The Real Estate UNLOCKED Podcast
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The Real Estate UNLOCKED Podcast
How Private Money Lending Works 101 | Episode 05
Discover how to unlock the full potential of your real estate investments with insights from our exceptional guest, Abraham Gray. In this episode of Real Estate Unlocked, Abraham takes us on a transformative journey from his challenging childhood to becoming a multimillionaire investor and entrepreneur. Learn why private money lenders are the secret weapon for successful investors, providing flexible and rapid financing solutions that traditional banks simply can't match. Abraham reveals the advantages of working with PMLs and offers invaluable tips to help you start leveraging these opportunities for your own real estate ventures.
We then take a closer look at the operational nuts and bolts of managing a private money lending fund, spotlighting Alexis Morgan’s successful fund in the Atlanta market. From guaranteeing strong returns for investors to securing profitable, low-risk deals, you’ll gain a comprehensive understanding of how to run a fund efficiently. We stress the importance of building trust, understanding local laws, and having robust legal support to ensure smooth transactions. Whether you’re a seasoned investor or just starting, these insights will help you navigate the complexities of private money lending with confidence.
Finally, we provide essential strategies for beginners, highlighting what to look for in a private money lender and the risks associated with different types of loans. Understand the nuances between lenders who seek guaranteed returns versus those interested in profit-sharing arrangements. Practical advice on networking, securing funding, and ensuring all paperwork is in order will set you up for success. This episode is a treasure trove of practical knowledge that will empower you to make informed decisions and achieve your real estate investment goals
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What up everyone and welcome back to the Real Estate Unlocked podcast. I'm your host, Joseph Marohn, and today we're going to be discussing a very important topic in real estate highly requested video DMs going crazy. Today we're going to be discussing the topic of private money lenders. Private money lenders are not only crucial to any real estate investor's business, but may be the only solution on why a deal even goes through. Private money lenders are individuals who utilize their own capital for investments such as real estate and profit off the interest that's paid on the loans. Private money lenders are not affiliated with banks or any other financial institutions and oftentimes interact directly with the borrower individually. They are a valuable asset to investors because they often have different approval requirements and a faster pace than traditional financing processes. While the qualifications and interest rates will vary based on the situation, the process of working with private money lenders will be similar to other loans. Now you know how we do it on the Real Estate Unlocked podcast. If we're going to do it, we got to do it right. We can't just bring on any private money lender. We need to bring on the private money lender.
Joseph Marohn:Today we have a special guest who is a multimillionaire investor, multimillion dollar business owner, very successful individual, but you would never know, because every event you catch him at he's out wearing flip flops. Because every event you catch him at he's out wearing flip-flops. Abraham started his first business when he was just 15 years old and since then has started, bought and sold a few hundred other businesses. He also bought his first property at the age of 22, and since then has bought thousands of other properties. He now teaches others how to do the same. So, without further ado I've been talking long enough, everyone if you will, please allow me to formally introduce to you Abraham Gray. Abraham, what's up, brother? Glad you can join us today.
Abraham Gray:Yo, what's up? Good to see you, good to be here and share knowledge and learn from each other.
Joseph Marohn:Absolutely, absolutely Well. I appreciate you taking the time out of your busy schedule to sit down and educate my viewers on such an important conversation and topic at hand. Oh for sure, sure, how's everything going with you today?
Abraham Gray:Yeah, everything is great. Yeah, we had a little delay. I was supposed to be on a few minutes before now, but we're good, we're all good now.
Joseph Marohn:No, we're all good, brother, we're all good. So first just tell us a little bit about you and how you found success at such a young age man. I mean most kids are riding bikes, playing video games or screwing around chasing girls at the age of 15, but you were thinking about money. Tell us a little bit about that and how that mindset came about.
Abraham Gray:Yeah, no, I was always thinking about money.
Abraham Gray:So you know, early on I had like a kind of a rough childhood and you know I went from like foster family foster family boarding school and when I started making a little bit of money when I was 15, I realized I was able to do more stuff and have more freedom, and I just always wanted that. I always wanted to be able to do whatever I want and not have to listen to people. And making money and having your own money was the way to do it. So I just busted my ass hustle and do whatever I had to do to make whatever I can, so I didn't have to rely on other people. And boom, here I am today.
Joseph Marohn:That's great, man, because, like I said, most people at that age, their mind is somewhere else, but you were already thinking ahead, and that's how successful people have to think, so it's great you had that mindset early on. So the purpose behind this podcast is to educate newly investors just starting out on the real estate journey and might not have all the resources available to them. So most of the questions asked today are just going to be from a beginner standpoint and as we continue into the interview, the questions may get a little more detailed. So let's start from ground zero. What exactly is a PML or a private money lender, and why would someone prefer going that route instead of just going to the bank and getting traditional financing?
Abraham Gray:Yeah, so a lot of it really is what you said earlier. Basically, when you go to the bank, banks won't loan on a lot of things. But even if they will loan on it, there's a million paperwork you have to do and all kinds of fees and it just takes a lot of time. A PML you can borrow money and get the money that day.
Abraham Gray:Pmls have all different types of things they'll loan on that banks won't, and they're just easier and faster to deal with. So most people would rather go with a PML, especially if it's a short-term loan or something, because they might need the money right away and going through a bank we can't get it that fast. Plus, some PMLs will give you much better terms, much better interest rates, but, more than anything else, they just don't have all the paperwork you have to fill out, which is work that a lot of people even fail to do before I have to fill out, which is worth it for a lot of people. Even if you fail a little more. I have to do all that paperwork and get the money faster.
