Lending for Real Estate Investors

Mike:Welcome to “Real Estate Investing Secrets.” We are all looking for freedom and the opportunity to live better, more fulfilling lives but most of us were trained our entire lives to work for someone else and chase their dreams. How can we use real estate investing as a vehicle to achieve financial freedom? My life is dedicated to answering your real estate investing questions and helping you build an investing business that allows you to change your life and the world around you and to enable you to turn your dreams of financial freedom into a reality. My name is Mike Hambright from flipnerd.com, and your questions get answered here on the “Real Estate Investing Secrets” show.
What’s up, freedom fighters? Hey. Mike Hambright here from flipnerd.com. Welcome back. This is the show number 459, and today we’re going to be talking about lending with my buddy Kris Bonocore of LendingOne. You know, it’s always a big question. A lot of people that are looking to get started are always concerned with where am I going to get money, how am I going to do deals and so that’s something we’re going to talk about today.
It’s funny because I coach and mentor brand new real estate investors, and I’m surrounded by experts, people that are buying hundreds of houses a year. So I kind of see the spectrum of everybody involved in the real estate investing industry, and I can tell you the two biggest needs of ever real estate investor whether they’re brand new or even a veteran is always they want more deals and more leads to get more deals and they always need more capital. Like real estate investors by nature are usually real estate rich and cash poor. They never have enough money and it gets soaked up.
So wherever you are this’ll be a good show for you to kind of listen in to Kris who’s an expert in lending and talk about some different products that are out there and maybe we’ll even talk a little bit about where the market’s trending because the market has been shifting a little bit lately and get some insights on that. So Kris, how you doing, buddy?
Kris:Great. Great. How are you?
Mike:Good, good. Awesome to have you here.
Kris:Yeah, awesome to be here. Thanks for having me.
Mike:But before we jump in, talk a little bit about the . . . maybe your background and a little bit about what you do.
Kris:Sure. So Vice President of Sales for LendingOne so I lead the sales organization. The inside sales team, the outside sales team. We have a wholesale division and all that kind of funnels and channels into me. I come from the world of wealth management for most of my career in both the chair of and individual contributor as an investment advisor and then a little bit later on in leadership. So I moved on into private lending about two years ago and here I am.
Mike:Awesome, awesome. And LendingOne is a pretty significant national lender. I mean, you guys do quite a bit of volume, right, working with a lot of real estate investors?
Kris:Oh, yeah. A lot of volume. So we are the fourth or fifth largest but we are certainly the fastest growing.
Mike:Yeah. Awesome. And the best looking is what I hear. I’m not here to judge but yeah. Awesome, awesome. Well, hey, so let’s kind of talk about . . . I want to start off by talking about different types of lenders. So, you know, there are some common ones and we’ll kind of take a deep dive into each one, maybe talk about the pros and cons.
So there are the more traditional route of banks. Could be local community banks. Of course for . . . if anybody’s listening right now and when I say banks you think of Chase and Wells Fargo and all those big guys like they don’t even lend to us at all. They don’t get our business at all but more of like community banks. We could talk about the private money type lenders. It could be, you know, even just friend and family type money which always has a lot of limitations on it. There’s more of kind of the hard money or maybe even private money kind of hybrids of people like you guys. And then there’s probably some extreme version of something that . . . I don’t really know what they’re called besides maybe like a loan shark type money.
Kris:Yeah.
Mike:You don’t get it paid back quickly, they’re going to break your knuckles or something so . . . but let’s talk maybe a little bit about the pros and cons and maybe we could just start I guess where we started off there with just like community banks. What are your thoughts on that?
Kris:Yeah, so look, a fine option. They’re not as forgiving when it comes to distressed properties as private money or hard money or certain loan sharks but it . . . you know, they’re more conservative in their approach. Their rates are generally a bit more favorable and when it comes to the borrowers they’re also looking for someone or folks who are . . . who have higher credit scores, more money in the bank.
Mike:Right.
Kris:And again are looking at the more conservative properties. So a fine option. Another limitation of potentially using them is they’ll often kind of cap out the amount of money that they will lend certain individual or an entity or the number of loans in terms of units that they will lend out to.
Mike:Right. Yeah, I have a couple of relationships with local banks and they have been good but there are some . . . I tend to use them more . . . I’ve historically tended to use them more for long-term buy and hold but they’re . . . you know, the pros are you might be talking to the president of the bank if you walk in. I will say one of the . . . I don’t know if it’s a con or not but when I first started it was like they had no interest in talking to me unless I was a banking customer. So I almost by default had to start a banking relationship with them until I could get any traction. And there was no guarantee that I would get any traction. You know, you might just have to pull your money out and go try somewhere else but . . . and one of the . . .
