We’ve discussed using other people’s money. Now we’re going to take it
to the next level where it will become an entire business for you. Instead
of borrowing money from the bank, you can become the bank. What do
banks do? They take money in the form of deposits, paying 1 to 3 percent
interest, then turn around and loan it out at 7 to 18 percent—and
credit card companies charge up to 29 percent interest. Have you
noticed that banks and insurance companies have the biggest buildings
and the nicest lobbies? They do because they’re taking your money,
holding it, and lending it out. Stop letting the banks make all the money;
you can learn to be the bank. You’ve learned how to analyze, verify, and
find good deals. If a house is worth $300,000, it’s a very low risk to buy
it for $180,000. It’s also low risk to lend $180,000 on something worth
$300,000. Why? Because if people don’t make their payments, you get
something worth $300,000 for $180,000.
By the way, your IRA cannot do “self-dealing”—that is, you can’t lend
your IRA money to yourself, but you can lend money on your own
deals, or you can get other people to lend you money, and the rates of
return can be rather high. You could use your own, but it’s even better
to use other people’s money (OPM). Find people with a lot of money
who aren’t making much in their IRAs or 401(k)s or their investments,
then offer them returns that are higher.
Start out by asking what kind of return they make now. If they make 7
percent, offer them 8 percent. If they make 8 percent, offer them 9 percent.
If they make 10, offer them 11 percent, but don’t go too high or
you’ll scare them away. So set up a business once you learn how to analyze
property, then find other investors and offer to lend them money.
One of the biggest difficulties for investors who like to buy property to
fix up and sell is that they’re always out of cash. Even if you have good
credit and a good business record, it’s difficult to borrow money on a
house that needs repairs. Yet most of the motivated sellers and good
deals we find are on properties that need repairs. Half the roof is gone,
or the floor has sunk, or the windows are missing. A person goes to the
bank and says, “I’d like to borrow $50,000; the house is worth
$80,000.” Yet the bank or the mortgage company often won’t lend
money on houses that are in poor condition. They may escrow the
money, but it’s going to take 30 to 45 days to close because of all the
paperwork, checking credit, gathering tax return information, and so
on. Then, the week you’re supposed to close, they might want more
Cash is king, quickness is queen. The more cash you have, the more deals
you’ll find. The quicker you’re able to close, the more deals you’ll complete
and the more money you’ll make.
paperwork. In the meantime, your motivated seller may disappear.
You’re better off to deal with cash.
One way to help people, including yourself, close more quickly is to
have access to large amounts of hard money or private brokered money.
Every state is different; check with your own state regulatory agencies to
make sure you’re not violating any rules or laws. If you borrow money
at 8 percent, you lend it at 11 or 12 percent. At what interest rate would
the bank lend to a real estate investor who has decent credit? Generally,
between 6 and 8 percent, but rates change constantly.
A lot of hard moneylenders charge 5 to 10 points up front when the regular
banks are charging 2 or 3 points, because the banks take a long
time and may not close the loan. When banks are charging 9, 10, or 11
percent interest, a lot of hard moneylenders are charging 11 to 20 percent.
Is that fair to the borrower? If the numbers work for the borrower,
it is. If borrowers could lose a good deal otherwise, it is. Say they find a
house that’s worth $300,000 for $140,000. They’re going to buy it, fix
it up to sell it, and make over $100,000 after their repairs. For this to
happen, the house has to close in two weeks, yet the bank said it’s going
to take a month to close and they may not even grant the loan because
the house needs repairs. As a hard moneylender, you offer to charge
them 10 points and 14 percent interest. Is that fair to those who are
borrowing the money? Yes, because if they didn’t have that money, they
wouldn’t be able to do the deal.
We tell people in the hard moneylending business that if you can go
somewhere else or have the cash on hand, don’t pay the extra points and
higher interest rates. But most hard moneylenders are always low on
money because there’s so much demand. If someone would lend you
money at 10 percent and you make 15 percent, how much do you actually
make? Five percent. Five percent of $100,000 is $5,000. If you borrow
the money and the lender doesn’t charge you any points and you
charge 10 points, that’s $10,000. You’ve just made $15,000 by putting
together the person who needs money with a person who has money.
Investors like you usually start out borrowing money, buying small
properties, and renting them out. That works fine, but after a while, you
get burned out dealing with the tenants. Then you graduate to the next
level: buying houses, fixing them, and selling them, and that’s great, too.
You may make a lot of money and it works out well, but you’re dealing
with contractors, and the houses don’t sell very quickly.
making good money, but with lots of headaches. At this point, some
investors graduate and learn that they can wholesale properties and
make money just for finding good deals, so they start doing that. Then
they learn about lease optioning and do that. Then, after 10 or 20 years
in the business, if they’re not either rich and retired or burned out,
almost all investors get into paper. And you can, too.