Investing in Hard Money with Scott Hill

 

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Investing in Hard Money with Scott Hill

**Introduction**

In the realm of finance, time is often of the essence. The need for rapid funding can turn into a major hurdle, especially when traditional loan qualifications fall short. Enter hard money loans—a form of asset-based lending that's increasingly becoming a saving grace for investors and individuals navigating financial challenges. This blog post delves into the expertise and insights from industry professionals Scott Hill, Vito, and Patrick on how hard money can prove invaluable.

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**Understanding Hard Money: A Solution for Financial Challenges**

According to Scott, hard money often serves as a last resort for individuals whose transactions hit a snag due to qualification issues. It allows for flexibility and can solve problems swiftly, particularly in real estate. Vito adds that whether you're buying or flipping houses or facing financial difficulties, extracting funds swiftly through a hard money loan can be a life-saver. The speed and simplicity of this financing option often outweigh the heavy paperwork associated with traditional loans.

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**The Benefits of Hard Money Loans**

Scott explains that one of the unique features of hard money loans is that the property itself supports the loan rather than the borrower's financial status. This means you could show no income yet still secure a loan, focusing more on the property's merit than personal finances. There's the added advantage of securing a second mortgage even with existing credit constraints by leveraging the equity in one's property. Patrick emphasizes that when opportunities arise, and fast cash is imperative, hard money excels in delivering results.

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**Playing the Long Game: Strategies and Returns**

Vito discusses promising returns, citing instances of seeing 9% to 13% ROI. However, Scott warns that like any investment, it's crucial to vet companies thoroughly to ensure sound decision-making by them on behalf of investors. Such proactive planning can result in year-on-year compounded growth, reinforcing retirement savings effectively.

Moreover, Scott advocates using hard money loans as supplemental to traditional retirement planning. While Vito suggests that with an initial $25,000, one could venture into property flipping without the need for large capital outlays, Patrick underscores that hard money can be transformative for those requiring rapid results.

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**Financial Wisdom: Weighing Costs and Benefits**

Despite the higher interest rates—typically three to four percent above standard rates—Scott encourages looking at the broader picture. The short-term expense can be justified through the gains made on profitable ventures. Keeping a long-term perspective, the cost of borrowing can be offset by substantial returns, akin to real estate agent fees on property deals. Vito concludes by reinstating that while making money invariably incurs costs, the amplified earnings significantly outweigh the initial financial commitment.

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**Conclusion**

Navigating the financial landscape with tools like hard money loans requires both knowledge and strategy. As echoed by Scott, Vito, and Patrick, while these loans may initially appear costly, they offer unrivaled flexibility, speed, and opportunity for savvy investors. Whether for property investments or as a critical stopgap in times of financial stress, hard money loans provide a compelling alternative for those looking to harness the potential of their property assets consciously.

transcript

 

Introduction and Welcome

 12 more days till Christmas. And today we're talking about hard money investing with the maestro, Mr. Know it all, Scott Hill.  

You're too kind on the know it all. I'm still working towards that. It's going to be a while. But thank you. 

I know. Lisa knows more than you and that, that's,  it doesn't say a lot, but it says a lot.

That's true.  Welcome back, Scott. How you been? 

Hey, doing all right, man. Thanks for having me here. It's it's raining out. Nothing like having some good conversation about finances, right?  Indoor stuff. 

It's all about financial intelligence. 

Hence the name of our little channel.  

That's right. 

Understanding Hard Money Loans

Today's talk was really cool though. Cause This is like  something that you never know you needed it until you need it.  Or, a lot of people never know it's even an option till they're in a situation and it's presented to them, right?

They're like, Oh, shoot. Yeah. This will really work for me. 

Yeah, absolutely. A lot of times it's like last resort, people get in into a transaction that they think is going to go smooth and they find out that they don't qualify. And there's still ways to solve that problem, in many cases with hard money. I like to say private money just sounds a lot easier off the tongue, especially for the listener. Sure. 

 When you're buying houses or flipping houses or you're in some sort of financial difficulty, pulling money out with a hard money loan is a great answer, right? 

It's not cheap.  

Serves a purpose. It's it's no different than in regular financing and conventional loans. I got a client today that.  Needs to put 5 percent down and get a Fannie Mae loan and they're caught on that They have to have some PMI some private mortgage insurance and it's all about psychology getting them to understand Wait a minute.

So you're gonna pay 93 a month  and you're gonna leverage a property with 5 percent down  How long would it take you to save up the other 15 percent and what would the home values do during that time?  And then the light bulb goes off. So ever since I got into the lane and I've been telling people there is a loan for every situation.

What's your situation? 

That's why, the products, the services, you know everything else on it too, right?  That's 

right.  

It's, like I'm looking at buying a house in Vegas for my parents  and I'm like, how am I going to finance this? And I can write out cash, but it's smarter for me to throw money,  into an investment, have that make money and then pay off the loan slowly that way.

I don't know. There's so many different ways to do it, right? 