Joseph Marohn:Right. So there's definitely some advantages there. So you said, you can get it instantly. When you say instantly, how fast are we talking?
Abraham Gray:I mean the right PMO will give it to you the second you ask them They'll be like oh, you need that, there you go. I mean, usually it'll take at least a day to a week, but I've done tons of PMLs where I give people money the next day. It's not super uncommon. If I'm doing it for a property, I'll need the title to be run to make sure that there's no other liens. I'll need to get security deeds or keep a trust and promissory notes and lender's title policies, all these other things. But you can do all that with one day.
Joseph Marohn:Right, right, absolutely. So I can definitely see the advantages there. So you know, you and I, abraham, we're a part of an awesome community called Sub2, right, we have access to a ton of resources and connections, but let's say, I'm not a part of sub two. How would one even find a private money lender, and where would I begin to look?
Abraham Gray:So obviously the most common thing that people do when they try to find a PML is to go to their family and friends and people that they know really well, because PMLs are really mostly based on having that good rapport with you, like, if you don't trust somebody, you're not going to loan them money.
Joseph Marohn:Who's going to trust you most?
Abraham Gray:Your family and your friends. That would be the first place to start. The next place, I would say, is on social media. I get tons of deals, whether it's PML or other types of deals on social media. I post so much stuff. I let people know what I'm doing. I let people know what I'm successful in. What I'm successful in, you know a lot of people will respond to me do you ever need help with something? Can I ever, you know, be part of your deal? Can I partner with you? Can I whatever PML with you? You know something like that. So the reason why I get those people that do that is because I post so much stuff and people see that I'm on social media.
Abraham Gray:All the different things that you do will get you a lot more business, will get you a lot more PML, if that's what you're looking for. Of course, going to different events, going to local meetups, going to masterminds, going to networking events are super crucial because if you talk and you find tons of people in there, some people need money, some people have extra money, every time I go to an event and somebody asks all right, who in this room has money to lend, who in this money needs money. There's literally tons of people raising their hand for both topics, and the amount of money these people have to lend are astronomical. Now, everybody has a different criteria. Some want to lend on land, some want to lend on single family, some want to lend on multifamily. Whatever it is, you find the right one for you and you're good.
Joseph Marohn:See, I think that's the beauty of private money lending, because it doesn't necessarily have to be someone in real estate, right, it could be any type of person with some money that just wants a great return, or maybe, you know, like you said, a family member. So very good advice right there. So let me ask you so, if I've never done a deal before, will a private money lender even work with me? And if they do, what might they ask of me?
Abraham Gray:Yeah, so that's the great thing about private money lenders you find the right one. They'll deal with you. A lot of private money lenders have a lend box, let's say, where they'll only lend people that have done deals before or people that they know that they've done deals with, but some deals before, or people that they know that deals with, but some people will lend to anyone.
Abraham Gray:So it's just like you know. If you're in real estate and you're trying to buy a deal, are you going to buy the first deal that you're trying to buy? Are you going to buy the second or third? You might need to go through 20, 50, 100 deals to get a deal, or two deals.
Joseph Marohn:It's the same thing with lenders.
Abraham Gray:You got to find a ton of different lenders and there that will lend to people that have never done a deal before.
Joseph Marohn:Okay, so let's say I do find the one that fits me. What kind of questions should I be asking them?
Abraham Gray:The only really thing that I would ask a private money lender is are you loaning money and if so, what are you loaning money on and what are your terms requirements? And basically that's it. After that, you just let them ask you all the different things that they need from you to feel comfortable with you.
Joseph Marohn:Let them do their due diligence. Ok, great, great. So what's the difference between a private money lender, a hard money lender and, let's say, a gator lender? Yeah, so a private money lender is just a regular person, that is not in the business at all whatsoever and we'll just loan money because they want to get a better return on what they can get on their money earned.
Abraham Gray:A hard money lender is an institution, a bank, some sort of bank. It doesn't have to be a bank, but someone that has a company. That that's what they do and they have a set criteria and they need a lot of paperwork and it's more sort of like a bank, right, so you do it at the bank, or a regular person. And then a Gator lender is someone that is trying to lend money, but only for very, very short periods of time, like sometimes a day, sometimes up to a month, but not much longer, and they're looking for bigger returns but for a shorter amount of time. So most Gator lenders are lending on EMV loans and those are usually typically three to four weeks or double closes, which are basically the same day or next day, Great.
Joseph Marohn:So are you doing both personally or are you more on the private money lending side?
Abraham Gray:I do a lot of both. I actually prefer the Gator Lender stuff because it's a bigger return and a faster return. So I do probably more Gator Lending than anything else, although I do a ton of private money lending too. But the problem with private money lending is no matter how much money you have, you're going to run out of money at some point. So I keep like $10 million of my own money that I lend out to people for private money.
Joseph Marohn:But it's literally like most of the time that $10 million is out.
Abraham Gray:So I'm only lending on new deals as I get paid on some of the deals that I already have out. I mean, if I had $100 million I'd still run out of money because then there would be more people. But with transactional, with Gator lending, it's really hard to run out of money because you get the money turned so fast. So I really like that model.
Joseph Marohn:I just want to clarify real quick. Back that up. You said $10 million, right yeah, that's awesome man. You're the right private money lender to have on their books, right yeah, I know.
Abraham Gray:So my lend boxes, I only lend in first position and I only led for deals in Georgia, 95 plus percent in the Atlanta market. But I only live in Georgia, so I never lend money outside of Georgia, but yeah, in Georgia I have, but I literally have way more people that want to borrow money than you know we're store. I'm actually starting a fund this month where I'll have probably 50% or double the amount of money to lend out but it'll go fast because everybody wants to borrow money.
