Post: #1

Asked to do a data sheet on equity lending.

********** Just a warning about this advice. This is based on law and securities commissions in Canada and more specifically Alberta. Although there isn’t much difference between the other provinces except those Pinko Commies in Quebec.*******

So private money and equity lending is big business not just in Canada but around the world. What I am talking about is the exact same thing that led to the financial crisis and MBS meltdown that occurred a few years ago. It works on the same principle but the difference is you won’t be pedaling crap. These are low risk loans with real security.

So you have someone that wants to borrow money. They have a house with a lot of equity in it. Meaning they owe let’s say a $100,000 but the house is worth $400,000. That means they have a loan to value (LTV) of 25%. Let’s say they also want to borrow a $100,000 from you (abc financial or Bob’s Bank). So that would bring their total Loan to Value (LTV) to 50%. You would have a bank mortgage on the title in what we call first position. Meaning that if the homeowner went into default the original lender would be first to be paid out. Now the beauty of this is you have a $200,000 buffer zone. Usually these equity loans are only for a year at most, so the price of real estate would have to be cut in by 50% in a year for you to even begin to lose money. This will most likely never happen. I have no doubt real estate can drop that much, but not in a year.

Now setting the rate and fee. Whenever you do a loan there is always a fee associated with it. Every lender does it. Even the big banks, they usually work it into the payment. The higher the risk the higher the fee. So for example using the scenario above I would assign the risk on that loan based on equity alone to be low to moderate risk. So the fee I charge wouldn’t be that bad. Probably about $10,000. Again based on the risk of this loan I would probably set a descent interest rate somewhere in the neighborhood of 10% to 14%. The reason being is because you are not in first position. If there was ever a problem you are second to get your money. The law in Alberta is such that you can basically charge whatever you want for a fee but the interest rate must be under 60% per annum. This is how the cheque cashing places and money marts of the world make their real money. Also the tax code has a higher tax rate on interest received than it does for a fee. I believe the tax rate for capital gains on a interest payment is 35% where a fee received is only charged 15%. Makes sense to charge a higher fee at all times and a lower interest rate. Most of the lending risk is based on equity, but I make the borrowers fill out an application so I can verify income, job, check their credit and other assets they have. It is just to be on the safe side. But most likely the people coming for a private loan either have one of the following 3 problems:

1. They need money instantly (I have this down pat that I can issue money 24-48 after an application is signed.
2. No Job
3. Bad credit or too much debt. This is a great way for people to pay off their debt then go to the bank and get a prime loan to pay you back and then they get a better rate from the bank.

Based on previous experience and of course having mentors, never go past 75% LTV. I try to stick to under 65% myself. That way you have a good buffer of protection and of course you are more than likely to get paid back because the home owner has a lot of stake. In the above example if you loaned $200,000 and brought the LTV to 75% you still have a $100,000 buffer and the borrower is not likely to walk away from that much equity.

Now the fun part! There are a few different ways of funding these loans. You can just use your usual bank account and money floating around in there. Or you can use your RRSP’s, that way you aren’t taxed on the income until you are 65. But in my opinion the best way to do it is the Tax Free Savings Account (TFSA). Reason being is you get to keep all the income derived off of this tax free and can spend it or reinvest it.
Probably wondering how exactly do I get paid on this Yo!! ? Well with every loan done you get post dated cheques starting a month out in advance for INTEREST only payments. So on the above example of $100,000 + $10,000 fee = $110,000 loan @ 10% a year/ 12 months a year = payment equals $1320 a month. That is right, $1320 a month of just interest being paid to you. No principal is included in that. To collect the fee at the end it is simply added to the mortgage and even though you issued the borrower a $100,000 they have to pay back $110,000 which is the actual loan amount registered by your lawyer onto the Land title or deed (U.S.) So let’s say the borrowers keep the money for a year and then pays you back. Total money made on your $100,000 is $15,840(interest received) + $10,000 fee = $25,840. Basically 25% on your money for walking down to the lawyers one afternoon to bring them a cheque.