Yeah,  no very true. And obviously the pursuit is to always get the funds  as least expensive as you possibly can. But sometimes you just need funds and it can be a short term solution. With a product that's a little bit more expensive, but  the reward at the end of what you're going to earn  by taking advantage of that investment is really what you need to be looking at because you can always restructure financing. 

You can't always take advantage of an opportunity  to pursue a piece of real estate that's right in front of you.  So it's critical to understand that and separate the two, and and that's why there's multiple levels of  financing available out there and a lot of people aren't aware of the private money or hard money sector, yeah.  

I think what could be really helpful, Scott, not to put you on the spot here, but if you could  maybe give us a couple of different scenarios, maybe just a couple of different stories about how somebody would use private money in a situation.

And then the bolts and nuts of that, how that transaction looks and how it gets paid off and all that. 

Sure. 

Bridge Loans Explained

Let's talk about a common one, which is a scenario where someone wants to take advantage of an opportunity to buy a home.  And let's say it's very competitive out there and they've stumbled across a home they want.

They currently own a property,  trapped a lot of the equity that they actually need in order to purchase this next property.  So this is where private money can come in. And we call these bridge loans and we're basically what we're doing is think of it like a bridge between two properties were essentially saying, Hey, we know it's unlikely you're going to qualify for two giant mortgages at the same time, but we shouldn't preclude you from being able to access your equity somehow to take advantage of this opportunity.

So let's add up the value of both properties.  Let's subtract out anything you owe on the existing property that you're going to be departing from.  And then let's make sure there's enough equity position in there, at least 30 percent or more typically.  And then it's very likely as long as your credit's not absolutely horrible.

With no income, you're going to qualify for a bridge loan. And we call that, it's a private loan essentially. And these are investors that are pooling their money together. I'm sure we'll be talking about that a little bit here in a little bit, credited investors and aggregating their funds together.

And they're really looking at two things. They're looking at equity position. Number one.  And number two  exit strategy.  How are you going to get out of this loan to pay us back?  Okay, because this is money that they want to  keep investing over and over again some might be okay with letting it sit for 12 months 18 months that kind of thing But typically your private loans,  they're going to go no more than 18 months Your bridge loans up to 11 months 11 12 months something like that but  That is one example using bridge financing so that the goal is get in to this new property, buy it quickly.

Typically, you can do this in 7 to 14 days.  So now you're competitive with your offer comparable to someone buying all cash.  And then you simply go to someone like Vito and start getting your home ready to sell. And then you either sell that property, take the equity out and pay off that bridge loan and have no loan at all.

Or You still need a loan. Then we just put a normal conventional loan on for the for the difference.  That's one example of using private funds. And again, two things that come to mind can't qualify traditionally and I need speed. Okay. So those are two real big benefits right there. 

Scenarios for Private Money Use

Another scenario could be you're about to purchase a piece of land and someone started building, they got a foundation down.

And they ran out of money  and  they are having a hard time qualifying because they're self employed and they write everything off. So traditionally, they're not showing a lot of taxable income here,  but they're putting down  50%.  But they show zero income on their tax returns. So that's the situation where a private investor is going to go.

Yeah, 50 percent down.  We like the equity position we're in  don't really care about your income in that case now oftentimes You'll still share your income, but it's not usually the deciding factor.  It's again equity exit strategy in most cases so that's just another example  usually the reason people do the hard money loans is traditionally because They need the speed of it  to  Jump on an opportunity that's presented itself and they just don't qualify.

And third, this is one we haven't talked about. Some people don't want to deal with all the paperwork.  There's very little paperwork. It's the easiest type of money you can get. You're typically going to have higher interest rates for sure. And you're going to now remember these investors aren't making a lot of their money  longterm, so it's short term.

So there's going to be more fees up front in the form of points. That's where they're getting most of their money. 

Typically like  round numbers, what are you looking at? I know it's a couple of points and then a higher interest rate. 

It's usually a little more than a couple.

It's you'll see anywhere from typically three for a really good borrower up to  five, six, depending on like that scenario. I just said, if you got investors coming in on a half built home, there's a lot of risk there. It's not a really good piece of property right there. Now they envision it's going to be eventually that's the goal.

You've laid it out, but it's still not the greatest piece of property right now.  So you're going to pay a lot more on something like that. Now you've got a scenario where it's 70 percent equity in the property. Phenomenal FICO scores.  You're going to have some much better  percent cheaper on the interest rate as well as maybe.

Couple of points cheaper on the upfront points with the file. So yeah those are three scenarios right there. So yeah. 

A question for you. What about somebody that's great. Thank you for  walking us through that. Sure. And I can see totally where, especially in the.  gave us somebody self emplo cash flow varies.

And about somebody who say  sa  just looking for t right? This, so we're not proper rating like that. the house, 

plenty 

 And it's gonna be a problem to refinance or whatever the reason is, cash flow is decent and plenty of equity. This would also be something that could do.  

Yeah, absolutely.

You could have a traditional first mortgage with a really great interest rate that a lot of us got back in the, 2020 21 22 timeframe and you need a second mortgage you've got a lot of equity in your property and you recently lost your job, but you got a bunch of money in the bank.