Joseph Marohn:What kind of fund are you doing?
Abraham Gray:So if you know Alexis Morgan, she actually is the one that started the fund and basically she's running it and doing all the paperwork and I'm basically in charge of just putting the money out and making sure everyone gets their interest every single month and stuff like that. But it's just a fund for people to put money in that you know, we guarantee them 12% return or higher, based on you know different things, but minimum 12% and they get paid every month or every quarter of their interest.
Abraham Gray:And then it keeps going. But all of that money is used to do PML on single family homes in first position in the Atlanta market. So I buy hundreds of homes a year in the Atlanta market. So I know how to comp. I know what stuff's worth. I make a lot of money on them, but I very rarely do a bad deal.
Joseph Marohn:I know if somebody else is getting a good deal.
Abraham Gray:If someone's buying a good deal, I'll loan them the money At the worst case scenario if they don't pay, I only loan them enough to where I know that I would buy it for more than what I loaned them. I would just foreclose property over or whatever. But I never have to do that because everyone on the money team knows that they have a lot of equity in it. So we'll never let them. You know not, they'll never not pay you. It makes no sense because they would lose a lot of equity.
Joseph Marohn:Right right Now. That's a smart idea, man, putting that together. So what kind of actionable steps can be taken to build a like, a genuine connection or a trust with this person?
Abraham Gray:And as far as a business relationship as it grows and we're doing more deals together, is it possible to get more favorable terms? Yeah, I mean depending on the private money lender.
Abraham Gray:I have a minimum amount that I charge, but I do charge more than that sometimes, depending on if the deal I don't like as much. So you just have to find the right private money lender that will charge less. There's private money lenders that will charge a lot less than others and there's some that need a lot more. Usually the ones that are very experienced and can do a lot of deals will charge more because they have plenty of people asking them for money and they can get it. But someone that's newer, a newer private money lender would probably give you a better deal, because they just want to get their money out there and they might not know how much people to loan to.
Joseph Marohn:So if you're trying to get the best deal.
Abraham Gray:Yet find someone that doesn't have a lot of people always asking for money and someone that isn't making hardly any money on their money. Whatever you offer them, it's a lot more and they feel good about it.
Joseph Marohn:Right, right, and then and they feel good about it Right, right. And so could you walk beginners through the typical process of applying for a private money loan, from the initial inquiry to the actual funding, or is there any applying process at all?
Abraham Gray:Yes, the process for me goes like this People ask me can I borrow money? Are you lending money? And I'll be like, let's say I have extra money to lend. At the time I'll be like, yes, I'm lending my boxes. It has to be in first position. I charge an amount of 18% interest, which is 1.5% a month. It has to be in Georgia, preferably in the Atlanta market, but definitely Georgia. Then I'll say send me your property that you want to borrow money on. How much do you need to borrow? What's your entry strategy? And then I'll look at it to see if I think it's a good deal or not. And then I'll be connected to a closing attorney here in Georgia and I'll lead them to get me the four things I need on every deal which is the security deed, a promissory note, a lender's title policy and then, of course, insurance on the property.
Abraham Gray:So once I have those four things, the title's run, everything else. I know my first position. Then the closing attorney finalizes all the stuff. I give them all the information on the loan, what all the terms are that gets put into the promissory note, and then of course, the amount that's about the security fee that gets filed in the county. I will first lean on that property and then, once the fix and flip, is over, like 90-some percent of my loans are for fix and flips. Once it sells, I get paid back.
Joseph Marohn:Great, great man. Is there a particular reason why you only go to Linden Georgia? Is that so you can just hunt them down if they're not paying you, or what?
Abraham Gray:Well, there's a lot of reasons. That's actually a good question. So, first off, I know all the laws in Georgia. So when I say all the laws, I know how much you can charge. I know the process to foreclose if someone doesn't pay me, which is really important.
Joseph Marohn:A lot of people with loan money in LA states.
Abraham Gray:They don't even know what the foreclosure process is if someone doesn't pay.
Abraham Gray:So I know I actually have foreclosure attorneys on hand that are ready to foreclose. Now I've done thousands of PMLs. I've only had to use a foreclosure attorney three times and out of those three times two people ended up just giving me a deed of loot back. So I ended up giving me the house back and I worked to deal with them. The third person the day before the auction actually found somebody else to pay me back. So I never even have to foreclose.
Abraham Gray:But it's because I'm very safe with how much I lend people. I lend people an amount that they'd be an idiot to lend me foreclosed because they're giving up so much equity. But that's pretty much the process. But with Georgia also, I know that it takes me two months to foreclose on somebody. If but with Georgia also I know that it takes me two months to foreclose on somebody. If somebody doesn't pay me within two months, I can get that property sold and get my money back. A lot of states it could be six months a year or even longer. So I know the Republican states overall are way more easier to foreclose and get your money back sooner. But I know some Democrat states it could take a year or two years to foreclose and get your money back. You just got to know are you comfortable being in a state that can take you that long or do you not want to? I would make sure that you know the state, know the laws, have a foreclosure attorney on hand that you don't have to figure it out if you come to that.
Abraham Gray:Also, again, I learned in first position if you start loaning in second position, you, if you start loaning in second position, you are going to have a lot of problems.
