone as high as 15%. When I started off, I took the attitude if you find somebody charging more interest than me, please let me know because I wanted to match the highest return but then I’ve learned that what’s best for the deal at the end of the day?
Keith: Yes, I want my money. I bought my first rental property because the guy wanted me to re-finance his rental with private money and I said there’s no way. And you got a bank loan at 5% with the balloon, you couldn’t get anymore mortgages in his name, so I ended up buying it for him ‘cause if I had I re-finance it with my terms that I would want. He would cash flow literally $22 a month. That’s it. It made no sense to do it that way and I said look I won’t lend it but I’ll buy it from you.
Keith: That my friend was my seminar when I bought that house. I rolled the windows down the day I sold that property and I was free. I’m a horrible landlord and I know that now.
Larry: No, no, no. That’s okay. You know what, I tell people all the time, I’m a firm believer, you got to do in real estate what you enjoy doing otherwise you won’t be in it very long because it is I mean real estate is investment and as a business. Somebody who can just write a check and be the lender I mean that’s an investment, right?
Larry: That’s an investment, but if you are doing fix and flips or fix and rent or whatever, I mean that’s a grind like you said and you are in the trenches doing deals and I mean we are in the trenches doing deals. I have to leave a property meeting to come in here and record this podcast.
Keith: Yeah. Right.
Larry: Yeah, we’ve got about 28 properties under contract right now. Now, we do two things. Wholesale and seller finance or lease option deals. But you guys can’t do lease options there. But let’s talk a little bit about the equity participation you do. You call it at the backend also known as equity participation loans, what type of kicker or equity participation or backend do you get whenever you are lending money and you are getting a piece of the action?
Keith: I gauge it with my minimum is 5%, I’m gonna get a 5% piece now.
Larry: Of the profit.
Keith: Of the profit. Everyone is paid off. My notes paid off. Everyone is paid. And to the profit I’ll get 5%. Now, a lot of folks have built up enough credibility where they have friends that are private lenders who don’t require any interest payments every month.
Keith: For me that’s a red flag because one, that borrower is they better be Larry Goins if they are doing that number one ‘cause they really need to know what they are doing. The number two that takes away one of my triggers to protect my investment.
Keith: Let’s say I do a 6-month loan with no interest payments and in week one something horrible happens to that borrower, right?
Keith: Catastrophic event either to the property or to the borrower. I have to wait 6 months to foreclose, so now there’s 6 months of empty house probably gonna be vandalized, if there is any copper anywhere near it, it’s gonna be gone. I mean the AC coils are gone and I’ve seen people even ripped a part of walls to get you know some Romex out of the studs. So, that 6 month window I don’t like doing that but what I will do though is if it is somebody, I will say okay like I’ll tell you what instead of paying, you know, let’s do simple math, a 12% loan is 1% every month due in interest may be I’ll take less of that on the front end. I get made wholeon the backend so I’m still gonna get my 12% for that time period but then I’ll get maybe 7% of the profit or 5% of the profit. They always try to talk me down to 2% or 3% and I’ll say well if you can find someone who will do it, that’s fine but that’s what I like to be comfortable. I don’t wanna take money out of anybody’s hands but I don’t wanna leave money on the table either at the same time. So, there’s a balancing act. I usually use equity participation when they want some type of concession on the front end then I wanna make sure that I get made whole on the backend and I have been assigned interest in LLC. I prefer to put it into paperwork, notarize and everything and drawn up by the lawyers and that’s how I prefer to do it.
If the deal is just screaming okay, so let me give you a hypothetical, let’s say you’ve got a property that’s 5 years old still got all the bells and whistles that everybody wants inside and somehow someway you pick it up for 40 cents on the dollar and you got to put like 10 grand into it, I would not give you the full 50 or 55 grand. I would like to do the draw and make sure the repairs are done ‘cause I never pay for repair until I know it’s done and done property. But at that point if we are all in it, you know, 55% LTV or lower and I’ve been in those situations then yeah just give me 100 bucks a month on the interest payment and then on the backend let’s get your pencil out. Let’s figure this. Because I’ll close tomorrow. I will have money in escrow tomorrow ready to go. If it is a screaming deal. So, that’s why I say it depends. It really depends on the person. It’s like you could bring me a screaming deal and we close tomorrow. My neighbor could come to me and I’ll tell them to go get a hard money loan. Even if it is a screaming deal, you know, if you came to me and said, hey, I wanna partner with Larry on this, now it becomes a screaming deal for me, you know, ‘cause now I’ve got a mentor whose reputation is on the line in addition to my money and that to me that’s a nice bit of risk mitigation there.
Larry: Experience is everything.
Larry: It really is. I don’t care if they have gone through a downturn, you know, been through a bankruptcy, divorce, whatever, you know, couple of things we do, we do 12% and 5 points, it is a 12-month loan but they are gonna pay a renewal at 6 and 9 months. In other words, they’ve got an incentive to pay at all in 6 months because on that 7th month if they wanna keep it, they’ll pay 2 points, right?
Keith: There you go.
Larry: In payments, right?