So there's a perfect example. I need a quick private loan to fund something for my business, my self employed business that I'm not showing income in, but I've got a long track record of being successful in this business and I need some quick cash. That's a great example where a private loan would come in and fill that void, if you will.

Yeah.  Yeah. 

And then there's another step for that too. 

Investment Opportunities and Risks

There's a,  an investor  loan that's out there where you can qualify the house just on the house, not the actual borrower because it's an investment property. 

Yeah. I think you're referring to the DSCR loans, the DSCR.  Yeah. Debt service coverage ratio loans, which really become extremely popular in the last couple of years. 

I got to tell you, it's a great product because a lot of people, again, they don't show traditional income, for whatever reason, many times are self employed. They're right off a lot, or they're a 

realtor 

or the realtor, or they have the ups and downs and maybe the last few months, whatever they've been in, hasn't brought in enough income, but they got a, they've got cash.

They've got a great opportunity to buy a piece of property somewhere. And what's unique about the product is,  Hey, I can buy an investment property and kind of really focus in on the property more than focusing on me, the purchaser. What's my payment going to be what's the cash flow going to be and what the lender's really looking for is Cash flowing the property.

I mean you could really be Showing no income at all and they're going to give you a loan because it's standing on its own merit of the property you're buying and is it cash flowing and We'll break it into percentages like 1. 1 1. 25 1. 5 like what's the percentage of cash flow? Is the cash flow better?

You Then what you're paying, then the terms will be a little bit better. Are you just barely breaking even? Then the terms might be a little worse, but  you're capitalizing on the purchase. You're not having to show all your income. You can act quickly.  And who's to say you a couple of years down the road, when you get your regular income back in line,  pay it off, put a traditional Fannie Mae loan on there, and meanwhile, your property has gone up a hundred thousand dollars.

And you paid an extra 150 a month. Big deal for 24 months. Who cares? So great product video that you're talking about right there. And can do those in most states, which is great. Can you do 

them in most states or do you have to? Yeah. 

Yeah. That's the one area where as a broker, I'm licensed in California.

And so with DSCR,  it doesn't follow the typical rules that we need to follow. And the sources that we go through to fund these loans,  We can use their licensing in those states and perform the loans, which is awesome.  

That's cool. I don't think I've ever heard of those loans. 

Typically 

you need  30%.

Yeah, you can get it. You can get away with a little bit less sometimes, but typically 30 is where you need to be with most sources. And that's where you need to be to make the numbers work. If you think about it, right? With the cost of way real estate's gone and with the higher interest rate market that we're in right now.

Yeah, so it's not for someone with very little cash, but boy,  it allows you to capitalize and not use hard money.  And the rates are pretty good. They're probably within 5 percent higher than a traditional loan. It's not horrible. And you can get them with  prepayment penalties if you're willing to take on a prepayment penalty,  meaning, hey, I'm not going to pay this loan off for a year or two years or what have you.

Then the terms are going to be a little bit more friendly because they know they're going to capture a little bit more interest. So you can pick different products based on a prepayment penalty scenarios. So  in 

a, I was going to say, so going back to the private lent, private money scenario, and just so people can fully understand how that would work.

Yeah. 

So I have my home.  situation comes up, don't want to go through traditional route,  reach out to Scott. He's able to find a private lender who looks at the situation and says, yeah, I'm gonna lend you that money. Now that private lender will secure the, he has to protect themselves, right? So they're going to secure themselves as a lien holder on the home.

Is that how that works? 

So let's say the three of us right here, we're the investors, right? And we get presented this opportunity. The three of us  are the ones that are going to pull our money together. And that's going to be aggregated by the individual, that's running that private lending company.

And so they have a list of accredited investors. Okay. And they're constantly throwing out opportunities and their inboxes.  Just got, I got another one today.  Some land here down in, in Gilroy there. There's so many, there's so much opportunity out there. It's not even funny. But then. The person that is borrowing the funds is going to be receiving this loan essentially from the three of us, right? 

And we're going to start getting a check.  Every single month. Sometimes you'll have one investor, just depends what the appetite is for that investment. Sometimes you have five, six, seven investors. So sometimes it can get a little tricky on a really short close because the more investors you have, there could be, somebody is a little delayed in getting the, their wire in or something.

And so I always got to tell borrowers, Hey, a little bit of a rollercoaster here. We got five or six, seven investors. It sounds like. We don't want to write too short of an escrow because something could come up, but it usually goes through pretty smooth. And I'm actually an investor myself.

And I like it. That's why 

we're talking today.  

Investor Insights and Experiences

So the funny thing is I just assume that you're going to dump in your 25 500 000 or whatever the lump sum is into a pool of money and then the advisor or the fund manager I guess you could call it would say i'm going to push the button on this It's different than that.

You actually hold on to your money until you're like I want in  

So I'm on both sides of it. I'll see investments come through and and I'm thinking like, Hey, that looks like something that'd be good to invest in. But then I'm also  putting these together for folks as well. So I see both sides of it.

