Confessions of a Private Lender Part 2
Why Do I Lend?
Sometimes I lend because I want to strengthen a relationship with a fellow investor. That’s right. Lenders want to partner with investors. After all, I have this self-directed IRA (SDIRA). I have to invest somewhere and I am not interested in taking a chance on the stock market. What to do? Why not lend the funds to a real estate investor and form a business alliance? If I analyze the deal correctly I can ensure the investment is relatively secure (there are no guarantees). If the deal goes as planned, I earn a good return and the investor earns considerably more. If the partnership is productive and I enjoy working with the investor (I rarely invest with people I don’t like—it is even rarer that I will do so a second time) the relationship will grow. We may do many deals together. In fact, most of the people I have loaned to I have loaned to several times.
Hint: people with self directed IRAs are great sources of funds for your projects. The best potential lenders may be those with SDIRAs who are in their 40s or 50s. Why? SDIRA investors cannot withdraw their funds until they reach age 59½ without paying taxes and penalties on the funds withdrawn. Many would like those funds to compound for long periods of time. They do not need those funds for daily living expenses—they have been put away for retirement. They may not want their funds back for quite a while. Treat them right and you may have access to those funds for many years.
Private money is, primarily, about relationships. When I need to borrow private money to fund one of my deals who do you think I am going to turn to? Do you think the investor I helped to earn $100,000 might be a good source? Do you think she might return my phone call? So do I.
If a deal runs into an unexpected challenge I may get to exercise my problem solving skills and try to restructure a deal. Please keep in mind that not all lenders will enjoy this (most probably will not) but I do, especially if I can find a solution that benefits everyone. If you are relatively new to real estate investing you may benefit from partnering with someone who has a bit of experience, someone who might be able to help you navigate through an unforeseen situation.
To date, all the deals I have funded have been in Southeast Michigan, where I live. This is intentional. The deals I fund create jobs; jobs for roofers, electricians, plumbers, title agents, insurance agents, gardeners, home inspectors—lots of jobs. I am also a landlord. I prefer my tenants be employed. I usually require that they be. If my investing helps to create local jobs I am helping to increase the pool of qualified tenants. This is not some bleeding heart, kumbaya agenda—this is good business. We are all in this together.
In my initial example (first blog of this series) I mentioned that my annualized return was 21%. Good for me, but 21% is a pretty steep rate to pay. Why would anyone agree to do that? Well, the investor who set this deal up borrowed $50,000 to purchase a home and sold that home for $70,000. They earned approximately $15,000 after expenses in 32 days and had none of their own money in the deal. They secured the money in less than 2 days and didn’t fill out a loan application or pay an application fee. They didn’t have to do the deal but that deal put $15,000 in their pocket. Was it worth it? Are you still using the excuse that you can’t invest in real estate because you don’t have any money?
I was pleased to be invited to contribute to this redesigned site. This is the second entry in
what I hope will be a long series of posts. Some of my posts may be familiar to some of
you as they were previously posted elsewhere. They have been updated, and/or rewritten
before they appeared here. There will be new posts, but it seems appropriate to retell
some of my stories to introduce myself to new visitors and reintroduce myself to some
old friends. If I touch on a subject that interests you and that you would like me to expand
on, or if you would like to suggest other topics, please leave a comment and let me know.
That may become the theme for a future blog or podcast. If you think I have missed the
mark completely, go ahead and tell me that also. You won’t make me cry and it may turn
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Hi Jeff, I’ve been reading your blog and you seem to mention self directed IRAs a bit. I am reaching out to ask if you have any resources I can go to in order to learn about them. It’s hard to decipher the true information from the garbage that is out there on the Internet. Thanks in advance!
The custodian companies will have lots of information on their web pages. Equity Trust is the largest, though, not necessarily the best. Others are Quest, Entrust, iPlan, etc. …. there are now dozens. Their services and fee structures vary but, I suspect, most will do a good job of explaining the many benefits of self directed IRAs. If you qualify, Solo 401ks also provide many benefits. I attempt to execute my transactions in my self directed Roth IRA whenever there are enough funds available in that account to do so. If there are not enough funds there or the structure of the deal is better suited, I will use my wife’s Solo 401k. If the funds in both of those accounts are deployed and the deal is good enough, I will use other accounts and pay the taxes.