Larry: It comes with that payment if they want that loan. They either gonna pay it off in month 7 or pay an extra 2 points along with the payment and we do charge monthly payments as well. But we do a background check and an appraisal. We do get an appraisal. I know a lot of private lenders don’t do that. Because we loan all over the Carolinas we do get an appraisal just to make sure.
Keith: You aren’t just lending in your background.
Keith: I think the beauty of private lending is the person on one on one. But a deal is a deal is a deal. If it is a deal in Lake Wylie then it’s probably gonna be a deal in some other place but you are not there.
Keith: So, yeah I absolutely get an appraiser, I like to get a panel of three, I’ll let the borrower choose. One of those three they can call them, interview them, whatever, they are my appraiser. They are not their appraiser.
Keith: I look at an appraisal as little differently especially if it’s gonna be a rental, I discount it because if I have to do a quick sale, I can’t use ARV. I can’t go to the MLS.
Larry: That’s right.
Keith: Hey, this is a $90,000 house, well, it’s a rental and maybe 75 tops. So, I like to work with appraisers who aren’t just bank appraisers but they have an investment mindset.
Larry: They get it.
Keith: Yeah, they get it exactly. And so if it is a fix and flip then yeah what type of crown moulding what type of granite, what were the bells and whistles.
Larry: That’s true.
Keith: But yeah, I do like appraisal especially with people I don’t know. I’ll tell people to go to REIA meetings, go to IRA, all the meetups and start meeting people. Your network is your net worth at the end of the day it is so true.
Larry: That’s so true. That is true.
Keith: Yeah! So, people come to me and say I know them from Adam. I’m gonna have to get an appraiser. You have to pay, sorry but it’s gonna be an extra 400 on this, but if it is a screaming deal and that right there is a great test because if they are bulking on $400 then what are they worried about?
Larry: You don’t wanna loan a money anyway.
Keith: Yeah exactly. If that’s great of a deal why are you concerned about it, the appraisal should be fine if it is that great of a deal.
Larry: Sure. Sure.
Keith: There’s this little hands and little things like ways you can screen people out and they might just be a tire kicker. You know, I kinda wanna do this. Like I said I’m happy to talk with anybody but if you wanna talk about underwriting or getting the note originated then I wanna know if you are serious and I’m not gonna be spending my wheels or my lawyer’s wheels or anybody.
Larry: Exactly. That’s good. You do a lot of lending and self-directed IRA and work with a lot of people that do that and I know you use Quest, I know Quincy and Nathan are really good. They are great guys. They do a tremendous amount of education, right? They really do. I’m involved in the Financial Friends Network which Quincy is involved in quite a bit and I was just at their expo a few weeks ago and you and I saw each other there.
Larry: So, tell us a little bit about using a self-directed retirement account, do you loan right out of the account? Do you use an LLC or trust or how do you do that?
Keith: I loan right out of my accounts. I don’t loan in the LLC and I know there are arguments for the checkbook control LLC so on and so forth. Going back to I like to get my hands dirty, I like to see all the mechanics of it first anyway Quest is going over the Quest Trust now. There’s gonna be some changes, so I will be… right now my personal mission is I’m loaning only out of self-directed IRAs and my wife’s self-directed IRAs and here’s the beautiful thing, my two kids who are minors are contractors for the podcast, so as long as they earn a reportable income then they can invest in a Roth IRA. So, when they are making bandit signs for daddy or stuffing envelopes or doing whatever and I pay them and yes I pay them slave wages but I pay them, I cut that check it goes into their Roth IRA and it starts building right there and I use it. But when I started I took a bunch of old 401(k)s like most generation X as I am. I didn’t go to work for one company for 25 years. I bounced around. I had all these 401(k) so I just consolidated them into two. I had an IRA at Scottrade and that was my gambling money. I could day trader which means I just got my butt handed to me day after day after day. And I also open up one IRA with Quest and so little by little I’ve been converting money for my traditional IRA for me and my wife into Roth IRAs. I basically do that with every transactions. So, if I loan 50 grand out only 45 will go back into my traditional IRA and 5 into the Roth and little by little and this way I can do it without a big tax bill at the end of the year and it does, you know, you really need to talk to a CPA about it because I converted 25 grand and forgot that I did it. Come April 15th I was not pleasantly surprise that I owed money and I was like wait a minute, what do you mean and so my CPA had explained, well, you converted to your Roth. So, I’m slowly but surely going everything over to Roth and then once that is complete and tax is not an issue then I’m gonna look into the more advanced self-directed IRA system, the checkbook control and so on and so forth.
Larry: Yeah, and the Solo 401(k) maybe and we also have a HSA Health Savings Account and an ESA, right?
Larry: Those are really good as well.
Keith: Absolutely. The Education Savings Account, the Health Savings Account and I mean with the cost of college and Medicare or private schools or whatever, they are great tools that are available to us and you can be a private lender out of them and you can combine. If your kid has an Education Savings Account, you can take your wife’s Health Savings Account and my IRA and now between the three of us, we have enough money to go fund the deal.
Larry: Right. You can partner.