So I know how it works. And it's really, pretty simple. The Yeah. The investment comes out, it gets sent out, like I said, to, to  hundreds, if not thousands of people complete outline of the investment a little history on the borrower. Sometimes they'll mention, Hey, this is a repeat borrower with us.

They always pay back really well. Hey, the equity position's fantastic here.  They need it for about six months. And of course, they're always saying, Hey, what's the exit strategy? Oh, we're going to be selling this other piece of property and then we're going to be paying this off. And, this is going to be a six to 12 month loan or what have you.

And then, the investors start emailing back. Yeah. Hey, I'm in for a hundred thousand on that. Put me in for 200, and as soon as he gets it filled, he says, Hey, thanks. This investment's closed. We have enough investors. Yeah.  And now they're back talking to the broker or the individual borrower who's borrowing the funds directly because sometimes these investors Are they've been doing this for years and they're just going direct to whatever source they want to go to out there but anyway, that's how it gets going and then Yeah, the loan gets funded and if you're an investor you start receiving a check and if you are the the borrower You're getting your funds traditionally just wired in, close an escrow, signing with the with the title company, just like normal and pretty smooth, pretty easy. 

So when you dump the money into this fund,  a deed and a promissory note is written by the investment company, and that's presented to the escrow and the buyer and the seller, and then everybody signs off on it just like a traditional  conventional loan. 

Correct. 

So for they go to Fannie Mae, which is a tertiary market.

Correct. 

So  because it doesn't work with the Fannie Mae  respite guidelines or what have you it's a secondary market. Source of funds for you to fund loans for people that have issues.  What is the back end?  I'm seeing things like 9%, 13% return on investment.  Break that down for me. Who gets what let's just use like a million dollar scenario. 

So traditionally the way a lot of the private lenders will, what they'll do is, it's a lot of work. I talked to some of these guys and it's you're, you've got deals going on all over the country sometimes, and it's a lot of hours these guys that are aggregating all these investors together, but.

What typically will happen is there's a scale, like I said, on what's the loan to value, what position is the loan first, second is it construction? Is it just purchase money. And they'll look at that and scale it based on, okay, this is where the market is right now. It's going to be prime plus whatever.

based on credit score in loan to value primarily is what's driving it. Okay. And that can also drive the points a little bit in some cases. And so once that's determined, the what a lot of private lenders will do is they'll put out that interest rate  to the investors and they might put that interest rate out at  a half percent lower than what they're actually  charging the borrower.

So that's their big, if you will, they'll themselves collect maybe half a percent interest for themselves, but the majority of it going to the investors.  Okay. And a lot of them will set up third party servicing just to handle, all the payments to the investors and what have you. And yeah, it's pretty basic like that, in general. 

So 

I assume that you get like a sliding scale yeah. Yeah. Obviously, if you put 25, 000 down, you're not going to get  large percentage, but if you're a standard investor, say I have 500, 000 and I want to pop that down,  my percentage is going to be more, I would assume, right? No, 

they're just piecing all the, they're just, let's say we've got 10 investors at 100, 000 each  and the interest rate on for that investments, 11 and a half percent,  one person's going to get a million out of 11 and a half percent invested or.

10 at 11 and a half percent of 100, 000. It's not about how much you put in. They keep it really simple. 

They promise you 11 and a half percent. And then those points up front, that goes to the investment company. Correct. Got 

it. Correct. You're not getting the points as the investor. You're getting the return on interest.

The person that's aggregating this, they're not making hardly anything on the interest.  

They're running, they get their money up front. It becomes a storefront basically. That's correct. Now there's, that's their markup. 

There's ways that 'cause the qualifier here is  qualifi, qualified investors, right?

You gotta have a certain amount of income or a certain amount of assets. 

Yeah. 

There's actually a more and more folks, however, there's a big part of the second population who's not that, and there's ways they can participate in funds like this. However they're expensive in that the expense costs and things like this are. 

One to two percent. All right. And so you can still make, pretty decent return on these. As a mom and pop investor, but That's just a different animal compared to what this is right here. You can do so much more better, as a qualified investor for sure 

Yeah, i'll give you an example. So I had I had 250, 000 invested at one time.

That 200 got paid off and had another Yeah small loan for 50, 000. And at the time, this is when rates were really high. And I got in at 14%. So 50, 000, simple math times 14 percent is 7, 000 a year divided by 12.  I get a check for 583. 33 every month have been for about the last 17 months.  Like clockwork envelope lands in my mailbox every month 

position was like 40  Where are you going to get that? 

That's right.  

The key is not in the stock market. Yeah, make sure you vet out the the company  and That they are making good decisions On behalf of the investors, right? 

Because there's going to be some that do fall through  

But it's if they're good and they know what they're doing.

They've been doing it a long time.  It's very small You that's why the equity position has got to be good because who's going to walk away from that when that equity position is really good. Very few people. 

And when you mean equity position, you're talking about first or second lien. If it's a second lien based on a first and the, that group of people that invest in that property and happens to go into foreclosure, they have to agree to refinance or figure out how to pay off that first lien.