Abraham Gray:So I used to loan in first and second position, a little bit in second position and I've done thousands of deals in first position. I've had three where I actually had a problem, but I actually didn't have a problem at the end because I was able to get my money back or worked it out before the foreclosure. I've done 50 deals total in my life or less that were in second position. I've probably had problems with 15 to 10 to 15 of them, so 20 to 30% and that's a big problem. A couple I never got money back because of a bunch of different reasons, but it's because you know second position is a lot tougher for a lot of that stuff. The whole other conversation can be a long time, but I really don't want to be in the second position anymore. It's very rare, like once in a blue moon. I know the person really well and it's super secure and whatever, but it's still it's very risky.
Joseph Marohn:No, it makes sense. I mean, you're in Georgia, it's your own backyard and you know the laws well, so you know, as you just said, other states have their own laws and whatnot, so it makes perfect sense, okay, other states have their own laws and whatnot, so it makes perfect sense, okay. So I'm brand new to real estate. I managed to get a deal on a contract. I want to be no money out of pocket. Could you explain some common terms and conditions that lenders might offer to newly investors and how do the interest rates and fees typically work?
Abraham Gray:Yeah, so I mean, what I see is most people do interest only for a PML until it's paid off. Uh, usually somewhere between a six month, 12 month pooling. I would do six months but I always extended it. People are paying Right. Um, I usually see interest rates anywhere from uh three quarters of a percent a month for people that just are brand new, that don't know what they're doing, to two or three percent a month in interest. I charge one and a half percent right in the middle, but those are the rates that I see. Obviously, if you know the person well or if it's someone that's newer, doesn't have ways to put the money out, they're going to give you a better deal and better terms. If you haven't done it much, I don't even know how to protect yourselves very well. Their terms they haven't done much and I don't even know how to protect themselves very well. But that's pretty much what I see.
Joseph Marohn:I see that people that know what they're doing never really get screwed and are pretty much safe.
Abraham Gray:But newer people that are getting into it. I see a lot of people lose money. I see a lot of people that don't know what they're doing and loan too much money on a deal or money in the wrong state or money maybe not in first position and they don't understand the risks or they don't have the right paperwork or something, and I see a lot of people lose money If they talk to me first, they talk to someone that doesn't do it first. They can avoid all these issues because there's plenty of ways to do it safely and make a lot of money.
Joseph Marohn:Right, and that's great points you brought up, and that's actually the main purpose of this interview. I want to get more knowledge out there to people so they're making sure they're protected, right? So would a private money lender fund 100% of my deal?
Abraham Gray:Yeah, so again, every private money lender is different. I will fund 100% of somebody's deal if they are buying cheap enough, let's say the home's worth $100,000. I might loan. Let's say let's make the number. Let's say I loan up to $70,000 because that's what I feel comfortable on that home. So if they're buying the home for $80,000, I'll loan $70,000. They have to come up with the other 10. If they're buying it for $60,000, I'll loan them the whole amount.
Joseph Marohn:Okay, that makes sense. And then, what kind of negotiation strategies can beginners employ to secure favorable terms?
Abraham Gray:So if you're trying to borrow money again, it's just figuring out who the right private money lender is for you. If you're going to borrow money from me, I'm never going to go less than 18%. It's never going to happen. I would borrow money for less than 18% just because I know I could lend it for 18% or more.
Abraham Gray:So if you're trying to borrow, money for under that, then you've got to find someone that is willing to do it. If you are trying to find someone that's willing to loan you money for a longer period of time, maybe for a few years, if you're trying to do a buy, and hold then you've got to find a different type of money lender.
Abraham Gray:If you're trying to find someone who wants to loan you money in a second position, you have to find that type of money. So it's just a matter of finding the right one. There's not really, there's really a private money lender out there just for any type of situation, as long as you know, they feel that they're going to make money, and they can do better with lending the money than what their money is doing without it.
Joseph Marohn:Right. Right, and it's kind of like you know we kind of already talked about, you know the time frame. It varies, right. You know some people will give it right away, some might take a little longer. But how is the money received Like? Should I be sending a check, a direct deposit, wire transfer?
Abraham Gray:The actual lender.
Joseph Marohn:Yeah, the actual lender.
Abraham Gray:Yeah, so the lender, I mean in theory. 99% of the time the money should go through the title or a closing attorney.
Joseph Marohn:Right.
Abraham Gray:The exceptions would be this is for the lender sending you the money. The exceptions would be if title or the closing attorney, the reason why you send the title or closing attorney first. This is the reason why first. This is the reason why it's because they're going to make sure that they have all the correct documents, the promissory notes the deed of trust, the title insurance, whatever they need. They're going to make sure it's all filed and all done correctly before they give the person that's borrowing the money the money.
Abraham Gray:So that's, why you go through title, so that way you have all the documentation. If you need it for clothes, it's all there. So that's why you have to fill it. However, if you were to have Tidal fill all that stuff out with the buyer and then Tidal emails you or tells you look, they signed everything, I'm ready to file it, you can send the money directly to them, then you could. Then you could send it directly to them. That happens less than 1% of the time.
Abraham Gray:Usually it's a lot safer to go through title because you know that title is not allowed to send the money until all that's done. But if title technically tells you that all the paperwork is done and everything's filed, in theory you could wire the person directly because you're protected, because everything's filed. But you got to make sure. But that's super rare. I would say 99 plus percent of the time it goes through title and that's really the reason why.
Abraham Gray:So you're protected, so the person can't get the money and then all of a sudden they don't pay you and you try to foreclose and then the stuff wasn't filed. The stuff wasn't filled out right, that's the direction.