Keith: Exactly. We can definitely partner ourselves with our people and it’s not that difficult. It is just get your percentages you know so this account has X percentage of the deal so on and so forth, make sure it totals up to 100% and then make sure the payments are disbursed along that schedule of interest and the IRS is completely comfortable and happy with it.
Larry: Absolutely. And guys listen that’s a very advanced technique in my opinion especially for a newbie, so if you plan on doing any kind of partner in with your ESA, IRA, HSA whatever, make sure you speak with your own advisor first because if you do what’s called a prohibited transaction like maybe your ESA, HSA and IRA are all partner but then maybe you collect rent and you put all that rent into your IRA that would be a prohibited transaction and it would blow up all three accounts, right?
Keith: Yes. And taxes would be due right then and there.
Larry: Yeah. And the IRA, ESA, and HSA would cease to exist, right.
Larry: And then you would have to pay penalties and taxes on all that money so make sure you know what you are doing before you go and try to do that thing. I intentionally never ever ever partner with any of my other accounts. If I wanna do that, if I don’t have enough money, I’ll go to someone like Keith and say Keith lets you and I partner on a deal. I found the deal, you put up the money, we will partner on the deal, I get X percent and you get X percent. It does not have to be X percent based on who put up how much money. We could buy $50,000 house, I’ll put up 5 or my IRA put up 5 and Keith put up 45,000 but we are still splitting it 50-50 because I found the deal, right?
Larry: So, that’s the way I personally prefer to do it, but you can partner with your other accounts. Just make sure you know what you are doing guys.
Keith: Absolutely. That’s well said because most of the times my loans with Quest go through very quickly. The time that I partnered my Roth, my traditional and my wife’s traditional, we got more push back on the documents to make sure they are absolutely perfect spot on and then when the payments came in I had to have a payment coupon from that borrower saying this is how the payment is to be split amongst the accounts to whatever that split was because like you said yeah even if a tenth of a point goes into this account, it can become prohibited and you just blew everything out of the water and so yeah I like what you did there. Partner with other people because I mean prime example, I was in Savannah recently, my first time in Savannah, Georgina which was interesting, my day job I had to go out there but let’s say you find a smoke and hot deal right off the river there and you are short of cash, you call me up, hey, Keith you got some money in your IRA? Yeah, I’m gonna lock this up with the $5,000 deposit. You fund to close. I’m gonna flip it or whatever. Fix it up and then here we go, the paperwork comes between us, we Docusign or we can even do old school FedEx and all that stuff but we get the paperwork in order, we get our understanding established, money changes hands and business goes and that is the economy that I am talking about. That’s the alternative economy and I don’t have a cute catch phrase for it yet, but I will someday but that’s exactly, that joint venturing, that partnering is such a powerful wealth building tool.
Larry: That’s so true. That is so true. Man, I really appreciate everything you share. This has been awesome. Really good stuff.
Keith: Well, thank you for having me on and I look forward to having you on the Private Lender Podcast very soon when schedules allow and I love to have you come on and just share your knowledge because like I said I mean I don’t pack great stuff all the time but I keep stuff that’s good and Larry thank you. We haven’t had that much one-on-one interaction but I remember I used to get your newsletters, you would physically mail out newsletter.
Larry: We used to, yeah.
Keith: Every month and I learned so much about real estate through you and to me it’s an honor and a privilege to be on your Brain Pick-A-Pro podcast.
Larry: Thanks man. I really appreciate. I am really proud of what you are doing man.
Keith: Thank you.
Larry: You are rocking it.
Keith: I appreciate it.
Larry: That’s awesome. If somebody wanted to reach out to you, how would they get in touch with you?
Keith: They can go to PrivateLenderPodcast.com, that is the website or they can email me email@example.com and hopefully by the time this airs, I will have the PrivateLenderAcademy.com where you can go and sign up. I’m gonna release the course in January. I’m looking for beta testers and I might even just do the first one for free anyway just to get people comfortable with the idea of private lending. So, PrivateLenderPodcast.com or PrivateLenderAcademy.com is where you can find me and of course you can listen like you Stitcher, SoundCloud, iTunes, anywhere podcast are published, you can go and subscribe for free.
Larry: That’s awesome man. I really, really appreciate you being on. Thank you so much for being here. It has been a great, great podcast. Guys, go over and subscribe this podcast, listen to it, it’s good stuff. Thanks a lot man. I appreciate.
Keith: Thank you Larry and if I can say something real quick to everyone listening, go to iTunes or wherever, Stitcher, SoundCloud pull up Larry’s podcast, give a rating and review while you are there. This guy has been given out tons of valuable content for decades. Podcasts are free but it does take time and money to produce so go out give him a rating and review. Just give him 5 stars, just do it for me.
Larry: You are right man. You know what, I never ask people to do that and we hardly have any and I never ask people to do it. You know, I should be doing that on every podcast. I should be doing that.
Keith: Yeah, you don’t get unless… you know, Scott Carlson thought me that. At the very end he said sorry I’m gonna rub, but hey go give a rating and review so yeah please do that. Larry, it has been a pleasure. Thank you so much. You’ve made my day.
Larry: Awesome man. Thanks a lot. I appreciate it.
Keith: All right, man you take care.
Larry: All right, you too.