Are you interested in learning how to raise and leverage private money to make more profit on every real estate deal? If so, you’re in the right place! In today’s episode, we’ll be discussing the topic of real estate investing without the need for traditional banking institutions.
Jay Conner shares valuable insights on how private lenders can be your financial partners without demanding equity in your properties.
Jay explains that in the realm of single-family houses, private lenders function similarly to banks. They provide loans secured by the property and receive an interest rate just like a traditional lender would. However, private lenders do not hold any ownership of the property. Instead, it’s your entity, such as an LLC or land trust, that holds the ownership.
Jay also discusses how the math works when it comes to using Private Money. He emphasizes the importance of borrowing a maximum of 75% of the after-repaired value (ARV) of the property, as opposed to borrowing based on the purchase price alone. This strategy allows you to maximize your funding and potentially receive excess cash at closing.
Furthermore, Jay shares an example to illustrate how multiple private lenders can be involved in a deal. By securing funds from multiple lenders, you can diversify your financing sources and structure deals to meet your specific needs.
If you’re curious to dive deeper into real estate financing and how to unlock the power of Private Money, make sure to tune in to our podcast episode. Jay Conner, The Private Money Authority, offers unique insights and strategies to help you succeed in the real estate investing world.
Timestamps:
0:01 – The Private Lender Is The Bank
1:11 – How Much Equity Does A Private Lender Receive?
3:32 – What Is One-Off?
4:12 – How Do You Run The Math Based On The Number Of Investments?
9:12 – What Is Total Loan To Value?
10:05 – Jay Conner’s Free Money Guide: https://www.JayConner.com/MoneyGuide
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Private Lenders vs Banks: Exploring the Benefits for Real Estate Investors
Jay Conner [00:00:00]:
The private lender is the bank. In fact, the private lender doesn’t own any part of the property. It’s your entity, your LLC, your land trust, or whatever you’re buying your properties in. Now I’m talking about here as it relates to single-family houses. Now if you’re doing a large project such as multi-family or apartments then it’s common for the private lenders that are, like, investing in a fund to get a piece of the profit. But in single-family houses, we call it one-offs. The private lenders are loaning money secured by that single-family house and they’re getting an interest rate just like the bank would.
Narrator [00:00:44]:
If you’re a real estate investor And are wondering how to raise and leverage Private Money to make more profit on every deal, then you’re in the right place. On Raising Private Money, we’ll speak with new and seasoned investors to dissect their deals and extract the best strategies to help you get the money because the money comes first. Now here’s your host, Jay Conner.
Jay Conner [00:01:11]:
Well, hello there. Jay Conner here, the Private Money Authority, and just last week as I was doing a live stream here on YouTube, I had a question that was put in the comments section on the live stream from Wes. And so, Wes, Thank you for your question. And, by the way, for you that is watching this video, whenever you have a real estate investing question, particularly as it relates to Private Money. Be sure and put your questions in the comments section below and I’ll get your question answered for you. So Wes has actually had 2 parts to his question. Wes asked in the last week on the live stream, and he said, in essence, Wes wanted to know how much equity a private lender gets, either during the deal or after the deal. And the other part of the question was, how do you run the math based on the number of investors that you have in a deal? So, Wes, let me answer these 2 questions. First of all, how much equity does the private lender or the investor in the deal get? And the answer is 0.
Jay Conner [00:02:24]:
Now there are Private Money deals that you can structure to where the private lender will get what they what we call the back, you know, a back end percentage of the profit. But in my world private lenders not getting any equity. You know the old business model of using Private Money and private lenders is the private lender would put up the money. We, the real estate entrepreneur, and investor, would go find the deal, negotiate the deal, oversee the deal, and then at the end of the deal private lender gets a percentage of the profit or they split the profits. But not in this world. In this world, The private lender is the bank, right? In fact, the private lender doesn’t own any part of the property. It’s your entity, your LLC, your land trust, or whatever you’re buying your properties in. Now I’m talking about here as it relates to single-family houses.
Jay Conner [00:03:20]:
Now if you’re doing a large project such as multi-family or apartments then it’s common for the private lenders that are like investing in a fund to get a piece of the profit. But in single-family houses, we call it one-offs. And what we mean by one-offs is that every deal stands on its own. The private lenders are not investing in a fund. The private lenders are loaning money secured by that single-family house and they’re getting a straight interest rate just like the bank would. So I pay a straight 8%, 8% of the loan amount that the private lender has loaned on that deal. Now, that leads me to the next question that you posed and that is how do you run the math based on the number of investors? Well, here’s how we run the math. 1st of all, in answer to the question about running the map, what we, do in the program, and how we work with our private vendors we only borrow a maximum of 75% of the after-repaired value.