Now the even more exciting part is let’s say you don’t want to have your money loaned out that long. Well then we can do what is called securitization. Same exact thing that Wall Street was doing and what CMHC does in Canada. Basically what happens is once the loan is registered on title, you have what is called a Note. You have the right to buy Notes or Sell Notes to other individuals. Also no license is required to do any of this. There is a lot of old guys out there that can’t be bothered to do the leg work and want to just collect interest every month. Great thing about this is if you sell them the Note all the risk is on them and you get all your capital back.

Here is how it works in its basic form using the above example. You would have a $110,000 Note collecting $1320 a month in interest. What you do is find an investor willing to buy the Note off of you. Sometimes this means discounting the note which goes like this. Borrower is expected to pay you back $110,000 on a $100,000 loan, but since you are passing all the risk onto the other investor he might want you to take what is called a haircut. So instead of getting that whole $10,000 FEE you will only get $7000. Which means the second investor will give you a cheque for $107,000 instead of the expected $110,000. So he will get paid back $110,000 after one year’s time and you make a quick $7000 plus regain all capital. Beauty of doing things this way is it can be done in a matter of days after the loan is funded. I can usually do it in 6 days. So that means in 6 days I made $7000 off of a $100,000 loan. If you annualized that out over a year my return would be $364,000 of pure profit off fees. Of course this is unlikely due to that fact I am too lazy to hustle like that and fund a deal a week. But it can be done for sure, I get a million calls and emails from people.

I do all this with professionals and rely heavily on my lawyer to do all the paperwork and make sure I am protected. This is really the second best way in my opinion for safe investing. Gold/silver/guns and ammo are probably the safest. My mentor started in the 80’s with $5000 and now his mortgage pool of cash is up to $20,000,000. Don’t think you have to start with a huge bankroll. I got started with $10,000 and it has ballooned from there. In 6 years of doing this I have had to foreclose twice. It was quick and painless and I recovered all money owed to me, not mention in my contract there are massive fees if the borrower defaults so I kind of pray more of my loans would default. Although I prefer to keep my powder dry so I tend to sell my Notes off and just keep as much fee as possible. Also if you have to foreclose you have just as much power as a bank or the government. So you don’t have to be worried, this isn’t like the landlord/renter tenancy act that gives renters all the power and fuck us landlords who have taken massive risk to owning extra homes.

Feel free to ask any questions. This really is simple and I am happy to share more info with anyone as I gave just a brief description. There is a little more too it but it is basically pretty simple and easy to start up.

Post: #2

This is probably the most interesting financial post I have seen in a while. Does this work in the US as well, to the best of your knowledge ? I'm not sure what kind of tax privileged accounts exist in the US to do this sort of thing, however.

My question is, if all you need to start is $5000 and to be able to pay an attorney, and given the relatively low risk and high return, why are not more people doing this? The barrier to entry does not at first glance appear to be that high.

Other questions:

Where/how do you find customers/lendees?
Where/how do you find investors to buy your note?
Did you use a standard bank lending contract for the language and modify that ?
Are you doing this as an individual or did you incorporate and have the corp hold the note?
Suppose you start with $10,000. Are the lendees primarily those who ostensibly want to improve their home or are they people who just need cash fast and are using their home as their security interest?
Do people do this as their only job/source of income?

Post: #3

(09-08-2012 06:49 AM)Menace Wrote:  This is probably the most interesting financial post I have seen in a while. Does this work in the US as well, to the best of your knowledge ? I'm not sure what kind of tax privileged accounts exist in the US to do this sort of thing, however.

My question is, if all you need to start is $5000 and to be able to pay an attorney, and given the relatively low risk and high return, why are not more people doing this? The barrier to entry does not at first glance appear to be that high.

Other questions:

Where/how do you find customers/lendees?
Where/how do you find investors to buy your note?
Did you use a standard bank lending contract for the language and modify that ?
Are you doing this as an individual or did you incorporate and have the corp hold the note?
Suppose you start with $10,000. Are the lendees primarily those who ostensibly want to improve their home or are they people who just need cash fast and are using their home as their security interest?
Do people do this as their only job/source of income?

