Capital to fund your real estate business is critical, and the best rates you’ll likely receive, and the easiest lenders you’ll likely find to fund you are with private parties. Mark Hanf, President of Pacific Private Money, is an expert at teaching others how to attract private money for their businesses. In this episode of the FlipNerd.com VIP Flip Show, Mark shares many of the very same tips he shares with others that pay for his services. It’s a great topic…don’t miss it!
Mike: Welcome to the FlipNerd.com podcast. This is your host, Mike Hambright, and on this show I will introduce you to VIPs in the real estate investing industry, as well as other interesting entrepreneurs whose stories and experiences can help you take your business to the next level. We have three new shows each week which are available in the iTunes store or by visiting FlipNerd.com. So without further ado, let’s get started.
Hey, it’s Mike Hambright from FlipNerd.com. Welcome back to another VIP flip show. Today I have with me Mark Hanf who is going to teach us how to attract and find your own private money for real estate investing. A lot of folks are lending money, but not many people are teaching you how to raise money. So we’re excited to have Mark with us today. Before we get started though, let’s take a moment to recognize our featured sponsors.
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Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions as real estate investing can be risky.
Mike: Hey Mark, thanks for being on the show.
Mark: Hi. You’re welcome. Glad to be here.
Mike: Yeah, yeah. So we’ve talked a little bit about a number of things that you’re working on. You’re, essentially have a lending business and you’ve raised more money than you could ever use so now you’ve basically turned to teaching other people how to raise private money. So for those that don’t know you though, why don’t you maybe introduce yourself and tell us a little more about you.
Mark: So I am a private money loan broker. Some refer to us as “hard money”, but I’ve always preferred the term “private money”. Hence my company name. I’ve called it Pacific Private Money since I started in 2008. And I make like a lot of guys in this business, I’m making loans primarily to real estate investors. In fact, it was really the private money lending industry that helped, kind of helped the real estate business come back post- crash.
And in fact, I myself am a former developer that did not survive, like a lot of people who are probably listening to this video, didn’t survive the downturn in real estate. So when there was really not a lot of development opportunities in 2007, I kind of through serendipity stumbled in this opportunity to raise money and make loans to real estate investors.
So over the last six, seven years, I’ve just found that through the way I have operated my business I have attracted more and more and more private lenders. And I have come to find out, I didn’t know this, because I just thought I was doing what everybody else was doing. I was wildly promoting my business, not only for borrowers but for lenders as well.
And being a former developer I knew a lot of people in the business who still had money and like to lend it out privately for those great yields that you could get. But I didn’t realize that I had attracted 2, almost 300 lenders by 2010 and talking to other guys in the business I’m finding out that they only had like, six or seven guys they would turn to. And here I am with all of these guys throwing their money at me faster than I could possibly lend it out.
Mike: Yeah, yeah. What we were talking, briefly before the show here. And it’s a very real problem for, I know this, for newer investors this is going to sound crazy. But you first have the struggle of raising money at all.
Mike: And I know you’re going to share some tips with us today on how folks can raise money. But, very quickly, once you have some level of success, you could very easily find yourself in a situation of being able to raise more money than you ever need. And then the problem is, is making your lenders happy. If somebody says they’re going to pledge to you, let’s say a million dollars, well that sounds awesome but I only need $100,000 right now. Then you’ve got a problem on your hands is they’re not going to just leave their money just sitting in a coffee can somewhere until you need it.
Mark: Well, that’s right. And that’s why you want to have more than one private lender. And someone new listening to this, or someone struggling to find, maybe they’re struggling to find 100% financing. Maybe they went to a real estate boot camp and were told, hey you can do 100% OPM, other people’s money, real estate deals. Which is true. But 100% financing is hard to come by.
For example in our company we don’t do 100% financing. Our bread and butter loan program is 70% of acquisition. Sometimes we’ll do rehab lending. But actually I started my business really just focusing on, I want to do the small leverage piece for people who already had capital. But now I’m finding that almost every other day I get a phone call from someone saying, “Well I don’t have my own private lenders. Would you introduce me to some of your private lenders?” Or, “Could you show me how I can find my own private lenders?”
And that’s where I got the idea for sharing with basically the real estate investment public, really how to make yourself attractive to private lending. Because I think one of the areas that’s not well taught in real estate is how to find private lenders and how to make yourself attractive to private lenders.