Kris:They want the relationship and they . . .
Mike:Yeah, and I understand. I understand that but yeah. Probably one of the bigger things is the banks, you know, by definition . . . almost. Not exclusively but when you’re talking to a community bank they’re usually not that big. They might have a couple of branches and they have . . . and I’m definitely not an expert in regulation but I know that they are limited based on how much they have in deposits of how much they could actually lend out to any one person. So I know one of the banks I had a relationship with like it wasn’t hard to max out pretty quickly what I could even use them for.
Kris:Right. Yeah, that’s certainly a limitation. Another that a borrower might come across is the time that it would take them to do it. So if time is of the essence, regional or local bank, community bank is probably not your best option. They might take 50, 60, 70 days to close a standard fix and flip or bridge loan.
Mike:Yeah. Yeah. So banks . . . so there’s pros and cons there. What about like private money? So I know that that’s a wide range. You guys would probably consider yourself kind of a hybrid of private money and maybe hard money, right but at the low end of the spectrum or I don’t know if low end is the right word is there’s just like, “Hey, I’m borrowing money from Uncle Joe or something.” I mean, but those aren’t . . . you know, I don’t typically refer to those as a private . . . I mean, that is private money but they’re not a private money lender because they’re not really a lender as a business. They’re just lending a hand, if you will, more [inaudible 00:07:05] Kris:That’s right.
Mike:So that probably is the best money if you can get it. Of course not everybody has a rich Uncle Joe. Right? But . . . and the other thing that I would say . . . and I think that you’ll probably . . . you can probably share some thoughts on this is that when you work with a lender like you guys or somebody like you is you have a vested interest in that person’s success, right. Uncle Joe just trusts you but he can’t add any value to say, “Hey, I don’t really agree with your market values here or I think you’re going to put too much into that house.” Like there’s no safety net. It’s just some level of trust, right.
Kris:That’s right. Yeah, that’s right. So we will evaluate the deal, the borrower, the area, the amount of money they want to put into it. It’s very important because not only do we of course not want to get hurt in the transaction. We don’t want the borrower hurt. We want repeat business, and we want to see this person be successful in whatever it is that they’re doing. I just had a conversation with one of my account executives this morning and I just said, “You know, our job is really to be kind of an advisor or a consultant.”
Mike:Sure.
Kris:So that these borrowers will look to you. I think all successful people look back to . . . look back on someone or some group of people depending upon their expertise to help give them advice. So yeah. Uncle Joe is not going to give that to you. So whether it’s going to the local bank or to a private lender or hard money, you maybe not only have that person give you money but maybe give you a little bit of additional perspective.
Mike:Yeah. And I think also with that kind of Uncle Joe type person, you know, it always is like, “How rich is Uncle Joe, you know?” So he’s probably often . . . more often than not, we might have a family member or a family friend or somebody that we know that, yeah, they’ve got $40,000, $50,000, $60,000 but that’s only going to get you so far, right. Depends on what markets you’re in. That might not even hardly make a dent in what you’re trying to do. Let alone . . . I mean, one of the, you know, one of the things that we talk about in real estate all the time, the key to success is consistency in everything.
You need to consistently generate leads, you need to be consistently doing deals and I found through all the coaching and everything when people have this fear about what happened . . . they have this fear of like the proverbial dog catching the bus. What if I catch it? They’re almost like they want to get a deal but they’re afraid if they do, right. And sometimes that’s because of lending. Like how am I even going to fund this thing, right?
And so what I found is, you know, if you’re relying on private money or you’re not certain that that money . . . even when you have private money sometimes . . . like that money might not be there in three months. Like it’s there today but it doesn’t mean they’re just going to sit on it and wait until you might ever need it in your whole life. So if that’s . . . if the relationship is that loose, sometimes you start to have this fear in your mind of will the money even be there when I need it and you might actually subconsciously psych yourself out from even getting a deal.
Kris:That’s right.
Mike:Yeah.
Kris:Yeah, that’s exactly right. We do hear that kind of [issue at the 00:10:07] opening is . . . it’s one of the two or three biggest concerns is how am I going to fund this deal?
