Private Loans Secured By Real Estate

A Superior Alternative To The Stock Market?

This is a summary of a video Ron LeGrand, one of this nation’s most well-known real estate investors and teachers, has provided to his students to share with their friends. It is bringing you this very special message about how you can greatly increase the return on any money you currently have in a CD, money market, mutual fund, commodities, the stock market, or most anything else. This is about very attractive returns with personal loans secured by real estate.

Most people try to generate a retirement income by following conventional wisdom and letting other people control their money, and make decisions for them. By the time they need the money they discover they’ve barely kept up with inflation. The cost of living has risen faster than their investment.

My story is not about conventional wisdom. Show me one super wealthy person who earned his wealth who lived by conventional wisdom. If you do things like everyone else you’ll have to be satisfied with the low returns a herd mentality produces. Secondly, just to clear the air, I have nothing to gain by bringing you my story. It’s a service I provided to the person who gave you this message in an effort to help him better explain to you why you may want to consider joining forces to create a mutually beneficial relationship.

I’ll explain more in a minute, but before I do, I suspect you’ll want to know who I am and what qualifies me to be the messenger. About 30 years ago I was a mechanic looking for a way to make more money and get out of the job trap. After a long search and attending a seminar one weekend I decided that becoming a real estate investor was what I wanted to do.

I started with nothing, and over the next few years became a multimillionaire buying and selling single family houses, and keeping a few along the way. Eventually I got so good at what I was doing I chose to begin teaching others the tricks of the trade. We’ve now taught thousands how to create huge incomes. I’m proud to say we’re making millionaires all over North America and some parts of the world I can’t even pronounce.

Now, I’m not an attorney or an accountant, and you should know that the information I’m giving you comes from over 30 years of field experience, not from a classroom. In the beginning of my career I discovered a little known method of acquiring capital to buy and rehab houses so I could make a profit.

I learned this was not only good for me because it made my job easier, but it was also good for the folks who provided the money to buy and fix up the houses. Those people were absolutely ecstatic with the results. They saw their money grow at an outstanding rate, and when they went to bed at night they could care less what happened to the stock market that day. My house financing program was very simple and in fact completely hands off for them. They didn’t have to watch the stock charts or call their brokers or wait for the next crash.

My focus, at that time, was to go find a good deal on a piece of property that needed rehabbing and agree to buy it all cash for a wholesale price. I was buying them at a deeply discounted price because they needed a lot of work. I call them “Ugly Houses.” I also learned I could do a nice rehab job for a fraction of what some people think it would cost.

The Problem

The problem was banks and other lending institutions didn’t want to lend money on houses that were in poor condition. To make matters worse, I was self employed, making it hard to borrow from institutional lenders. If that wasn’t bad enough, even if I could find a lender to make a loan, they all wanted a substantial down payment which would severely limit the number of houses I could do at a time.

The Solution

So I found a better way. I started talking to folks with a little money put aside, and I created a program where they could lend me money to buy and rehab houses secured with a mortgage on the property. This became a very good investment for them for several reasons.

First, I’d only borrow about 65% of the after repaired value of the house. This left a lot of equity if they had to take over the property. It didn’t take my lenders long to figure out the worst that could happen was they’d wind up owning the house at a deep discount if I didn’t pay off the loan as agreed. If that happened, they could hire a Realtor to sell it and make more than what was owed. So that wasn’t a bad thing.

Next, higher returns are very attractive. You see, I paid my lenders a lot more than any bank would. They came to rely on this high return day in and day out. This was very attractive back then, and it still is today. You may be wondering why anyone would be willing to pay as high a rate as I did; but, as I mentioned earlier, the cost of money wasn’t my main concern: the availability of capital was more important, and especially, enough capital both to buy and to fix up the houses, something the banks wouldn’t do.

In short, I gave them a good dependable return secured by real estate. They supplied the short term capital to grow my business. It was a win, win situation for everyone.

Later I became a mortgage broker and have since made hundreds of loans to Real Estate Investors using my own money and that of others; hence, I’m also very familiar with that side of the industry. Our niche is people who want to buy and sell for a profit. We don’t make loans to owner occupants, and neither should you. That’s a completely different industry.

Here’s a thought, actually it’s more than just a thought, it’s reality for many of my lenders: what if we turn the tables on the banks and grow rich the same way they have by using other people’s money? When banks make a loan they do it with your money. The money you’re allowing to lie around in savings accounts and CDs that net less than the cost of inflation. You receive a few paltry percentage points while they loan your money out at a higher rate. They receive the difference they refer to as the spread. The spread amounts to billions of dollars monthly. That’s why the banks have the big buildings.

Why don’t you become the bank? If you are able to borrow at a low rate and lend it out at a higher rate, you can make a fortune off the spread. That’s the beauty of it. Who hasn’t received zero interest credit card offers from banks lately? Similarly, instead of paying off a low-interest mortgage, you can use that money to make a higher return by lending to real estate investors. Making money off the bank’s money, don’t you just love it?