You can take any number of boot camp courses today on how to buy, fix, and flip real estate. And when I talk about attracting private lending, I don’t get into that. I just figure you can go to any number of great boot camps and learn how to do that. But once you’ve got all this information about how to find property, how to make the correct offer, how to figure out what price to offer, how to calculate your remodel costs. Okay, well, where do you go for the financing?
Mark: So I basically realized that it made sense for someone like me who was in the business of making money by lending privately to also share with people how to find their own private lenders with the idea that, go find your equity partner and then come back to me and I’ll help you leverage your equity partner’s capital. Because if you think about it, using leverage helps boost the return on your equity capital.
And so really I’m a big proponent of anyone who has a financial partner that they’re working with who’s putting up the money, don’t do 100% cash real estate flipping. I mean it’s safer, but the yields, especially in this market now where a lot of areas throughout the country, it’s a tightening market. There’s not a lot of huge profit potential that there was say, in ’11 or ’12. Now in order to give the kind of yield that you want to give to your private lender, you really want to use leverage. And even if you just maybe use only 50% leverage, you do the math, it puts an amazing boost to your private lender’s return on his equity.
Mike: Yeah. So how do you structure that, Mark, where you as, if they’re levering it up to where everybody wants first lien deed of trust, right, to be sitting in that first seat. So how do you structure it to where you can still attract, and no hard money guys are going to play second fiddle to somebody else I don’t imagine? So talk about how you structure that so that you can maintain the first seat?
Mark: So, I know exactly what you’re asking. And it’s pretty simple. First, there’s a number of ways that you can work with private lenders. And again when I say private lenders I’m talking about your own private individuals that you would meet at say, a real estate event or what not. Not me, a private loan broker.
You’re right, I’m always going to want to be in first position when I provide leverage to a real estate investor who’s going to buy, fix, and flip real estate. Now what I have done for many of my clients is I will help them write a note and a deed of trust. In fact, not even help them. I’ll actually do that. I’ll provide the documentation that will secure their equity partner’s position but it will always be in a secondary position second to my loan.
Now, you don’t always have to do that thought. That’s the interesting thing when you joint venture with someone who has capital. You can form an LLC, for example, where you and your money partner are both members. And so you both have rights to the profits of that company. You don’t necessarily have to secure in the form of a note mortgage that private lender’s capital.
Now you might in the very beginning just to kind of prove yourself to that person. And in fact it’s very, very common, at least here in the Bay Area, for an equity partner to have that extra little bit of leverage by securing their capital contribution with a mortgage.
Mike: I see. I see. Okay. So talk a little bit about some of the advice. And first off I want to say that the best . . . it’s great talking to people like, what you’re doing here, and a lot of the folks that I’ve had on the show are folks that I know. Where it’s very easy for you, it’d be very easy, this is how most people look at it. Why would I teach you how to fish because then you won’t need me anymore, right?
And so I’m glad that you’ve seen past that and you see that the . . . I can tell you believe in karma, Mark. But the best teachers, the best people to partner with, the best people to follow are those that seemingly just kind of give, give, give. And it’ll come back to them somehow but that’s not their first priority. So thank you for being one of those guys. I appreciate that.
Mark: Well, the way I look at it is clients do outgrow me. And so sometimes they’ll come, they need help getting started. I will sometimes coach a new investor that maybe has a bunch of training and now they’re ready to go. I’ll help them, show them how they need to put together the appropriate credibility package that they can sort of use to attract their own private lenders. And maybe I’ll do a dozen or so more deals with them.
But what tends to happen in this business is they do outgrow me. They find cheaper and cheaper capital. And that really, particularly in this market again where the yields are starting to get skinny and many of the markets throughout the country when it comes to fixing and flipping the key to making more money is having cheaper and cheaper access to capital.
Mike: Yeah. Yeah. And I’m sure that when those folks do outgrow you they’re happy to recommend the people to you and they’re glad that they found you instead of resenting that they had to use you for all of that time. Back to the karma thing, I’m sure that comes back around.
So, well, talk about the advice that you give folks that are looking to raise money. Because I think people come into this one of two ways. Probably more often than not they have no idea where to get started. They don’t think that anybody will lend them money. And like you say, the big part of it is the credibility and how you represent yourself.