Mike:Yeah. Yep. So well, then . . . if you kind of shift to the other end of the spectrum of a private money lender, more of a true lender and then . . . there’s kind of these . . . and I want people listening to this to know that there are . . . we’re talking about kind of four or five buckets here. There’s like gray areas in between each one. Like how hard is the hard money? How private is the private lending? And there’s even inside of hard money spectrum . . . I’ve come across hard money lenders before. Usually local guys that they . . . this is going to sound terrible but it happens is they hope that you default because they don’t want to . . . they are like, “I’ll just take the house and I’ll make another 10 on it or another 20 on it.” Like there’s . . . and that’s kind of probably where we get into the loan shark money like I’ll break your kneecaps if you don’t do what I say type thing so . . .
Kris:[I’m in Philly 00:10:57] . . . we do thumbs in Philly but . . .
Mike:Thumbs in Philly, yeah, yeah. Depends on regionally where you’re at so . . . but my point is that there’s different . . . there’s a gray area between each of these buckets. There’s people that are kind of a little bit of both and so if you go to the other end of the spectrum which is probably more where you guys are kind of organized private money/hard money. What does that person look like? How’s that person different than Uncle Joe?
Kris:Sure. So I think it comes down to . . . when you’re looking at all the options it comes down to probably three, maybe four things. One is fees. What are the fees that you’re going to be paying, right? Your origination fees, your . . . what the industry refers to as junk fees and then what’s your interest rate. And then the timing. How important is time to you? How quickly do you need or want to close on this deal?
I think customer service as a third area should definitely be looked at and that would also tie into that consultative approach, that advisory type approach. And then lastly is for us technology. You know, is it easy? Maybe it’s more broadly processed. So is it . . . what’s the process for obtaining money from a community bank, from the hard money person or the . . . or Uncle Joe? Do you have to go through song and dance? Do you have to put together a PowerPoint presentation? What are you doing? Or is it an awkward conversation at Thanksgiving dinner? So process, timing, fees and then what level of service or consultation are you getting.
Mike:Yeah. And so with the private money . . . talk a little bit about . . . I mean, inside of those things the importance of the service. And maybe you could give some comparison to different types of hard money lenders that are out there. Some focus on . . . just on fees and sometimes their service suffers because of that because they . . . maybe it’s because they charge so little that they’re just like, “We don’t provide any service.” They don’t necessarily say it but that’s what happens. Then there’s people that are like, you know . . . have a higher level of service. Just talk about the importance of that for a real estate investor in terms of, you know, what’s out there but also just the confidence that it should give an investor that you really do have a partner that’s there looking out for you or you don’t.
Kris:Yeah, so I would include, you know, the terms and the money actually being there. So a lot of firms . . . we have a number of competitors in the space who are hard money folks. They might say something at the onset of a deal or the initial conversation but do they ultimately follow through with it? Right, and I think that certainly is something that’s very prevalent when it comes to customer service.
And then the entire process once again is from cradle to grave. Once the opportunity presents itself all the way through loan closing what’s that customer service like? Are you dealing with processors? Are you dealing with a variety of let’s say account executives or people in it? How streamlined is it? What type of paperwork are you supplying or required to supply or not required to supply? Is there follow-up and follow through? Is there responsiveness to your emails and your phone calls? All of that adds to the client experience and it’s very important in any transaction.
So, you know, you could lead with price. I think you ultimately demonetize yourself if you do that. As any type of lender, you know, whether it’s bank or hard money or private, you know, what have you. But the price is only an objection in the absence of value. So the value that we are offering is . . . and many others offer just like us is the customer service and the client experience which . . . you know, whether it’s technology or it’s the individuals that you interact with is very important.
Mike:That’s great, yeah. And it’s not just in lending too. It’s everything, right? You don’t . . . I’m not naïve enough to say you always get what you pay for. Therefore you should always pay more because you’re going to get better service. I know that’s not always the case but generally there’s some truth behind there, right.
And so I was actually just teaching a course here the other day to a whole bunch of real estate investors on finding contractors and that’s one of the things that we say. You’ve got the little guy. Like there’s this guy with truck and his son works with him or his brother works with him and doesn’t have any business cards, doesn’t have any professional . . . you know, not professional in any way but just out there trying to make stuff happen. And sometimes those guys are okay. And then you’ve got the guy in the middle that’s more organized running some crews, has insurance. Like things like that. Then you’ve got the big like wrapped Hummers guy that like . . . they have just a ton of overhead because they’ve got 15 layers of management in the middle there.