Jay Conner [00:04:37]:
Now I didn’t say borrow 75% of the purchase price. Big difference between borrowing a percentage of the purchase price and borrowing a percentage of the after-repaired value. So, for example, let’s say just for easy figuring we have a house that’s got an after-repaired value of $200,000. That’s the after-repaired value. Now let’s say that it’s got a rehab, it’s got renovation that’s needed, say you have $35,000. And then let’s say that you’re going to buy this house all cash with Private Money for $100,000. And by the way, that’s a very, very common example. I buy houses all the time that need renovation and rehab.
Jay Conner [00:05:19]:
I buy them all the time at 50% or less than 50¢ of the after-repaired value. So let’s run the math, after-repaired value of 200,000. Rehab’s 35, I’m gonna buy it for 100. So if I can borrow up to 75% of the after-repaired value. Well, the after-repair value is 200,000, so I’m going to borrow 75% of that which is $150,000. So watch the math here, Wes, in how we’re running it. So I borrow up to 75%.
Jay Conner [00:05:51]:
That’s 150,000 Well, I’m buying it, remember in the example, I’m buying it for $100,000. So when I bought this house, $150,000 was wired into my real estate attorney’s trust account. You might be using a title company to close your deals. Whoever the closing agent is, the private lender is going to wire the funds to the closing agent’s trust account. Well, in this example, I’m borrowing $50,000 more than I need to buy it. Did you follow that? I’m borrowing 150 at 75% of the after-repair value. I’m buying it for $100 so that’s got what’s called excess cash and, by the way, that’s the actual phrase that is on my real estate attorney’s check stub that I pick up. So I’m picking up a check for $50,000 less than closing costs when I buy the house.
Jay Conner [00:06:46]:
You see, in this part of Private Money, we’re not taking any down payment out of our own pocket to the closing table. All the funding is being taken care of by the private lender. So I’m picking up a check. I mean, who wants to get paid to buy houses, right? So I’m picking up a check for $50,000 less than closing costs. Now I’ve got that check. Now I’m going to use $35,000 of that check to rehab or renovate the house, in this example. That leaves me an extra $15,000 from the excess cash when I bought the house that I can use for carrying costs, utility bills, and if the private lender actually needs monthly payments, whose money am I using to make the monthly payments when I initially started that deal? I’m using the private lenders’ money, which was in the excess cash, to make their initial monthly payments.
Jay Conner [00:07:37]:
So Private Money, just in and of itself, can and will, like, put a big infusion of money in your checkbook. It’s the fastest way I know to increase your checkbook when you’re doing real estate investing, particularly single-family houses. Now you also, in your question, you talked about based on the number of investors. So that brings up a good question, Can we use more than 1 private lender to fund a particular deal? And the answer is yes. Now let’s use the same example after-repaired value is $200,000. The maximum I’m going to borrow is 75% of the after-repaired value. So I’m going to borrow $150,000. Well, I can get the $150,000 from 1 private lender, or, for example, I could use 2 different Private lenders.
Jay Conner [00:08:29]:
I could be getting $100,000 from 1 private lender and I could be getting $50,000 from another private lender. So how does that work? Well, the private lender that is loaning the larger piece of money goes in what we call first position, first position. And then the private lender that is loaning a smaller amount of money, in this case $50,000, they go in 2nd position or what’s called a junior lien position. And for those that are in a secondary position, I’ll pay them a little bit more interest. I’ll pay 10% to the private lender that has the smaller amount of money. I don’t mind paying 10% on smaller amounts of money, but I don’t want to pay 10% on larger amounts of money. So you see now we run the numbers based on something that we call total loan to value. And what total loan to value means is we’re going to add up all the loans from the private lenders and then divide that by the after-repaired value.
Jay Conner [00:09:28]:
So total loan to value in this example, we got $100,000 from 1 private lender in the first position. We got a $50,000 loan from a private lender in 2nd position. So add those together, and there’s your 150. So 150 divided by 200,000 we have a total loan to value still at 75%, even though we’re using 2 different private lenders. Wes, thank you so much for submitting the question. Again, if you’re watching, or listening to this video and you’ve got any kind of Private Money questions, put those in the comment bar below and I’ll get your questions answered just as soon as possible.
Narrator [00:10:05]:
Are you feeling inspired by the knowledge you gained in this episode? Then head over to www.JayConner.com/MoneyGuide. That’s www.JayConner.com/MoneyGuide, and download your free guide that shares seven reasons why My Private Money will skyrocket your real estate investing business right now. Again, that’s www.JayConner.com/MoneyGuide to get your free guide. We’ll see you next time on Raising Private Money with Jay Conner