Or they have access to family money that is fairly easy. They might need some help structuring it. But they have friend or family money that they can tap into that’s a little bit easier. But they probably can get by without demonstrating a lot of their credibility and things because they probably had something else going for them, which, again, could’ve been a family relationship or a friend relationship that’s very trusting. But for those that really have no idea how to get started, talk about kind of some of the top tips that you cover to help them get going.
Mark: Okay. Well, let me answer that question this way. Because the obvious question is what do I do? How do I make myself attractive to private money? How do I find my private lenders? Oftentimes, when I get that question, what I realize is that the person on the other side really is not yet ready to meet a potential private lender. They’re not ready to have that conversation.
And so when I give talks in front of real estate groups about how to find your own private lenders, I call the topic “Attracting Private Money”, and I talk about it in the form of five questions. There are five questions that every private lender that you’re going to work with is going to want to know the answer to. And so how you create your presentation, which includes your credibility package, really revolves around answering these five questions.
And the five questions are this: number one, what is the opportunity? And number two, how much money do you need? Number three, how much money can I make? Again, it’s from the perspective of the private lender, right? When do I get my money back, number four. And number five, what happens if you get hit by a bus?
Now, all five of those questions, the information that I teach people how to prepare when they prepare a credibility package really are in the interest of answering all five of those questions. And to start with, we don’t have time to go through all five of those right now, but to start with, what is the opportunity is really, the question behind the question is who are you and why should I believe that you know what you’re doing and that I should invest with you?
And that’s where the credibility package comes in. That’s where you create your executive summary of what it is you’re looking to accomplish in the fix and flip business, or in real estate investing in general. Again, it doesn’t have to be fix and flip, you can raise money for any number of real estate endeavors.
Mark: So, and then your biography, your bio, which a lot of people don’t put together. They’ll have a resume made but they don’t do a bio which is more of a marketing piece. It can be a little bit boastful and use a lot of adjectives to promote yourself.
Mark: But there’s things like spreadsheet of past projects, before and after photos of work you’ve done before. Now, if you don’t have experience, you can still create a really effective credibility package by leveraging the experience of your team members, or if you’re coaching somebody, leveraging the experience of that person’s experience.
So really . . .
Mark: . . . it’s amazing that sometimes I come across people in this business who say that credibility packages are either overrated or unnecessary and I couldn’t disagree more. I mean, the way I determine whether I’m going to make a loan to you is based on your application to me. And I’m lending out private individual capital myself. I’m making decisions on behalf of people’s life savings who rely on me to invest their money in notes that are going to get paid back.
Mark: I’ve learned over looking at thousands of loan applications how the best out there are presenting themselves. I’ve collected in, over the last six or seven years, some of the most amazing looking bios and PowerPoint presentations and spreadsheets and stuff. And I’ve got to put all that together and I use that, I’ve made template examples for some of my students to use to kind of get a jump start on what an effective credibility package on you looks like.
Mike: Yeah. Yeah, that’s great. And would you say that, I guess, what are some of the biggest areas, would you say that’s the biggest area that most people kind of fail is not really knowing how to package themselves to present to somebody else?
Mark: I would say so. I mean I happen to have an artistic flair and I like marketing and so for me it wasn’t difficult to put all this stuff together for me personally and then market myself as a private money loan broker. And then finding out over the years that I was attracting more investors than I could possibly work with.
Mark: So I realized that, I guess, many if not most people really don’t, either they don’t have a knack for it or they just don’t know what they don’t know. They haven’t seen, like I have, hundreds of applications from people who are fairly creative. And so, I mean, before I got into this business I didn’t know about how effective, for example, before and after photos could be.
Mark: And even if you do nothing more than put six pictures, before, after, before, after, before, after, on one blank white sheet of paper on Microsoft Word, that’s more than what 90% of people who are out there trying to find money to fix and flip have actually done. So really it’s, I’ve found that that’s probably the most helpful thing I’ve been able to do for people who work with me is to say, “Here’s some templates that you can use that just go back and fill in the blanks.”
Mark: And send it back to be. Because I want to be able to market you, my borrower, to my lenders as someone who knows what they’re doing and who has a very, very high likelihood of executing their real estate strategy and therefore paying back the loan we made to them.
Mike: Right, right. And can you talk a little bit about, and just to clarify Mark, are you an attorney?
Mark: I’m not.