But my general kind of summary after all that is that the more downstream you go to that guy that is . . . maybe that’s Uncle Joe, right, in terms of . . . sort of talking about lending here. Doesn’t have . . . the more downstream you go the more work you’re going to have to do. You’re going to have to chase them, you’re going to have to, you know . . . they can’t wait three days to get paid. Like they need . . . they’re calling you right now saying, “I don’t have enough gas in my truck to get . . . ”
I’ve literally had this happen before. This guy was like, “I just finished the job and I’m at the house. I don’t even have gas to get home. Can you bring me money right now?” And it’s like, you know, early on I realized like I can’t work with those guys. My time is worth more than all the headaches that they cause. And so I had to kind of go upstream to be willing to pay more for more service because I value my time, right.
Kris:Yes.
Mike:Yeah, yeah. So let’s kind of get into the more like the loan shark area. We’re kind of joking and saying they’re going to break your kneecaps and stuff but I can tell you a couple of specific areas, the things that I’ve seen lately or certainly over the past year or two that I would put people in this bucket. One is they have you paying some sort of fees upfront before you’ve even done the deal, right. Some of those guys are just flat out scams. They just take your money and run.
But also people that say they’re going to do your loan and here it is like three days before closing and they come back and they say, “Oh, we valued it at less so you need to put another $10,000, $20,000 of your own money down.” Now that mitigates the risk for them but what a shitty way to do business if all of a sudden you’ve got to come up with more money out of pocket to make sure this thing closes on time. You can’t afford to go start over with another lender or something like that. And those people are just kind of preying on people that . . . they just have in their mind, “I’m only going to do one deal with this guy. He’s never coming back to me but I’m going to make sure I squeeze every single piece of juice or profit so called out of this.”
So anyway, those are a couple of things that I’ve seen.
Kris:Probably call it juice. Yeah, that’s right.
Mike:Yeah, yeah, yeah. So anyway, talk about kind of some of the . . . more of the shady end of lenders that are maybe, you know, truthfully taking advantage of people.
Kris:Yeah, so I think that there are people in need of those folks and they’re out there. It’s capital and there is going to be a cost of that capital.
Mike:Right.
Kris:The reality is those folks are taking on a level of risk. Now they might be again a little bit egregious in their approach but there are folks who . . . borrowers, investors who have very low credit scores or they just do not have any capital whatsoever but they’re trying to get started and maybe they’ve gone to hard money and the hard money has said no so this becomes an extreme option for them just to get their foot in the door when it comes to investing so I think it’s quite simple. You should expect or they should expect to pay very, very high rates and fees and who knows? Who knows? A certain level of risk that comes with that that their property may not be theirs at some point but sometimes extreme measures are necessary so . . .
Mike:And there’s gray areas there too, right. There’s the people that are like, “Hey. Their rates are higher. They’re taking a risk on you because of X, Y and Z.” It could be your personal credit profile. It could be experience level. It could be risk of the deal, whatever. And people would expect to pay higher rates. And then there’s kind of . . . at the high end or the other end of the spectrum is really people that are just flat out kind of scammers. It’s not so much about rate. It’s just about terms that are pretty much guaranteeing failure for the investor.
Kris:And they’ve got an ulterior motive. Maybe they’re trying to acquire the property and so they put them in a corner or something. So certainly . . . any listeners out there who are considering that option, be very, very cautious and wary.
Mike:Right. Right. So when we teach people, you know, to get . . . usually for people that are getting started specifically there’s . . . sometimes there’s a fear of needing money and we usually . . . we try to talk to them about, “Look, if you start with wholesaling a . . . if you start with assigning deals, wholesaling, you don’t need capital, right, to do deals.” But even those that want to rehab and then want to move into that that they might have to start with hard money. Sometimes there’s this like hesitance and I was like, “Look.”
I just had this conversation with somebody the other day. Like, “Look, maybe instead of making 30, you make 22 or 20 because of the lending but would you rather have 0 or 22, right?” And they’re like, “Well, 22.” I was like, “Okay, well, stop being worried about it.” I mean, if you buy right, if you buy principled enough to where you can make a respectful profit your lender . . . you can fund a lender for whatever lending you need and everybody gets paid. You know, the problem is when you don’t buy with principle and you overpay for the house. Then all of a sudden it puts pressure on the whole situation.
Kris:Right, right. If you’re . . . and this is an environment where this might occur more often than not but if your margins are too thin and, you know, you’re afraid of . . . like everybody wants to save some money. I think that goes without saying but if you’re afraid of not making money or making significantly less because of an extra half a point on an origination fee let’s say, you maybe should step back and reevaluate the deal.