Joseph Marohn:Absolutely. If I'm going to be lending money, I'm going to be sending it to the title company just to make sure that nothing can happen. They can just run off with your money. So what kind of due diligence should one undertake before entering into an agreement with a private money lender? And there's a ton of scam artists out here asking for routing numbers, asking for account numbers. How are both sides protected?
Abraham Gray:So if you're the borrower, I would never send a private money lender any fees up front. I have never asked anyone for fees, ever when I'm doing a private money loan. I basically will wire the money to title and if there are any fees I charge, it's going to come out of the money I wire. So if I have to wire someone $100,000 and I'm charging $2,000 of fees up front, well, I'm just going to wire $98,000. I'm not going to make them pay $2,000 and after I get $2,000, I'll wire $100,000.
Joseph Marohn:Right.
Abraham Gray:So everyone that is scamming like every lender that's a scam lender will be like oh, you have to get me money up front. So anytime you have to get money up front.
Joseph Marohn:That is a big red flag.
Abraham Gray:There are some times where you know hard money lenders and different people like that will ask for money up front it should be very minimal amounts. It's usually for an appraisal or something like that that they don't want to pay out of their own money. But you just have to be careful that that's not a scam person, you know if someone asks you for money up front.
Abraham Gray:You've got to really vet them and find out all the different people you're blowing money to, and hopefully you should know some of them to verify that that's not a scam. But sending money up front is a big scam For a lender sending money outside of title sending money directly to the person you're blowing money to is a big red flag for a scam as well.
Abraham Gray:Like I said, there is that one exception where you can do it, but it's super rare that a title company is going to say, okay, I'll do all the paperwork and you can just wire them directly afterwards.
Abraham Gray:That's super rare I see that happen once in the blue moon, but it's usually when you know the person really well and you know the title company really well and everybody knows each other really well. But if everyone doesn't know each other really well and you haven't done multiple deals and known each other for a long time, that should really never happen.
Joseph Marohn:That's some great info. Thank you for providing that. What are some effective strategies someone can use to ensure they can comfortably repay the private money loan with the agreed upon terms?
Abraham Gray:Yeah, so basically, the person that's lending the money should underwrite the deal and understand that, look, there's profit in this deal. Look, I am charging this person $2,000 a month. They're probably going to need six months, so that's $12,000. They're paying $100,000 for the property. They're spending $25,000 on rehab. So $100,000 plus $25,000 plus $12,000, that's $137,000. This property should sell for $190,000. So there's 30,000, 40,000 profit after my private money. Now, if you underwrite it and you're like, wait a second, after all these fees, there's no profit. You might have a problem getting your money back. You shouldn't have loaned them that much money.
Joseph Marohn:So it's basically all underwriting and making sure.
Abraham Gray:So obviously most private money lenders want to make as much money as possible on their loans. There's a fine line Like you want to get people a good deal, you want to get a good deal, but you also have to get people a good deal. So if you're charging way too much, you might put them in a position where they can't pay you. So you've got to make sure that there's room for them to make money as well. If you don't make money, you're also a bad deal, because everyone has to make money.
Joseph Marohn:Right.
Abraham Gray:Right. And so then, what would happen if the loan didn't get paid back on the agreed terms? What happens next?
Abraham Gray:I wasn't in agreement and I'm going to be a lot more strict with that person going to do it alone in the future. But if I see that they're talking to me or they're trying to work something out, then I'll work with them. If they go radio silent and you can't get a hold of them, I just assume that they're dead. I assume they're dead and if they're dead, the only way to get your money is to foreclose. So if they don't respond to me or they can't, work, any deal that's acceptable to you or me.
Abraham Gray:whoever's willing to money, then you foreclose. It's really easy to foreclose in Georgia and that's why I live here.
Joseph Marohn:Yeah, I'm so glad you brought that up because so, since we're on the subject of both sides being protected, let's talk about communication and transparency for a second. You know, I'm sure you've seen quite a few lenders in the community been getting burned and it's just an unfortunate situation and I don't think it's the borrower purposely just trying to burn that person. I think it's more of a communication and a lack of just being transparent with that lender, right? So how important is communication and transparency between the borrower and the private money lender, and what expectations should beginners set?
Abraham Gray:It's crucial Any single time your lender calls you or emails you, you've got to respond or answer the call. If not, they think you're avoiding them.
Joseph Marohn:So communication is crucial, but the reason why most people that we know that are losing money.
Abraham Gray:Are losing money, they're very new.
Joseph Marohn:They don't know what they're doing. They're making a lot of mistakes.
Abraham Gray:They're not doing any of the things I just told you you need to do. If they do everything I'm telling you what to do, which is making sure you have all the paperwork done right, do a few title, making sure that you comp the property right and you're only loaning enough to where you know that they can pay you back because they're getting a good.
Abraham Gray:You can't loan money to somebody that paid too much for a property. You can only loan money to people that got a really good deal on the property. So if you're just to loan money to people and you're not seeing if they got a really good deal on the property, that's just like buying a property for more than it's worth. You're going to lose money probably Right.
Joseph Marohn:And so then, when they're asking you all these questions, they're asking it for a reason, right, because they're trying to do their own due diligence and underwrite the property properly. So we established that not all private money lenders are the same. Each has their own terms and conditions and how they choose to work with you. What are some key qualities or criteria that new investors should look for when selecting a PML to work with?
Abraham Gray:just someone that will do what they need, someone that their lend boxes in what they're trying to borrow, but then you know, obviously trying to find the best terms that they can get whether it's the best interest rate, the most amount of money, the longer the balloon. So all those things are important for someone looking for a lender, but obviously someone that's looking for a lender is going to search for as many as many people as they can and then pick the best one that matches up.