I'm just talking about the property itself, the collateral. If there's a, if there's, if they're going to be borrowing 600, 000  and the property is appraised because they're going to appraise these properties or do  BPO's on them sometimes, broker price opinion, right? They're, Oh, there's 40 percent equity here.

Okay.  The borrowers got their act together. It makes sense why they need the money. They provided a clear exit strategy. Who's in  that easy.  

It's highly unlikely that person knows that probably gonna walk away from it, right? That's correct Yeah, and 

if you're in first position patrick if they're if this loan is in first position and they go to foreclose or deed In lieu, which is basically the buyers giving it back to the bank, which is the bank, you know the investors  You don't lose anything because now you have not only the equity position But you also have one tenth or whatever percentage of that property and then you go to secondary We go back on the mls 

No, wait a second.

Make sure I understand the same thing because I think what I heard from Scott was, the first, this is a situation where somebody probably has if the property's paid off, that's right? If there's a loan on the property, though, you're coming in the second position. 

Yeah, that's something you have to be aware of.

And as an investor, when you're going into this, you have to understand if you're in second position and there's 500 million or 5 million or 500, 000, that house goes into foreclosure. Every one of those investors that are in second position, they have to belly up to buy that first loan and satisfy it and pull them out of foreclosure.

They lose their 

money. 

Yeah. And so if a private lender is going to land in second position, you can bet.  that the rates going to be higher, the points are going to be higher and the equity position needed is going to be higher. Because they're going to earn more money because it's just like putting it in the stock market at a really risky investment, or really, or I'm going to go in bonds.

And so who's willing to go into this risky investment in second position, but the equity is pretty good. Maybe this person has a track record of doing this over and over again as a borrower of funds and has always paid back faithfully.  You're gonna get people that are gonna invest their money in that it's 

a win-win situation. Yes. Where the person leading the money, they have equity, just can't get money as fast as they need at the time. 

That's right. 

Come in, the investors come in second place, which in second position, which is riskier. However, you're not gonna do that unless there's plenty of equity.

And so in the worst case scenario, you'd get your money back and might be a bit more, what's the word? High maintenance to do it however. You're more likely than not going to recoup what you put in. 

Yeah. And first position is going to get paid off first. That's why anyone coming in second is going to go, all right, there's still a ton of equity for me still to get paid off as well.

That's why they're leaving say 40 percent equity right out of the gate. I'm going to get my money back a high likelihood that's going to happen  because you're not going to see going in second position up to 70, 75 percent loan to value. Not, that private lenders playing with dynamite.

It wouldn't do that, but yeah 

Racing right now. I'm like, I don't know, but like, how much money do I need to put down? Let's get going. 

I worked with somebody who was doing a lot of this in the early two thousands and was mostly catering towards people who needed a second to come in second position at that time.

He's probably making, I'm going to say somewhere between eight and 12 percent on these on the loans and interest only. And And we get paid off the refinances whenever the time was right.  And then of course, 2008 and nine happened. And so there was a lot of, There was some losses there, but none of that compaled compared to what he made though.

And, fast forward, years later, some of those folks who stopped paying, guess what? 10 years later, they had to refinance and they still had to pay. 

That's right. 

So they still had to pay. There's no way around it,  whether they sell it or refinance, which in California, you're going to do that at some point for most folks anyways.

So even those worse are case scenarios where it doesn't work out exactly as planned for the investor. It's still more likely not going to work out. 

That's right.  That's right.  

Comparing Investment Strategies

And it's a one way, like I said, it's also good for the the person that needs the money. And that's what you would want, right?

Yeah.  

So Patrick, I don't know what my fund's doing with you and it's doing really well. So pat yourself on the back, first of all, but.  Compare and contrast this opportunity to what you're doing with me, which is the ETFs, I think, right?  I'm totally freaking ignorant with this with stock market.

This I think I understand what you're giving what you're asking and  There are different strategies. I often get asked, what should I do or compare this to that? 

Tax Implications and Retirement Plans

It's not either or it's usually and you should do this and you should do that question This is how much you should do it with  The challenge sometimes that can come up in this type of investing as phenomenal as it is, it's man, I've started to get a tax problem,  right?

All of this is taxable income.  

Tax paying taxes is good. There's other things you can do to offset that by buying businesses or buying investments, et cetera. 

Yeah, absolutely. Absolutely. All I'm saying is it depends on what you're doing and where you're doing it at. So as an example,  it's hard to do these things in retirement plans.

Yeah, it's really hard. Almost impossible. 

Yeah, I looked into it. I got the same answer. Yeah, I was like, Hey, this is what I want to do. Can I put all this in?  

You got to figure out where you can play, where you can't play  now. I think that'll change here in the future, though, because of the need for retirement returns for Americans is pretty high.

And I think. You're going to start seeing a lot of loosening up of those restrictions.  I don't know that's going to happen, but I believe it's going to  

happen over the 

10 

years. You get a lot of people that just got a lot of money on the sidelines. They've maxed out their retirement. They maybe sold a piece of property and they just want to no hassle, no nonsense form of monthly cashflow.