Mike:Yep. Yeah. Awesome. So talk a little bit here to people that are . . . are you guys typically . . . like when should people . . . and I’m talking to newer people here. More veteran people have already figured this out. When should they start looking for funding? When they’ve got a deal or when they’re anticipating to start doing deals?
Kris:Well, I think it’s important to evaluate your funding options well in advance. This way you know once you do have a deal . . . because we all know that deals move very quickly today more so than they did say 10 years ago and 5 years ago with technology and just the pace of the overall market. So I think it’s important to have that funding in place well in advance whether it’s through a preapproval from a bank or a private lender, hard money lender. I’d probably offer something along those lines as well . . . or it’s just a, you know, a conversation with Uncle Joe, “Hey, look. I’m looking for a deal. It’s in this price range. You have some money on the sidelines. Would you be interested? And here’s what I’m offering in terms of terms.”
So I . . . back to your question. I think it’s very important to evaluate the options that are out there and establish yourself with your funding at least conceptually in advance of finding a deal if at all possible.
Mike:Yep, yep. Awesome. Guys, if you’re listening right now, what I’d like you to do is I’d like you to go over to our Facebook group which you can get to flipnerd.com/facebook. If you’re not already a member, you can request access there and just ask some questions you have around lending. I’m going to ask Kris to . . . when you guys ask some questions that we need him to chime in on, I’ll pull him into the conversation if you need help.
But if you could just go over to flipnerd.com/facebook, that’ll get you into the FlipNerd Real Estate Investing Group and ask your questions down below. We’ll provide a link in the show notes here about lending. We’ll try to continue this conversation so . . . and by the way, guys, if you’re . . . also if you’re listening right now . . . if you’re not listening right now, then you can’t even hear me say, “If you’re listening right now,” so I don’t know why I said if you’re listening right now. But for those of you that are listening, if you haven’t already subscribed to us on iTunes, Stitcher Radio, YouTube, Google Play, wherever you watch or listen to podcasts at please subscribe and give us a positive rating. We’d appreciate that. That’s kind of the fuel that keeps me going here after 459 episodes and we’re going to keep bringing them to you.
So Kris, thanks for joining today.
Kris:Yeah, thank you for having me.
Mike:Awesome, awesome. And if folks want to learn more about LendingOne and some of the products you guys have, where do they go?
Kris:www.lendingone.lendingone.com. So www.lendingone.com. I think I misspoke there [real quickly 00:24:03]. Or you can very simply call 866-837-9547 and that’ll get you to one of our inside account executives and get you taken care of.
Mike:Great. We’ll add those links . . . the link and phone number in the show notes here. And you guys . . . we didn’t talk much about it but you guys lend for buy and hold investors as well as kind of bridge lines or kind of hard money, private money, more short-term stuff too, right?
Kris:Sure, we do. We actually have four main product lines. So we do bridge, fix and flip, do long-term rental. You know, we do new construction ground up and then we also do multifamily bridge and I would say, you know, stuck in there too somewhere is portfolio blanket lending, fix to rent, those types of things. So we’re . . . we continue to grow and respond to what the market is asking for.
Mike:Yeah, that’s awesome. Hey, we didn’t talk about this much. I should’ve mentioned this earlier but real fast give your thoughts on the market shifting here a little bit. We’re early 2019. Starting to see some shifts. Where do you . . . how do you see that impacting lending let’s just say in 2019?
Kris:Yeah, so 2018, the vast majority of our business, probably upwards of 70% certainly in the first half of 2018 was 70%, 80% bridge fix and flip and just because of a variety of factors that many of your listeners might be familiar with whether it’s inventory or it’s rising rates or what have you. We’ve seen a shift. Certainly in the second half of 2018 and now into early 2019, a shift into rental. So I would say our business in particular is comprised of probably about today 40% bridge, 40% rental and then 10% the other two, new construction and multifamily bridge so . . .
Mike:Okay.
Kris:Seeing folks make that shift locking some lower, historically lower long-term rates for their rental portfolios.
Mike:Yeah.
Kris:And just so they could take advantage and still continue moving their businesses forward.
Mike:Awesome, awesome. We’ll add the links . . . we’ll add a link to LendingOne and the phone number down below if you guys are interested. We’ve actually known these guys for years, think a lot of them and definitely somebody you should talk to if you need money for your deal so . . . Kris, thanks again for joining us today.
Kris:Thank you very much for having me here. I appreciate it.
Mike:Absolutely, absolutely. Everybody, hey, until the next episode I want you to stay strong, stay cool and keep fighting for freedom. See you on the next show.
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