One of the best things about investing in real estate is the ability to use other people’s money, also called OPM, to fund your deal. Yet you get all the tax benefits, the appreciation, and the cash flow from that deal while the renters pay down your loan.
To write this article, I spoke with Brian Stark, the VP of originations at IceCap Group, a direct private lender in New York City. Brian has been a private real estate lender for about 20 years and helps provide loans to real estate investors nationwide. He has bought and sold hundreds of properties and originated over 1,400 real estate loans.
We’re seeing so many changes in lending right now, so I asked him what’s going on. Continue reading to gain some valuable insight into how to invest in real estate with other people’s money in today’s lending environment.
What are the big changes happening in lending today?
According to Brian, on the investment side, we’re still seeing rates that are pretty well-depressed, but not in a negative way. In some areas, they’re even going down a tiny bit because there’s so much investment activity and there’s a lot of competition among lenders. Everybody’s feeding for the borrowers and depressing rates a little bit. While there’s a little interest rate bump for consumers, the investment rates are staying stable overall, and in some cases they are even reducing a tiny bit.
This is great news!
There’s so much money out there chasing some kind of yield without being able to get it, but lending provides that. When speaking with Brian I was a little surprised to hear this perspective — I just hadn’t really heard that rates are stable in this way. I wondered if it was happening more with private lenders and not so much with the Fannie and Freddie lenders.
Brian explained that there are two buckets: one bucket would be government-backed money like that of the Fannie and Freddie banks, and the other would be all private lenders. When we say private lenders, we’re not just talking about the nice guy you sit next to in church who has a couple of hundred thousand in their IRA. We’re talking about what has now become, in the last five or six years, multi-billion-dollar companies that have raised huge rounds of capital.
These include hedge funds, private equity funds, and substantial private institutions that make loans to real estate investors for fix-and-flip and buy-and-hold investments. The difference is that these types of companies are not governed by United States government regulations and stockholders in most cases.
These companies are governed by their owners, who, on a given morning, might say, “Hey, let’s get into this business. Hey, let’s lower rates. Hey, let’s do higher LTVs. Let’s compete with this company or that company. I want 50 more borrowers this month. Let’s do another $50 million this month.” They can lower their rates just that fast because it’s their money.
How is business-to-business lending regulated?
When it comes to business-to-business lending, there is regulation to the extent that you and I are both regulated. We’re not allowed to drive past a certain speed or steal somebody’s car. These companies are regulated to that degree, but in reality, there isn’t a lot of strict regulation of business-to-business lending. There is very little in many states, and these companies stay out of the half a dozen states where there is a lot of regulation.
California, Arizona, Nevada, North and South Dakota, Utah, and Alaska are the most regulated states. Territories like Puerto Rico are also challenging because they are a whole different business.
How are private lenders able to lower costs?
Lower cost of money comes in a lot of forms. One form is, “Hey, our rates are low, we charge 5%. Oh, now, we’re charging 4.75%. Oh, we can do it for 4.5%.” Another lower cost of money is lowering fees, closing faster, and raising what we call leverage. So, “We’ll lend 80%. Oh, we’ll lend 85%. We’ll lend 100%.” All those things are coming together to make more money available at a lower rate. It’s been said that there’s over $2 trillion looking for a home. Liquid money that’s literally sitting in investors’ bank accounts.
This isn’t surprising since $5 trillion was just created in the past year. It has to go somewhere and it likes to go to real estate.
How do you start investing in real estate with other people’s money (or buy more real estate with other people’s money)?
If you want to invest in real estate with other people’s money, you need to have (1) decent credit, (2) a little cash on hand, and (3) education.
1. Have decent credit
When investing with other people’s money, lenders first want to see that you have decent credit. At least 650 and ideally 700 to 720 before you seek out a private lender. This is really important, and it’s not about you as a person. Lenders need to be able to sell their loans to their own funds, a cash management structure, or to Wall Street or other institutions that will buy your loan so that they can turn around and use that money and make more loans.
2. Have some cash
The second thing private lenders want to see is that you have, at least, some cash. It’s true that there are many ways to invest in real estate without any money, but from the perspective of a private lending company, you need to have liquidity. These companies want to deal with somebody who can show they have enough money to make their payments for six months, pay their closing costs and origination fees, and a little bit more. They don’t want to give a loan to somebody who is going to be out of cash by month number two.
3. Get an education
If you don’t have any experience investing in real estate (with or without other people’s money), definitely get some knowledge. Take a course, go through a workshop, get a partner, or join an investment club like RealWealth that can coach you through the buying process. To jump into this business, or any business alone, knowing nothing, having done nothing, with nothing, is just asking for trouble. It’s so easy to make a wrong decision. It’s great to do the first 6, 8, 10 deals with someone who knows what they’re doing.
When should you start investing in real estate (with or without other people’s money)?
The best time to start investing in real estate was yesterday. Whatever day you’re thinking about starting, don’t let any time go by. Just get started. Jump in, figure it out, and get going. It takes time to 1) research where and what to buy, 2) how to put real estate deals together, 3) learn how to buy real estate with other people’s money, and then 4) build equity with your investment property.
Get all the education that you possibly can and start investing. But remember to balance the knowledge you gain against people trying to sell you courses that may or may not have good information. Spend as much time as you can with people who are truly successful in the business, not people who act successful. What kind of watch they wear or shoes they wear, or car they drive, which may or may not be paid for, doesn’t matter. What assets they own is what you want to look for.
Brian mentioned knowing a guy who’s easily worth $100 million. He wears mostly T-shirts, sandals, and shorts. This immediately made me laugh because living in Malibu, we often see people who we assume are homeless, and we only later find out that they are actually billionaires. Ha!
When it comes down to it, people who don’t look wealthy often have the most assets. You want to spend time with these people because you can learn a lot.
What holds people back from investing in real estate?
There are many reasons people don’t start investing. A big one is fear. People wonder if the economy is going to collapse. They think prices have been going up too long and we will see another 2008 housing crash.
The truth is this will probably happen, but we don’t know when. It doesn’t pay off to worry about this and stall investing. The economy is cyclical, and crashes will always happen. There are always good real estate deals to be had. Just learn to watch, be careful, don’t borrow too much, and don’t leverage yourself too heavily. Always have cash and keep your credit strong. When the economy collapses, see it as a win and buy more investment property.
I knew many people who were impacted by the 2008 housing crisis. My mom’s pastor, for example, had 10 rental properties during the downturn. They most certainly lost value, but he didn’t sell them. He collected the rent and lived off the rental income. During that time, rents increased because more and more people lost their homes and needed to rent. Because of this, he didn’t feel the recession. Now, those homes have gone up dramatically in value.
In other words, if you’re holding for rental income, you don’t need to worry so much about the property’s value. You will be in this business for 10, 20, 30, 40, 50 years. Real estate is a long game.
Long story short, start learning about real estate investing strategies and how to invest in real estate with other people’s money.