Mike: Okay, okay. Congratulations. No. My lawyer friends are going to kill me for saying that but I knew that before I said it, so. But no, so you’re really kind of doing more the packaging, the marketing side. And then I know you work with some folks on the legal side for folks that are looking to raise money as well, right? Or you can refer them to, yeah-
Mark: I do. Everybody that I work with that are coming to me for information, ideas, and templates on how to go out and find their own private lenders, I include with that the importance of proper disclosures. Because anytime you go out and you attempt to raise capital privately you’re basically treading into the area of selling a security.
Mark: And so you don’t want to short cut that area. And in fact, most private lenders, you know the question number five that I said, what happens if you get hit by a bus? What that question is really asking is what have you put in place to ensure that this project succeeds and if something happens to you who’s going to take up the slack?
That’s one but also they’re thinking about the risks. And when someone’s lending you money they’re thinking about the risks. And you need to disclose certain basic risks every time you raise money. And a real estate attorney, they’re very good at that. They can help you with that. I’m right now, I have a mortgage pool fund that I launched last year that I’m raising capital for. The private placement memorandum that I use to promote that has 20 pages of risks and disclosures.
Mark: When I saw that I’m thinking, “Oh my god, this is going to scare people away!” But it actually, it doesn’t. It makes you look like a pro when you disclose properly the risks that could happen. And again I give examples of that in my promotional packages.
Mike: Yeah it gives you a lot more credibility.
Mark: It does, it does. And always work with an attorney. It really doesn’t pay to short cut that because really, at the end of the day, when you properly disclose you’re really protecting yourself. And when I’m working with people and helping them learn how to find their own private lenders, what I tell them is that you’re always making it about the other guy. It’s really about your private lender. The way you become attractive is you’re always making it about what’s in the best interest of your private lender.
The only time that that might not necessarily be the case, where you’re really looking out to protect yourself, is through proper disclosure. You’re disclosing the risks, you’re providing the information that you need to provide to your prospective lender, but really it’s to protect you in the event that something goes wrong and you get sued.
Now obviously we hope that that never happens but if it does you’re going to look much better in terms of your defense if you actually disclosed that there were, you know the basic risks that you would normally disclose in a real estate transaction.
Mike: Sure. And can you share any information I know this is all over the board, but what types of rate, just to kind of compare for folks that are kind of curious. There’s a lot of folks that either have no money, or they use hard money, or something in the middle. But can you kind of compare just rough rules of thumb if somebody properly learns how to raise money themselves for their own deals and packages themselves properly.
Which I presume the better you can package yourself the better rates you might be able to receive on lending money because you look less risky and more professional. But can you just talk about maybe the rates that people could expect to receive versus using hard money?
Mark: Well, I’m going to make some of your viewers sick when I tell them that I’m in the San Francisco Bay Area and we have some of the least expensive private money and hard money in the nation. And the reason for that is we have San Francisco and Silicon Valley in the Bay Area so there is just, there’s billions and billions of dollars here and it’s looking for yield.
I mean, that’s the reason why I think it’s [inaudible 00:22:11]. I mean, people need what real estate investors are providing. People need, I mean, I’m a baby boomer and I’m not ready to retire yet. I need to make those returns.
Now, that being said, here in the Bay Area hard money for fixing and flipping is as low as 10% and 2 points. And I know from talking with others in the industry that it’s quite a bit more expensive in other markets. I mean, sometimes it’s 3 and 10 or 3 and 11 but more often than not it’s 2 and 10 for hard money.
Now, private money, I’ve got some clients who have private investors, their own private investors, and they’re paying them 6%. And some of them have been able to use their own private lenders for first-position acquisitions as well as 100% financing for fix and flips and paying anywhere from six to eight percent so it’s really, it pays to do your homework and put the work in because when you’re talking money like that, and that’s what bank financing was 10 years ago.
Mike: Right, right. And do you advise folks, when they’re looking to raise money, where do they start? Like I know one place probably to not start where I see stuff now is posting how much you’re willing to pay somebody in a bunch of Facebook groups . . .
Mike: . . . publicly. But do you encourage people to start kind of closer to home with friends and family and then work your way to friends of friends type thing? Or do you advise much on that?
Mark: I do. And here’s what I like to say about friends and family. You know, there’s that old Bible saying that an expert is someone from the next town over or your own family is least likely to be behind you. But I coached a student that thought that their friends and family wouldn’t be interested in lending to them, but after she’d put together her credibility package they were actually pretty impressed.
But that being said, well actually, you might be surprised to learn what friends and family might do if you’re able to create the right credibility package and opportunity package and present them to them in a way that they might go, “Wow, I had no idea you knew all of this.”