Joseph Marohn:Right, and then you talked a little bit about first position and foreclosing, but how is collateral typically handled and what types of assets are commonly used as security for loans? Would lenders be okay with taking second or third position, or is it first position always a requirement?
Abraham Gray:For me, first position is pretty much always a requirement, just because the second position can be a real hassle if they don't pay you. I can give you a quick example of a few reasons why. But I mean, there are plenty of people in second position. Most of them don't really understand the risks and a lot of people are newer that do it. Now would I loan in second position? If it's someone that I know super well, would I loan case money in second position. I'd loan it then in fifth position it doesn't matter because I know he's going to pay me. But would I loan money in second position to someone that I don't know really well or have done tons of deals with and know that they've done plenty of other loans and it paid off?
Joseph Marohn:Hell no.
Abraham Gray:I never would. So in second position. This is the reason why you're in really bad shape in second position. I'll give you one quick one, although there's a lot but I don't have time to go through them all. But just to put it in perspective let's just say a home is worth $100,000. Let's just say you're comfortable lending 70%. So let's say you're comfortable in $70,000 on this $100,000 home. Okay, cool. In first position. Let's just say now the person already has a loan on the property for $50,000. They need 20,000 more. So they're coming to you and they're like look, you can get a second position, but look, I know you're only getting that 70,000 on it.
Abraham Gray:Guess what I only owe $50,000 first, I just need $20,000 more. It still falls within that $70,000, so you're still safe, right? Yeah, of course you think you're safe. You're not, but you think you are. So that's the problem most people have. I'm going to explain to you why you're not000. So they're still $30,000 worth of equity in their minds.
Abraham Gray:So that's the biggest problem. What people don't realize is if somebody isn't paying you on your second position loan, that $20,000 loan, if they're not paying you on that loan, who else do you think they're not paying?
Joseph Marohn:Good point.
Abraham Gray:They're not paying the first position probably, either Most of the time they're not paying the second position. They're not paying the first position probably, either most of the time they're not paying the second position. They're not paying the first position almost most of the time. So so what happens in this situation? Well, this is what happens. Who knows how long that first position person is going to let?
Abraham Gray:that person slide without paying them. Some people might start foreclosure process in a month or two. Some people might let it go for six, nine months because they're busy or don't know what they're doing or whatever. They're trying to work with the person. But let's just say it goes on for five or six months. Now, on top of that $50,000 that's owed to that first position, there's five or six months worth of interest, five or six months worth of late payments and actually at this point now they're going to hire an attorney, which that's going to be added to the $50,000. Then they're going to hire a foreclosure attorney that's going to foreclose on that and that's going to be another $5,000.
Joseph Marohn:Then you're going to have late fees and all these other things.
Abraham Gray:Before you know it, that $50,000 that's behind in payments and interest. Now, instead of owing $50,000, you owe the first position $65,000. So when the second position has to close and they're owing $20,000, and this home figure is going to go for $70,000, which it might, the $70,000 might go for foreclosure but guess what?
Abraham Gray:$65,000 is going to go to the first position. You're going to get $5,000. Might go for foreclosure, but guess what? $65,000 is going to go to the first position? You're going to get five that's left. In the second position, you're going to lose $15,000.
Joseph Marohn:That makes sense. That's a great point that you brought up there. Questions even my partner Ash and I ran into early on were if we have our own capital to fund our own deals, is it wise to even utilize a private money lender? Why borrow money I now need to pay interest on when I already have the capital to do so? What's your advice on that?
Abraham Gray:So I would never borrow a ton of money, if I have money, with the exception of you always want to have a cushion, some extra money in case something bad happens. So figure out the cushion that you need and keep that cushion, but borrow the rest. So let's say I have $100,000 in my bank and I need $100,000 to buy this deal, but you wanna have a 30, $40,000 cushion in case some crazy shit happens. Borrow 60,000, keep the 40,000 there so you have a peace of mind and less stress. So if something happens, you have that extra money or borrow the money, borrow the whole $100,000, even if you have the $100,000.
Abraham Gray:The reason why you borrow the whole $100,000 is because maybe you're going to find another really good deal in the next few months and you don't want to have to find a private money lender then because you have one right now. So you have that extra $100,000 for the next really good deal and you might lose that really good deal if you didn't have any money to come up with it, if you couldn't find a private money lender at that time.
Abraham Gray:So a lot of people keep that money because there's an opportunity cost that if you don't have it you might lose money. So those are the two reasons why I would use a private money lender, even if I had my own money. But typically I would only borrow the amount needed to where I still have that cushion or where I know I might have enough money to buy another type of deal that I might have before this other deal is done.
Joseph Marohn:Oh, that's a great point with the cushion, because you know, all the time we see, you know Pace is teaching us like never use your own capital, you know, always use private money lenders.
Abraham Gray:You know, and it's like every time we come up with a deal, the reason why Pace says that and it's really smart is because of the way Pace does deals. Most people don't do deals the way Pace does deals. If you want to be like Pace and you want to do deals like Pace, you should borrow money for every deal. Why?
Abraham Gray:Because Pace does deal after deal after deal after deal, no matter how much money Pace has or anyone has, you're going to run out of money, but Pace knows that he wants to keep doing deals, so he'll keep getting new private money lenders even though he has money, because at some point he might need to use his money for stuff on deals that he can't get a private money lender for. So as long as you keep getting private money, and as long as you underwrite it where you're going to make money with private money lenders.
Abraham Gray:he also looks at it like this I can do 10 deals with private money lenders and maybe make 10,000 deals instead of 20,000 deals, but I'm doing 10 deals and make 100,000 bucks.