I am sure you can do this in the US as well. We have huge private companies in Canada that do this as well. You usually see their ads being ran on the TV guide channel or some hokey commercial on the radio. I will look around and see if I can find bigger companies similar to this and re post my findings. As for your other questions:

1. Finding clients is easy for me now. I pretty much get all mine from referals from mortgage brokers across Alberta. These are the clients that can't quite qualify for a prime loan from a " A " institution. Also alot of guys advertise on kijiji, craigslist, in the paper and I think the best way to advertise is to do monthly mailers. Which I did along time ago to get started. You will get a hundred phone calls right away and a small percentage will actually have enough equity to qualify.
2. Again finding investors to buy the Note came mostly from the brokers. Once you get into the industry it is just a matter of time before you build a huge database. I have a sheet with over 300 individuals who buy Notes. ALso you can advertise just like you would to bring in new borrowers. It is very attractive because of the tax structures in this country and alot of people are looking for new ways to invest within their RRSPs because they have finally figured out mutual funds are a scam.
3. The contract I use was modified off of the one my mentor gave me. But most real estate lawyers should have a basic template they will work off of. My contract is not very long, 5 pages. Just ask around and find a good real estate lawyer and he/she should be able to provide you with a bullet proof contract for your State.
4. I already had a Real Estate holding company for my properties so I just used that incorporation when I started. But to take advantage of the RRSP's benefit and TFSA those have to be in individual names. I now also use a Limited Partnership structure and I do the same thing with my friends and families RRSP and TFSA accounts. If I was you I would open a corporation up in a state that has no income tax. Then I would declare all money made by the corporation to be income. That way you would only have to pay a small income tax to the FEDS and the rest you get to keep.
5. Try to only lend money to people who are using it to reduce debt, fix up their house, starting some sort of business and or an investment. I decline people if they come right out and tell me they are buying a new vehicle or going on a vacation. Borrowing money to spend instead of investing is what sunk the Western Worlds economies. You will be getting a glimpse of the problem at the local level.

As for why more people don't do this ? Biggest reason is they don't know. When I started the Limited Partnership, almost none of my relatives or friends were even aware of this. I believe it has alot to do with the Banks and Government trying to monopolize the RRSP and mutual fund industry. They want to control all the capital and throw it into their ponzi schemes. This way of investing is outside the norm but it puts you in control of your own financial destiny.

Post: #4

How did you calculate a monthly payments of $1,320 per month?

Post: #5

Great datasheet. Thanks for the good information.

I have been thinking about investing some recent gains in the stock market in real estate, but I don't know if I want to be a landlord. This looks like a better option.

Questions:

-who signs the post dated checks? The person who took out the loan?
-does if have to be done like this, or can you simply set up a payment plan with your address to send the payments?
-if after a year, what happens if they can't pay off the original $100k? That is they want to extend another year of interest? Do you agree or say pay?
-what if they stop making payments? Can you begin proceedings against the mortage immediately, or do you have to wait?
-Is there any kind of license needed to to this? (I am in New Jersey)
-is there any reason to only loan to people near where you live, or can they be elsewhere in the country?
-How do you know the value of the home? Do you base it on comps or an appraisal?
- you said you only had to foreclose twice, does this mean they did not pay back the loan so you proceeded in court to take the house and sell it? What is involved in doing this and how much does it cost?



I am sure I will have some more questions.

Post: #6

I am looking into doing something similar in the US. Not the note selling...

If you are going to sell notes to investors, you really need to understand what type of investment they are looking for so you can write up the note with that in mind. Otherwise, you will be taking a HUGE discount (if they will even buy it) which wouldn't be worth it. I looked into selling Notes a long time ago and the discounts were way too big for my liking.

You can also sell payment portions of the note. Sort of like time sharing for notes. haha There is a lot of creativity in that market.

Even if you don't sell the notes, it is better to still have it in the back of your mind. It is always a great move to be able to liquidate your holdings if the need arises.

Post: #7

(09-08-2012 06:49 AM)Menace Wrote:  My question is, if all you need to start is $5000 and to be able to pay an attorney, and given the relatively low risk and high return, why are not more people doing this? The barrier to entry does not at first glance appear to be that high.

Other questions:

Where/how do you find customers/lendees?
Where/how do you find investors to buy your note?
Did you use a standard bank lending contract for the language and modify that ?
Are you doing this as an individual or did you incorporate and have the corp hold the note?
Suppose you start with $10,000. Are the lendees primarily those who ostensibly want to improve their home or are they people who just need cash fast and are using their home as their security interest?
Do people do this as their only job/source of income?