And if you think about it you could literally do this over a year, collect all the interest.  Get paid off.  Now you turn around and you take the original principle plus the new funds you've earned  if you're disciplined and then now reinvest that and just keep redoing that year after year and growing that as well.

I don't think people should not do their retirement planning with a good financial planner. That's the number one thing they should be doing. This is something alternative. That people can do. 'cause it can bolster your retirement goals, pretty safely, yeah. You need, but you also 

have to be pretty proactive about it, right? . 

Proactive vs. Passive Investing

With what I'm doing with Patrick is very passive. He sends me these automated. Company profile things. I'm like, I don't know, whatever you just do it. I don't want to look at it. And that's, I'm a dream client for him because I just give him money and he gets to play with, not like it's billions of dollars or millions of dollars, but it's, it's something 

that's right.

And, but with this, you actually have to be fairly proactive. You have to do the due diligence yourself.  

You do. And depending on who you're working with, the.  And I'm talking about, the people that run these hard money companies, you want to make sure, you know what they're all about.

And if you've done it long enough, you eventually just trust their discernment on these investments because they don't want anything to go belly up because it's a bad mark on them. So if they're track records pretty good,  you just start trusting them. You're not going to go out and look at all the properties yourself.

And you can. Sure. That investment might be gone by the time you went and have done all that because he's quick, but you can definitely do that. Not a problem. But most people just look at the profile of what's been sent out. They even sent out with the borrower's permission, a credit report to review. 

Okay. Sometimes an appraisal, if they've had one done they provide a due diligence package to the investors that it's pretty pretty top notch for you to make a decision without having to go look at the property photos, the Zillow link. A lot of times, it's. It's pretty cool.

Minimum Investment Requirements

Scott, typically, mostly companies like this will have like minimums. Is that something that you're that?  Yeah. What's that? Yeah. 

I think minimums would probably be maybe 25, 000, something like that, 25, 000, 50, 000 but 

look, guys, if you if somebody's out there saying, Oh, I want to get into flipping houses, but I just don't have 20 percent down in the cash to hold it and the cash to fix it. 

This is a great opportunity. If you have 25, 000, you can build that into a down payment and holding costs and fixing repair costs. That's right. You can then do your flipping. And absolutely. It's something  being my age I think I'm older than you too, both of you. Being at my age, I'm the youngest person on this 

podcast, by the way.

Yeah. Fuck off. Youngest person. I  say that too many times anymore.  The youngest for sure. Those times I get to see that are slim  . 

The last thing I want to do is pick up my hammer and.  Do a repair on a fixer flipper and i'm a huge I hate I look at fix and flip houses and I make fun of them on my videos because The people that do them do a crappy job and you can tell  most of them There's some really decent ones.

You have to look a little bit harder, but That's the last thing I want to do. And being in a business mindset versus being an employee or a service provider mindset where you're doing everything right. As a loan professional, as a financial advisor, as a realtor, you're doing everything. You're actually, you're not a business owner in the sense that you can't scale your skill set out. 

This is something where you're actually investing money. So if you look at Kiyosaki's four quadrant, you're in the fourth quadrant with this. That's 

right.  

People make fun of his quadrant thing, but it's a great mindset to have because the last thing you want to do as you get older is to have to pick up a fricking hammer and buy a fix and flip.

Yeah. And this doesn't just equate to residential. It's also commercial, right? That's right.  

Commercial as well. You got it.  You got it. They look at it all.  I'm  excited. Do you want to? You want to  talk a little bit about what the requirements would be to be an investor 

after this? 

Yeah, 

I have a scenario.

I want to push to you.  I saw my house.  I get a million dollars in equity and I go to buy them. My parents a house in Vegas for 500, 000. Instead of putting cash down, I put 20 percent down and I take that 400, 000. That's, 80 percent of 500 and invested in this,  the 20 the Las Vegas loan is 7%. 

I'm getting nine or 10 or 11 percent on this.  It's making money for me instead of, I become the bank basically. 

Correct. You're arbitraging, right? And you're leveraging that asset. That property is growing still, whether you sunk all your money into it or not. So the decision you just made  is growing your net worth  faster. 

As long as the interest performs  on the investment that you stick the  400, 000 into 

right And I do the same thing for the next house. I buy it 80 down here  Two million dollar house and then I sink the rest of that money into  something that's going to make money for me So it pays off my loan  

or maybe you take 200, 000 of the 400, 000 and give it to Patrick to do something so you can diversify  and then 200, 000 into one of these investments and now you feel really diversified and safe.

I'm pretty diversified with Patrick right now, so I'm happy with that. We're going to give him more at the end of the year, but yeah. 

But  theoretically, Vito, yes.  If you, Yeah. If you can make more money somewhere else, but then you got to just understand what are the tax implications of the different investments and, that kind of thing, of course,  

again, it's. 

It's mitigated through different ways. That's what my accountant guy does.  I tell him to go make it show, make me show that I only make 25, 000 a year. So I don't have to pay income tax.  Never happens.  