Abraham Gray:But I'd rather do 10 deals and make 100,000, or two deals and make 40,000. So that's the way Case looks at it and for him it totally makes sense. But it doesn't make sense for everybody. How many deals can you handle? So some people can do it and then it makes sense for them, but if you only do one or two deals it might not make sense for that particular strategy?
Joseph Marohn:Yeah, and that makes perfect sense because we're not to the level of pace, obviously, and the amount of deals we're doing. We have the funding to do so ourselves. So we're like, why take money out from a private money lender and have to pay interest on that, when we could just keep funding our own deals for now and then, as we start to scale, then we'll start looking into more private money lending on further deals. Okay, so can you discuss how private money lending can be applied to various real estate strategies, such as fix and flips, rental properties and development projects?
Abraham Gray:Yeah. So on fix and flips, they're typically around six months. You know loans and you'd borrow money and you can pay a high interest because if you buy it at a big deal there's a lot of profit in a fix and flip, if you know if you're doing the rehab right and you're doing everything right and you know what you're doing, so you can pay a high interest On a buy and hold deal that you are doing.
Abraham Gray:you really can't pay the same type of interest. That's why I really only do fix and flip loans for six months or less. A fix and flipper can pay really high interest if you're making a lot of money and it's a win-win for everybody. For a buy and hold investor it's very hard to pay anywhere near what a fix and flipper can pay because you have to have that cash flow.
Abraham Gray:And if interest is too high there's no cash flow on a buy and hold, so too high with no cash flow on a buy and hold, so you have to find a totally different type of lender.
Abraham Gray:on a buy and hold, you have to find someone who's going to loan at a lower interest rate than a fix-it-flipper, and also someone that's going to loan money out for a longer period of time, someone that only is making 2%, 3%, 4%, 5% on the bank, but now could be the lender for 7%, 8%, 9% to you. But a buy and hold person is fine with an 18%, 15%, 20% because they're making so much more and they're going to turn it over faster.
Joseph Marohn:Right. And then, what would you say as far as like new development projects?
Abraham Gray:New developments are somewhere in between a fix and flip and a long-term hold, because a new development takes longer than a fix and flip, but it's way shorter than a buy and hold. So again, you have to find the person that's going to charge you about what a fix and flip is you know, the person is probably the money lender is, but hopefully a little bit less.
Abraham Gray:Or maybe work a deal to where. Look, I'm going to guarantee you I see this a lot on fix and flip loans and on the new development loans. They'll be like look, I don't know if I can pay that type of interest, but I think I might.
Abraham Gray:So what I'll do is let me guarantee you not even 10% interest, but I'll give you 20% of the profit of my deal, like 50% of the profit of my deal, and that way you can't get hurt, because if you don't make as much money on the deal and you're still making money because you're not getting a high interest but if you're making a lot of money on this deal, now everybody needs more money the private money lender and them. So that's another way to work and deal with the private money lender.
Joseph Marohn:Great advice, great advice there, abraham. What advice would you give to beginners who are considering utilizing private money lending for their real estate ventures?
Abraham Gray:I think it's crucial. I think they need to Like without you know, unless you just have a ton of money, most people need a private money lender. So again, start posting stuff on social media, post wins, post positive stuff, go to all these networking events, you know. Find a private money lender. So when you have a deal then you know you have somebody right there that can fund it.
Joseph Marohn:Right, and that's why I love going to investor events. You know, every time you go to an investor event, anything you would need in real estate is in that room, right, and it's up to you to make those connections. So that's what I'm constantly. Every time I'm networking and I'm constantly building my private money list, building my buyer's list, I'm always connecting with other people. So great point on that, and you're absolutely correct. So something I like to do is I like to give back to the community and allow them to also have a voice on these podcasts.
Abraham Gray:All right cool, Let me give you my cash app then Okay, got it so.
Joseph Marohn:So I generally I'll create a post asking if anyone has any questions on on the topic I'm covering and I and I usually I'll just shout them out and choose a couple of the questions to ask my guests. So one of the questions. It's actually a two part question. So, luis Fernandez, actually his question was does a private money lender only offer monthly payments or will they also defer payments to the end of the term?
Abraham Gray:So I've seen both. A smart private money lender should always get monthly payments or will they also defer payments to the end of the term? So I've seen both. A smart private money lender should always get monthly payments. However, I've seen tons of private money lenders that defer all to the end. The reason why a smart private money lender will get monthly payments is because it pushes the person to get this deal done faster, because every month they're making a payment and you see that they're capable of making this payment.
Abraham Gray:But if you're deferring it to the end, it's just a lot more riskier for the lender and I would charge I have done that before, but I just charge more money it's a lot more likely you're going to have a problem as a lender to get your money back, so I would just charge a higher interest.
Joseph Marohn:Good point. And then you kind of on his next question. You kind of touched on this a little bit, so, but I want to, I want to read it back to you. So he says he's spoken to several private money lenders. Most of them are asking for a loan origination fee of one to three percent of the loan amount immediately after signing the loan approval agreement letter. This sounds like a scam to me, am I right?
Abraham Gray:No, a lot of a lot of people will charge a higher interest rate with no fees up front. And then some people will charge a lower interest rate with fees up front. The scam is if they ask you to pay them that 1%, 2%, 3% before they fund the deal. Typically, if it's not a scam, they'll be like it's fine to pay that 1%, 2%, 3%, but it'll come out of the money. So let's say you're borrowing $100,000. Instead of you paying them the $2,000 and then borrowing $100,000, they should just borrow the $98,000 and it automatically comes out. I have done a bunch of loans where I charge a 2% or whatever a registration fee. I've never had the person pay me up front. I've always just wired that 2% less.
