This is a hub for private money education. I’m very lucky to have been in the profession of a financial planner and helping people with insurance and mutual funds and College Planning and retirement planning and estate planning. I know that’s a lot of boring stuff but that’s my background.
So why is that helpful in private lender marketing? Finding private people to fund your transactions?
Well in order to understand how to get money from people especially people that have money in their IRAs to lend to you for your projects, you need to understand what traditional IRAs are and then what self-directed IRAs are
. Now I don’t want to be too analytical but you need to understand the code, the Internal Revenue code or IRC.
Here’s a few of the sections that you need to understand for private learning:
- IRC 401
- IRC 402
- IRC 408
- Section 4975
So IRC 401, we always have heard of 401ks. They retirement plans from companies.
So what’s 402?
Well 402 has a lot to do with Ira rules but here’s the code if you want to see it
408 has to do with individual IRAs and it’s important that you understand this section,
Lastly Section 4975 it’s probably the most important one to understand. These are prohibited transactions in IRAs. You need to understand this in order to be able to talk to Ira holders so they can do private loans for your business.
The IRS defines a prohibited transaction as follows:
“Generally a prohibited transaction is any improper use of your IRA account or annuity by you, your beneficiary, or any disqualified person.
Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of lineal descendant).”
–Source: IRS Publication 590
IRS Publication 590 indicates that, in addition to prohibited investments, the IRS prohibits certain transactions within IRAs. Prohibited transactions include investments with disqualified individuals (as defined by IRC 4975), “self-dealing,” and receiving indirect benefits.
Permitted Investments
The IRS does not provide guidance on what is permitted, but dictates only what is NOT permitted.
Examples of prohibited IRA investments include
- collectibles (such as artwork, stamps, rugs, antiques, and gems),
- certain coins, and
- life insurance.
See IRS Publication 590 for more information about prohibited investments.
Pub 590
IRS Publication 590 explains the tax rules and guidelines for individual retirement accounts (IRAs). This IRS document also includes information on how to set up an IRA, how much you can contribute, and more.
IRS Publication 590 is in two parts—Part A and Part B, which cover IRAs and distributions.
A lot of times you run into somebody that has money in their IRA and they’ll say something like,
“It sounds all good and I’d love to be able to use my IRA money
but I need to talk it over with my CPA.”
Well, if you know the tax code you can talk to CPAs. A lot of CPAs have clients where their clients have lost money in the stock market or done poorly meaning they haven’t made much return on their money.
I think the average 401K rate of return is under 5%. Don’t quote me on that.
When I talk to CPAs I basically say,
“I focus on investments that are quick turn.
Meaning I go in, I buy something, I improve it, and I sell it quickly
usually within 6 months.
My partners and my private lenders I’ll make at least 10% over 3 months
which is over 40% a year APR.
They use their retirement funds so they don’t have to pay any income tax on the gain.
They use a self-directed custodian that’s been in business for over 40 years.”
Finding these people you need to work at it. But they’re right next door. Again they are right next door
. Ever heard of the book, The Millionaire Next Door? read this summary.
One of the easiest ways to open the door for private landing and joint ventures is to have a really good elevator speech.
What is an elevator speech? It’s a speech that’s very short, like 30 seconds. It could be 60 Seconds. What you want to do is to start a conversation that will lead to a 15 minute interview over coffee. And if that works out then you go into a presentation that takes about an hour. That those are two appointments not one.
It’s very similar to getting an insurance or investment advising appointment. I’ve done thousands of those.
Now most people are very very nervous about getting involved with private lending or joint ventures. Well all I can tell you is that if you have a coach that’ll help you with that, it’ll probably make your life pretty easy.
We got to think outside the box in real estate investing. Let’s talk about what’s common and what’s uncommon.
What’s common is wholesaling where you are coming in at 65% of after repair value minus repairs minus your fee
. If the property is a $100,000 after repair value, you’ve got to buy it at this formula colon 65% of after repaired value is $65,000, minus repairs let’s say of $20,000 minus your fee of $5,000 equals $40,000 as a sales price. And that’s if you sell it for $100,000. If you sold it for $90,000 you wouldn’t get your $5,000 fee. But in wholesaling you don’t care about that you just care about selling your paperwork to a rehab or that will buy it fix it and resell it.
The problem with this is everybody’s doing it. There’s a scarcity of real estate deals. I have a friend of mine that is buying 100 houses per year because he has the capital. His lead sources probate attorneys, and the probate attorney doesn’t make any money until the property sold. Somebody dies in the property has to sell in order for the probate attorney to make any money. So that’s his marketing. Probate attorneys, helping the property get sold quickly as is with no contingencies.
Well if you had 10 private lenders that would give you $100,000 each for a turnaround of 3 months with a profit of 10% on their money, you could go make offers all day!
So here are your steps,
Develop a really good elevator speech,
if you’re in the We Buy Houses business, think of three boxes,
-
I help sellers sell quickly, no matter what condition
-
I help renters become homeowners, even if they have credit problems
-
and I help people get 10% of their money over 3 months in their IRAs
-
and in their 401ks
I hope you’ve enjoyed reading this or listening to this. I did my first deal in 1986 which is 40 years ago. REI skills has been helping Real Estate Investors since the year 2000 which is 25 years ago. Read the testimonials if you want coaching on either how to buy houses or how to sell houses or how to get private lender money or how do you do joint ventures.