Incidentally if you aren’t using your own money, you have the best rate of return ever:  it’s called infinity. You see, when you have none of your own money invested, you can’t measure the return. I had one client who lent me a little over a million dollars in one year, and I didn’t know it at the time, but he was making a 5 point spread on all the money I borrowed from him. He made over $50,000 net that year without putting up a penny of his own money. In fact, he used a credit line so he wouldn’t have to pay interest while the money wasn’t in use. He made 50 grand using the bank’s money.

Frequently Asked Questions

I’m sure you have other questions concerning private lending. I’ll address the most common ones right now. If I miss any, the person who gave you this message from me can fill in the blanks.

First, can you use your IRA or 401k to make these loans? You bet you can, absolutely you can. In fact, it’s a great use for them, and what better way to grow than tax free. If it’s your IRA, it must be self-directed. This is easy to accomplish. It’s only a matter of moving it to an administrator of your choice. We use Equity Trust located in Elyria, OH. It took me several years to find them, and after dealing with a few administrators that made life miserable, I found them easy to work with. I have my IRA with them, as well as hundreds of clients. The website to get a hold of Equity Trust is www.trustetc.com. Go there and explore for yourself. They’ve been around a long time. They have thousands and thousands of IRAs, and I think you will find them a pleasure to deal with.

Now don’t worry, this is not a roll over with penalties from the IRS, it’s merely a transfer from one administrator to another. If you’re going to use your IRA to make loans, you’ll find this a necessary step because most people have their IRAs housed with a company that will not allow them to make loans or in fact make any kind of investments other than what’s on their list. We call those multiple choice IRAs, not truly self-directed IRAs. With Equity Trust, you will be allowed to do what you want with your IRA and not what someone else insists you do that’s on their list.

If you’re using a 401K, you must be in control of writing the check. You’ll find it difficult to get your employer to direct your company’s pension plan to do private loans. They’re usually managed by stock brokers with guidelines. They’ll do what they want, and you won’t change their mind. Now, of course, if you recently left a job, that 401K belongs to you. They have to allow you to transfer to a traditional IRA if you so choose. So you might want to check that out and transfer to a self-directed IRA, and start making private loans.

I had several of my lenders take money out of their company plan and shift it to their own self directed IRAs. You might want to consider the same if it’s applicable to your circumstances, and if your company plan doesn’t have a history of high yield, which is unlikely.

Second question, is this a security or a mortgage deal? Well, the answer is yes and no. Technically, it is a security. Any debt is security. But it’s not a security that you’re going to need a license for or register with the SEC or anything of that nature. You will own the whole loan with no other participants. You’re in control all the way, which makes this a better investment than all other vehicles I know. Only when loans are pooled do they become a security needing registration. When the person who gave you this message finds a house, at that point he will know what it takes to get the job done and relay that to you. At that point you decide if you’re in or out based on the loan amount needed and any other factors you feel are important.

If the borrower needs to borrow more than you have available, he has to find another lender, put up some money of his own, or fund with more than one investor by simply giving one investor a first mortgage or trust deed and the other a second. That’s two separate loans, but secured by the same property. Of course the second mortgage holder must know it’s a second and be willing to accept the inferior position.

Frankly it shouldn’t matter as long as the total loan-to-value doesn’t exceed about 65% of the after repair value. For example: if the house appraises at 100K, and the borrower needs 65K, he may split the loan into a 50K first and a 15K second. Both loans are still well secured, because the total loan to value ratio does not exceed 65%. Splitting like this is more common in areas where property values are high, and an investor would need large amounts of capital to make the deal work for the borrower.

In most areas the average loan will run between 40K and 100K. If your available capital is less than 40k you may still get involved by working with the person who borrows from you by agreeing to take a second position, or by lending when there is a need for a smaller first mortgage.

Third, who handles the paper work? Well, it won’t be you. You should never write a check directly to the borrower. All real estate closings should be done by a real estate attorney, a title company, or an escrow company depending on your state. Your check (or wire) will be made out directly to the closing agent for the gross amount of the loan. All expenses will be paid by the borrower and will be deducted from the proceeds at the closing, just like any loan done anywhere regardless of who the lender is.

It then becomes the closing agent’s responsibility to receive your funds and make sure all documents are in place to secure your investment. You don’t do any paper work. You simply commit to make the loan and get the money to the closing agent when it’s time.

Next question, well, how do I know what documents I’ll need? When making any investment you should seek the advice of professionals and let them handle the details for you. It’s no different here. I’ve made hundreds of loans like the ones we’ve discussed. Here’s a list of items I always insist on getting, and if they aren’t at the closing table, my funds don’t get dispersed; it’s as simple as that.

First, I want an appraisal verifying my loan doesn’t exceed about 65% of the after repair value when dealing with “ugly houses.”