Many tax questions. That's not going to be my wheelhouse at all. That's, that would be more.

More Patrick here. 

So 

you can invest,  but to your point or I think you were getting rigged into that qualifications. 

Accredited Investor Criteria

You're going back to what I was saying about how I think a lot of these things will be changing in the coming years. For a long time, the accredited investor was,  it is what it was, or it is what it is.

There was no way around it. They recently opened that up to, certain financial professional professionals. You don't have to have the assets or the income. As long as you have the expertise, quote unquote, you are considered a.  I think you're going to, we're going to see that list expand 

and 

and see more and more professionals with real estate or mortgage lending.

If you have expertise in finance in some ways shape or form, you're going to see those people added to those with those as well. 

No, it's true. It's true. So I put together just a little list here. The latest info on how you can become an accredited investor. You gotta, first of all, you got to fill out the. 

two page form  with anybody that you're gonna 

lose you 870 re 870. Okay. And it's questionnaire that helps you helps them determine your  availability to do this. So let's talk about an individual. Okay. The income test individual must have an annual income exceeding 200, 000 in each of the last two years  or 300, 000 if you're combining with a spouse.

Okay. And there has to be an expectation that's going to continue  in the current year. Like a P and L, if you will, right? You can't be, Hey, I'm falling off the cliff this year, but I was good last year and the year before, right? Or a net worth test. An individual must have a net worth exceeding 1 million.

This is important, excluding the value of their primary residence. The net worth is determined by the value of all assets, including investments, real estate and other property minus liabilities, including mortgages and other debts.  Okay, so can't count your primary residence in there. Just like Kiyosaki, right?

He always said your primary residence was a liability, not an asset, right?  So there's the Kiyosaki part right there. Let's talk about entity. Okay. Entities, corporations, partnerships, LLCs, trusts may qualify as accredited investors if they meet the following conditions.  Assets of five million or more,  and the entity was not formed for the specific purpose of acquiring the securities being offered. 

Ownership by accredited investors. If all equity owners of the entity are accredited investors, the entity itself may qualify.  Banks, insurance companies, registered investment companies, business development companies and small business investment companies are also automatically considered accredited investors. 

Okay, that part of it will not be my wheelhouse. I'm an individual, but I wanted to put all this out there for you guys. And then  to Patrick's point, professional certifications, certain professionals such as licensed financial professionals, for example, brokers, investment advisors with a Series 7, Series 65 or Series 82 license.

May also be considered accredited investors based on their professional knowledge. The criteria are established under Rule 5 0 1 of Regulation D of the Securities Act of 1933, and are subject to changes or updates by the SEC,  and that's a new one. And then just, and then the additional notes here. All right, this is good.

Again, they. The Val Pri primary residence exclusion. The value of an individual's primary residence is excluded from the net worth calculation. Although mortgages and other related liabilities are included in the calculation of net worth and then sophistication requirement, this totally blows you out.

Vito. 

I'll just sit here and eat my crayons.  

While the SEC uses financial criteria as the primary basis for defining accredited investors, the underlying principle is that these individuals or entities can bear the risks of more sophisticated  investments.  And then I put an asterisk here. Being an accredited investor enables participation in investment opportunities that are otherwise not available to the general public, often involving high risk.

But also potentially higher returns. There you have it. 

There you have it,  which is the same or not the same. Two things. One, like the professional designation stuff, that stuff is new. I want to say it's only the last two years. Yeah. Before that it was just strictly, any common assets.

So I do think that list will get expanded. If you think about 300, 000, depending on the state or the city living, then that's a lot of couples. That's a lot of folks out there. They may not qualify on the asset part yet, but they're younger. However, think of Bay area. That's a lot of folks for sure.

Yeah, 

they just probably don't realize they can do this. 

Yeah. 

Yeah. There's also a lot of private this is, we're talking about the private money side. There's all, it's the same qualifications to get into private equity, to get into those things before they become IPOs,  investor. and 

You don't have to investor though, an accr do you?  I mean there's ce  give you,  you can put 25  

offering? 

Yeah, I was loo  couple of other places ou will offer it to non qual 

I'm not sure. There  I'm trying to think what that might be.  

Remember last year we were talking about the difference between REITs and syndicates. You could, you can only be an investor in a syndicate if you're 

Oh a REIT you can invest in as a non, as an accredited investor, but that's not private equity.

That's a publicly exchanged thing. Private equity you're trying to think, you're trying to get into something that it's early before it's gone public, you  Big examples, like a Facebook, for example, for my public, there was, it was all private equity and then it went public. The challenge now is though, so many companies have done this and all the people making money are the ones who got in on that IPO, right?

And it's all this 

scheme, right? It's a big pyramid scheme. 

I wouldn't say that, but there's so many returns is being, there's so many people getting locked out of that. And so going back to what I said earlier, there's a lot of Americans with retirement accounts that are too low to get locked out while this stuff.