Mark: So that’s one. But the other question is where do you go? Right now meetup.com, the meet-up groups, that’s probably the single largest opportunity, at least here in California. I know that I’ve gone to a few meet-up groups recently where I couldn’t believe how many people stood up in say, a room full of 50 or 75 people and raised their hands as potential private lenders. So people with money to invest in real estate or real estate secured investment vehicles are going to these meet-up groups to try to, they’re trying to meet people who they can feel comfortable with maybe joint-venturing.
Mark: And I would imagine that that scenario is playing out throughout America because again, people are sitting on money, they need to earn yield, and what better way than through real estate?
Mike: And Mark, are you saying meet-up, are you specifically referring to like, REIA clubs and investor clubs?
Mark: Exactly, yeah. So you go to meetup.com and you type in real estate within, I think it defaults to within 50 miles, I think it’s going to come up with all the different meetings that are in your area. And here in the San Francisco Bay Area, for example, there’s probably three-dozen different meet-up groups. I mean, almost every night of the week there’s somebody meeting and a lot of them are attended by people with money looking to invest in. So if you’re a wholesaler or you’re a contractor or a rehabber, you really should go to that website, sign up put in, type in some key words like real estate and see how many meetings are popping up in your area.
Mike: Yeah. And we’re a big proponent of REIA clubs here at FlipNerd.com. I just, everybody got their start by going to a REIA club meeting, and didn’t know what they didn’t know, and found their way to some level of success.
You know it’s interesting, I heard somebody else say recently about how they tend to go to clubs that maybe have nothing to do with real estate, or at least investors to try and find money, so go to, if you can find, I mean there’s pink poodle lovers groups all over the country that you find. Meet-up has, if you never thought there was a group for something, there is on meetup, right?
But to try to find people that are you could find retired mortgage bankers groups. Or just people that it could be Ferrari lovers, you know. Go someplace where the money is where it’s less obvious that if you go to a REIA club meeting, lenders, it’s like going to, let me give an analogy. It’s like going to a bar and there’s like three girls and 100 guys, right? Everybody wants to get their attention.
Mark: Well, that’s the way it used to be, you’re exactly right. Two years ago it was that way. In fact, I got a lot of my flip clients, borrower clients by going to REIA club events and meet- up groups. But what I found, I stopped going to them recently because there were too many people standing up saying, “Hey, I’m a private lender. I’ve got money available.” So, and this is happening here in California. And whether it’s happening in your hometown is worth a look.
But just to piggyback on what you said look up, like put in keywords like “alternative investments”. That’s a buzzword for people who are looking for ways to again, maybe beat the stock market. Or maybe it’s an IRA group, like a self-directed IRA group. People with self-directed IRAs usually choose that investment vehicle for their retirement plans because they want to choose their investment type. They either want to buy real estate or they want to lend on real estate within their IRA so they can grow their retirement savings more effectively. So those are all good ideas.
Mike: Yeah, yeah.
Mark: Anything to do with retirement or alternative investments.
Mike: Absolutely, yeah. So Mark, talk a little bit about how people could find out more? I know that you have an e-book that teaches folks a lot of information. Why don’t you talk a little more how they could learn some more information about what you have to offer?
Mark: Well, thank you for the opportunity to promote my new e-book.
Mark: I call it “The Insider’s Guide to Attracting Private Money”. And it goes through what I call the five-question money method. Which is the same five questions that I spoke about a little bit earlier. But it goes into intimate detail about how to put together a credibility package, an opportunity package. What disclosures look like and what should be in them. And a whole bunch of other information that will really help you. And it’s not a long read, it’s only about 50 pages long. Very concise. I don’t fluff it up with a bunch of boring stories and stuff.
Mark: I get right to the point. And you can get that book by going to attractingprivatemoney.com.
Mike: Awesome, awesome. Well Mark, hey. Thanks so much for your time and thanks for being willing to share your knowledge not just here but to all those that you’ve worked with in the past. I think you’re doing a great thing so, appreciate that.
Mark: My pleasure. Thanks.
Mike: We’ll add links to attractingprivatemoney.com. But it’s attractingprivatemoney.com. We’ll add some links to these things that we talked about here down below the video, so Mark thanks again so much for your time. I look forward to talking to you again soon.
Mark: You bet. Take care.
Mike: Take care.
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