Second, I want title insurance, and it must be issued at closing naming you, the lender, as the insured. This protects you against title defects which could affect your collateral.

Third, I want fire insurance, naming the lender on the policy so if the house burns down, you get a check for the full amount on the loan.

And fourth, when you receive your package after the closing, it should contain the original mortgage or trust deed which will be recorded and mailed to you by the closing agent.

Again, a good closing agent hired to represent you makes all this easy for you and ensures proper execution. It’s common for you to hire the attorney, and the fee to be paid by the borrower. In fact I would insist on it if I were you. The banks do it every day. Again you do nothing but make a decision, and wire the money to the closing agent. They do all the rest, and they will get you a package back with all the proper documentation, and make sure it gets recorded to protect your interest.

Next question, is this a long term investment? Well, that’s up to you and the borrower. 90% of the loans I fund have no monthly payment. They may have a two year balloon with all the principal and accrued interest due at that time or when the home is sold, whichever comes first. However this can be arranged any way you want it to, whatever it takes to meet your and your borrower’s needs.

The longer the money stays out, the longer it accrues interest. Many lenders like to keep the money out and accrue monthly interest. It saves them from collecting interest payments, and it’s very nice for the borrower as well. It helps his monthly cash flow when he doesn’t have a monthly payment to make. Yes, the principal keeps getting bigger, but at a 65% loan to value ratio, I’m not worried about that. Especially with the short term we usually use.

Sometimes your borrower will only want to use the money for a few months because he intends to rehab and resell the property or refinance it. And sometimes the borrower will want to sell it with owner financing. That gives his borrower time to go refinance at a later date and cash you out sometime in the future. Frankly, the longer the loan is out, the longer the term you’re going to be making that interest.

I’ve taught your new friend who gave you this message from me the power of selling with owner financing, how it greatly increases the profit by being a little patient and certainly makes the house a lot easier to sell. If it’s a short term loan you win. If it’s a longer term you win, and this should be disclosed and discussed with the borrower on a case by case basis.

Next question is, do you have to collect payments if you have monthly payments? Answer is, “absolutely not.” You can if you want, but I wouldn’t suggest it. Many banks will collect payments and deposit them in your account and send you the annual 1098 form, to the borrower and you, or there are companies that will do it for you on a national basis. I’ve done it both ways.

But frankly, as I said, I do mostly accruing loans today so there aren’t really any payments to collect so it’s not a big issue for me. That’s entirely up to you. If you want to collect them, you can, but frankly I think you’ve probably got better things to do than messing around with collecting monthly payments, and I can assure you that your borrower would just as soon not have to send you one. This is something you guys can work out together.

Is making a private loan really a safe investment? If you want to be really technical about it, there is no risk free investment, but your real estate loan is secured, and you should make sure the appraised value is sufficient to satisfy your risk tolerance. If you apply common sense and don’t break the rules it’s as safe as any other high yield investment and a whole lot safer than most. In fact, in my opinion, it’s a lot safer than the stock market.

Think about it: with stocks you’re betting on companies you know little about, and the volatility of the market is out of your control. You can do well one year and get wiped out the next. Every day you’re wondering if you’re gaining or loosing and the only choice you get to make is when to buy or sell: now that’s risky. I don’t care how good you are or think you are, you don’t get to make the rules in the stock market. Your investment is at the mercy of the ever changing circumstances.

Compare that to mortgage loans. With mortgage loans, your return is fixed. It won’t change regardless if the market is up down or sideways. While the market investors are jumping out of the windows, you’ll be smiling because today’s fickle circumstances didn’t affect your money. Your loans are secured by real estate that you can see, and they aren’t going anywhere regardless of what the stock market does. In the final analysis, you are as safe as the real estate market is: it has its ups and downs, but it is seldom as volatile as the stock market frequently is.

Another great advantage is your building personal relationships with your borrowers that could lead to other lucrative opportunities or joint ventures. When people build wealth together and prosper from each other’s efforts, it sometimes creates long lasting friendships. I know this has been the case for me. It’s one of those side benefits having nothing to do with the money.

Over the past few years, I’ve played the market, dealt in options, mutual funds, money markets, CDs, and a few off the wall investments. Some of these ventures made money, some of them didn’t. I’ve found nothing that’s given me the safety, stability, and high return I get from private lending. I have never lost money making private loans. In fact, I’ve always made at least the minimum amount shown on the mortgage.

Next question, should you put all of your money in loans? Well, probably not, a little diversity wouldn’t hurt, but you owe it to yourself to check it out. Why not give it a try? I’m sure you have other questions you need answered. If so, have a chat with your new friend who gave you my story, and he will either know the answer or he will inquire about them and get back to you.

Next Steps

It was my job to open the door and bring you this message. Now it’s up to you to take action. Use the Contact Us link/form on this website or simply call 708-614-6041 and leave a detailed message with full contact information, and someone will reach out to you ASAP.