So I think we're going to be seeing ways where the marketplace is going. Provide a way for those folks to get in on the IPO as well.  So we'll see, 

but he said 

that this is an awesome opportunity right here. This is a great way to, for people to diversify their income, especially the guy Cassidy on the side, people who sell a second home or.

come into inheritance or get bought out at work or, the list goes on and on. What a great way to create. Yeah, 

I look at it like a cd in a sense, especially when a bridge loan opportunity comes out and you've got some money, sizeable amount of money sitting somewhere that You know, you're not purchasing a piece of property for nine months, 12 months. 

And someone that's getting a bridge loan needs a bridge loan because they're trying to sell the other property. So there's a high level of motivation for them to get out of that bridge loan in three to four months.  And you're going to get your money back pretty quick. Now, obviously it's not as guaranteed as a CV because they're going to give that person 11 months.

Just in case, but they're usually only making 

1%. 

The return is better. 

Yeah. So I'm willing to, if I don't need the money for nine months and I know they're high probability, it's getting paid off in four, five, the most. It's still buffering another 35, 40 percent of time that I'm going to get my money back and have made some money off that.

And even in an interest rate environment where people can get four or 5 percent on their cash for that, which sounds pretty good compared to what it was for a long time. Interest rates are starting to trickle back down and in this kind of opportunity, interest rates don't trickle back down very much.

They 

go up faster than they come down. That's 

right. That's right. 

That's a good point, Patrick. That's absolutely the truth. Yeah. A lot of them are tied to prime though, so they will come down a little bit, but primes only come down what three quarters in the last, but started in, what was it?

Summertime, right? Somewhere in the summertime. They did the half and then a quarter. It's still pretty robust. I guess it'd be for 

somebody who's looking for it. If I'm in a situation where I know I have the equity, I need money fast for another opportunity. This is an excellent solution.

Yeah.  Yeah.  No, no doubt. You need to get together and kibbutz and get your clients together with this. Because  I don't know, is there, is it like an MLM where you get credit? If you refer me to this company?  

I don't think they, most of them don't have that. I don't think they want to get involved in that kind of a thing. 

Not that I know of. I've never met anyone that does that. Not to say it doesn't exist, But talk offline about stuff, but typically I don't, I haven't seen that.

Scott, if we have somebody, I know somebody can reach out to you if they're looking for a private lender, right? They can come to you and that's an opportunity that you can help with. 

Absolutely. Absolutely. It's a game changer for a lot of folks, and I'm glad you, I'm glad you guys wanted to do this today because this recording is going to help a lot of people who a are on either side of that fence, they need money. 

Or they want to get involved and don't realize it's another form of investing. But it is a game changer for somebody that needs funding. It takes a little bit of education. They got to get over the interest rates, three to 4 percent higher. Yeah. It's short term though. Yeah, it's going to cost me a little bit more upfront, but look what it costs to pay a real estate agent every time you buy or sell a property, right?

So it's just another transaction. You're still in that same range. of cost, but you're now able to jump on an opportunity that is going to be something you wouldn't be able to do without the funds. 

Final Thoughts and Predictions

And I enjoyed the back and forth today, guys. A lot of good info here for  

the viewers. I want to put it out there that  I pride myself for negotiating the price so high that I pay for my own commission. 

I did just did it again today. I had a house it's been on the market for a long time. Cause there are two trustees fighting over whatever.  Finally got it back on on the market and got loans. And it went from 1. 5 up to.  1. 7 and then I pushed it after everything was up. I pushed, I broke, my job is to break the buyers, right?

I pushed it up to 1. 82.  So the value that I brought was my negotiating, my pit bull negotiating afterwards. So yeah, it costs money to make money, but I make you a whole lot more. And at the end of the day I negotiate for myself to be paid by that extra  percentage that I get for you. 

Yeah. Yeah. Yeah.  No, that's why I think that it's a win scenario.

There's a reason why the interest rates are higher 

and 

the scenario is different 

and 

It is a win for everybody involved  for sure. Yeah, this is awesome.  Thanks Scott Manford. This is a great this is a great walkthrough. Appreciate it. 

Oh, you bet. Thanks guys. Great questions. Good stuff. Thanks Vito.

I'll be talking to you in the beginning of the year for this and We'll talk more about it because 

I just need to get a little bit more sophisticated first  

I'm the crayon eater. Yeah,  the last thing we should say is our predictions for the football game this week  

took the last one.

They're going to take this one. 

Wait. I heard army is playing Navy and the Marines are supplying the cheerleaders. That's right. That's right. 

YMCA. 

That's right. That's right. They're playing the band. They're in the band. That's right. Hey, 

don't mock the band. I've been a band dad for the last three 

years.

They are. I'm gonna leave it alone then. I've seen the band make a tackle before.  Big game, right? 

Yeah, you don't mess with the band. They'll knock you out. On guys. She's a little  major guys. Hey, thanks a lot. I think this is it for the year. So Merry Christmas and Happy Hanukkah and Kwanzaa and all that.

And,  thanks for watching everybody. 

Absolutely. Appreciate it. Everybody have a good one. Merry Christmas. Yeah. 

All that.