One of my favorite things to do is to solve problems for a real estate agent.
Here’s a story that I think you would enjoy:
Mary, was it real estate agent that called me many years ago. She had a client that hired some contractors that did a bad job. They paid the contractor and the contractor left the job site. The amount of work that still needed to be done was about $20,000 and the sellers owners did not have the money.
Mary try very hard to sell the property in a non-approved condition but had no luck.
Mary called me and asked me to go take a look at it.
I agree that it took about a $20,000 to get it in for sale condition. This is not a good We Buy Houses type of deal
. After repair value was 750,000
$20,000 to fix
65% of $750,000 as $487,500
– $20,000 equals $467,500
– $20,000 fee for wholesalers
The net number to the home seller would be $447,500
I offered the following colon
I would come in with my own $20,000 as a private lender loan
I would fix it and then buy it on seller financing and carry my profit on a note
This house was free and clear of all loans
So my purchase price was $20,000 plus $50,000 fee as a loan against the property, first position, to be paid once the house is sold through escrow
The best possible outcome is $750,000 – $70,000 or $680,000 before commissions and closing costs.
Now I would have to pay interest on the $20,000 to borrow the money to pay for the renovation out of my $50,000 fee, but that’s only 10% of 20,000 or $2,000 interest.
Do you see where joint ventures is a wonderful way to solve problems? You’ve got to realize that time is money to a lot of people. These home sellers needed to leave quickly, they had to move out of state.
Forget about finding the money, go look for problems and the money will come.
One Last Story colon, I was living on the west coast and he was living in Texas, and he said I got a deal that’s a beautiful house and it’s a motivated seller, it’s free and clear and it’s an expired listing. I’m wondering if you can help me talk to the seller.
Well, I looked at the cops and I looked at the beautiful house which is only a year old, he was worth $250,000 easy in a cul-de-sac in Texas. I love free and clear houses cuz there’s lots of things you can do
. It turns out that the home owner was living out of state building another house in Florida. I got his phone number and I called him up and I acted like a homeowner trying to buy a house. I didn’t act like a fast-talking real estate investor!
The conversation went something like this:
Me calling Hey I was looking at this house that used to be listed with a real estate agent, is it still for sale?
Owner colon yeah it’s still for sale, you want to buy it?
Well I’d love to walk through it, is there an active listing on it you have to pay commission on the house if you sold it or can you sell it privately?
Owner most probably I don’t need to pay the commission. I want $250,000 for the house. I’m out of state right now
. Oh that must be really difficult. Living out of state and trying to sell a house. Any idea why the house didn’t sell it looks beautiful? Is there anything wrong with it on the inside or was the agent lazy, what do you think the reason why it didn’t sell?
Owner I’m not sure I haven’t been around to make sure that the agent was doing their job but I really do need to get this property sold
. Well I’ll walk through it and call you back how’s that? I noticed there’s a lockbox on the door is there a combination you can give me so I can walk through it?
Yeah here’s the combination and call me right back
. So I looked at the house and it was gorgeous there was nothing wrong with it and I would love to have it for a real estate deal. Problem. But I wanted to be able to buy it without any cash out of my pocket.
So here’s the lesson colon the owner can always refinance and now you use not OPM other people’s money but other people’s credit and other people’s mortgages
So I call him back and I say well I just have fun question do you have any money pressure right now do you have to get some money quickly?
And he sighed and said yeah I’m building a house right now, I bought the land out of savings and I’ve got some materials coming but I need about 130,000 cash to pay the Builder and to pay the rest of the materials. This thing is going to be stuck and I really need to finish this house.
There you go. There’s the pain point. He needed the money fast for a good reason.
So basically I structured the following colon
The owner would get a new First Mortgage of $130,000, as a new First Mortgage
. You would carry back the balance of $120,000 totaling $250,000. There would be no payments on this carry back note for 5 years and a balloon payment with no interest paying the pay or 120,000.
This is how it was negotiated:
Well I have some good news for you but I don’t know if you’ll like it or not I like it I think it’s a good deal for me but you tell me if it’s a good deal for you
. We have a plan putting together that you’ll be able to get $130,000 cash in about a week and a half. The house should be sold in a week and a half. The purchase price will be $250,000. We will buy it on seller financing where we will create after you get your $130,000 new First Mortgage, a second mortgage of $120,000. That will be paid off in 60 months. The payment to you will be $1,000 a month. How does this sound to you, you will get a hundred cents on the dollar for the equity in your house. Because you know the house. You’ll be the bank.
I like the transaction cuz the house is beautiful and we are in the investment business. We are going to get a resident in that property for 5 years and then they’re going to buy it cash. They will be paying off your new first mortgage and your second mortgage that you’re carrying back.
We can do this quickly and you will get your $130,000 and about a week and a half
. If this makes sense talk it over with your wife and get back to me.
The end result is that he did do the new First Mortgage for $130,000 and carried back $220,000 with no payment
. The exit strategy was selling the house on a wraparound mortgage. We found a buyer that would put down $30,000 cash for the $250,000 house but sold the house for $270,000. The payments per month were $2,500 a month, with $1,000 a month going to the owner. We would be working the spread of $1,500 a month.
Being a transaction engineer is important in this business where you can find a way to solve somebody’s pain point and make some money for yourself.
Best of luck in your real estate investing!
Brian Gibbons
REISkills.com