Joseph Marohn:Okay, so as long as they're asking for it after you sign the agreement, it should be fair yeah.
Abraham Gray:As long as you pay it. They take out the money they're wiring, you're fine. If you have to pay them ahead of time, that's a red flag. Could it be legitimate? It could be, but that's definitely a red flag. That's not how it should work.
Joseph Marohn:99% of the time. Okay, cool. Next question is actually from my partner, ash, and his question was what type of deals make sense for them to be a private money lender versus a private money partner, and what do they look for in either case?
Abraham Gray:Yeah, so most private money lenders, or most people that bought that loan money just want a guaranteed return on their money.
Abraham Gray:So most people are going to be private money lenders because they just want a guaranteed return. A private money partner is someone that has a bunch of money, doesn't have the time to fix a flip. They want to be a fixer-flipper and they want action in the deal. So they'll loan you money at no interest or very low interest, but they want a percent of the profit.
Abraham Gray:And if you could find someone to be a PMP instead of a PML, I think that's a lot better for the person borrowing the money because you have no risk. They're putting up the money and they're only making money based on how you do. So it's a lot safer for're putting up the money and they're only making money based on how you do so. It's a lot safer for the person borrowing the money because you don't have to pay interest typically or very little. But as someone lending the money, they want some sort of guarantee most of the time, unless they see the deal and it's a no-brainer great deal. It's harder to get someone to be a private money partner, but there's plenty of those out there. Like I said, you find people that want to be involved in deals or something at the time or can't find the deals, and they believe in you, they believe in the deal, and that's how you become a private money partner.
Joseph Marohn:Right, right, great points, great points. So awesome man. Thank you, abraham, for taking the time to answer all these questions. I feel like private money lending is just such a large topic to cover, so I wanted to make sure that we got the majority of the questions answered here today. That way, newly, investors have a better understanding of what to expect and what questions to ask. With that being said, I want to make sure that we're not leaving any questions unanswered here today. Is there anything else we didn't cover here today that newcomers should know, or any specific concerns that you think we should cover today?
Abraham Gray:I mean, there's a million things we could talk about?
Joseph Marohn:I mean, we covered the most important stuff, you know.
Abraham Gray:So I think the most important stuff is what everyone should know and that's what we covered. But obviously there's tons of nuances on each little thing, what they are, and you know. Obviously if people have questions about it, we'll answer them all, or we can do another one another day for more advanced.
Abraham Gray:But I mean I think anyone that wants to get into it has enough information now to know at least what they should do and shouldn't do and at least hopefully be safe to where they won't do anything stupid and lose money. But you know, they can always reach out to you, they can always reach out to me.
Joseph Marohn:And we, but you know they can always reach out to you, they can always reach out to me and we can always give them advice as well. I think that's a great idea, man, because the purpose, like I said in the beginning, like I wanted this to be more towards, you know, a beginner standpoint. You know that's why a lot of these questions were like very beginner questions. But you know, as you said, private money lending, there's a lot to it and I feel like maybe, maybe, we could do a part two on this and get more detailed questions answered. That's a great idea.
Abraham Gray:I mean just that second position loan are like we could have hours of conversations about the pluses, minuses and risks. And I'll add, just on second position we didn't really get into it too much. I thought a little bit just to understand why second position is a lot more risky. But also, if you foreclose and you are in second position, you have to really know who the first position person is. You should be talking to them, you should know ahead of time, you should know how much they're owed, what their interest is. You have to know all these different things or else you're jumping in blind and you lose a lot of money. But second position is like a whole other story we've talked for hours and hours about.
Joseph Marohn:Right, we can probably do a whole topic and discussion on that alone. Yeah for sure, Perfect Abraham. Where can people find you and are you still currently open to funding deals?
Abraham Gray:Yeah, I'm always funding deals.
Abraham Gray:I do Gator deals every day. I'm funding the whole closes and EMD deals every single day, every single week. Pml I still do, but right now I'm pretty much where I want to be with the money I have out. But as I get money in, I let money out right away. So yeah, 100%. If you want to reach me, obviously on Facebook, abraham Gray. On Instagram it's Abraham Gray Official. I have a YouTube channel that I have for almost a year and a half AbrahamGray G-R-A-Y YouTube. I answer all my emails, answer all my messages on Facebook and everything else.
Abraham Gray:So if you have any questions, yeah, just reach out to me and we'll answer every question.
Joseph Marohn:Awesome. Well, make sure to plug your YouTube handle on the video here. That way, people can reach out to you and check out your stuff, man, because I've been watching your content, man. It's very beneficial. Well, abraham, it's been an honor to have you on the show. You're an absolute monster in this real estate game. We're all hoping to reach a level that you've already succeeded at, and I wish you nothing but continued success, brother.
Abraham Gray:Yeah, you too. Thanks for having me.
Joseph Marohn:I hope everyone gained a ton of knowledge from Abraham Gray today. Make sure you guys take a second to like, subscribe and drop a comment down below so we can reach as many people as possible. I think you guys are going to find a ton of value from this episode and I want to make sure it reaches as many people as possible. Also, stay tuned for my next episode, where we'll be bringing on a powerful speaker by the name of Richie Matthews and he'll be covering the topic of rental arbitrage and how exactly a subleasing model can work for your business. It's going to be a great episode.
Abraham Gray:Thank you again, abraham have a good day, brother, thank you.