I don't know how this works in Canada, but private lending in America is a multi-billion dollar business.

1) Customers - you can advertise. If you open your newspaper, you'll see the ads all over the classified section.

2) Investors - there are note buying websites. Most of this is done through brokers.

3) lol @ a standard bank lending contract. That's your starting point, but if you don't know what you're doing, judges typically hold the language in the contract against the person who wrote it.

4) You can do this as an individual or an entity (llc or corporation). It's better to do it as an entity for taxation and liability purposes.

5) What do they do with the money? - This is the hard stuff, the reason that people can make money doing this, they do (or should do) a lot of investigation of the borrower.

6) if you have this kind of money to lend out, you're playing at a different level to begin with. You can definitely make a living doing this. If you've got a big stack of cash, you can lend it out and live on the interest. Most people in this business are middle men.

They find the borrowers, vet them, put up their own money, and then sell the note to long term investors and take their profit.

This concept of being the middle man is at the heart of a lot of different businesses, because the middle man does a bunch of work.

He has to sell the borrower on taking money from him, he has to do all the leg work in figuring out if someone is a good credit risk, and then he has to sell the long term note holder on the value of the note, that the end borrower is a good risk.

WIA

Post: #8

It sounds like a good idea, but I would strongly not recommend engaging in this type of investing without first seeing a lawyer with knowledge of this area. Otherwise, a poorly drafted contract could lead to you losing all of your money fast.

Post: #9

(09-08-2012 02:53 PM)Blanco Wrote:  How did you calculate a monthly payments of $1,320 per month?

Haha...Whoops did my calculation a little wrong. It is $916.67 a month.

Post: #10

(09-08-2012 05:23 PM)jdelisi Wrote:  Great datasheet. Thanks for the good information.

I have been thinking about investing some recent gains in the stock market in real estate, but I don't know if I want to be a landlord. This looks like a better option.

Questions:

-who signs the post dated checks? The person who took out the loan?
-does if have to be done like this, or can you simply set up a payment plan with your address to send the payments?
-if after a year, what happens if they can't pay off the original $100k? That is they want to extend another year of interest? Do you agree or say pay?
-what if they stop making payments? Can you begin proceedings against the mortage immediately, or do you have to wait?
-Is there any kind of license needed to to this? (I am in New Jersey)
-is there any reason to only loan to people near where you live, or can they be elsewhere in the country?
-How do you know the value of the home? Do you base it on comps or an appraisal?
- you said you only had to foreclose twice, does this mean they did not pay back the loan so you proceeded in court to take the house and sell it? What is involved in doing this and how much does it cost?



I am sure I will have some more questions.

The borrower signs and hand overs the cheques. You can do email money transfer or EFTs. Really anyway that is convienent for you. I like old school cheques just because the paper trail is easier to follow should any problems arise.
Depending on the circumstances I will renew. I do try to get paid back or reduce the loan amount. If they are having issues I have my brokers try to help them out and get them a Line of Credit.
If someone misses a payment I give them 10 days and then the demand letters goes out from my lawyer and we start filing the paperwork to take the house away.
No reason to wait and no license required.
I have done loans in BC even though I live in Alberta. I only do that because I have lawyers I trust in BC and I know their market pretty well and laws. I would try to keep it as local possible until you get more familiar with the process.
For property value I look at tax assessment and sale comparisons. If I can't put a value on it myself I will accept an appraisal if they have one. If need be I get an appraisal ordered. But If I have to go that far I usually lose interest and wait for something else.
The 2 times I foreclosed it went pretty smoothly and I think start to finish was under 90 days for both. We had open and shut cases so I didn't have to pay my lawyer anything up front. Lawyer just took his cut out of the sale proceeds. I have great relationships with the lawyers I use and I suggest you build the same rapport. Goes a long way and plenty of free advice. I also send them alot of business so I don't need retainers anymore.

Post: #11

(09-09-2012 07:38 PM)BIGINJAPAN Wrote:  

(09-08-2012 05:23 PM)jdelisi Wrote:  Great datasheet. Thanks for the good information.

I have been thinking about investing some recent gains in the stock market in real estate, but I don't know if I want to be a landlord. This looks like a better option.

Questions:

-who signs the post dated checks? The person who took out the loan?
-does if have to be done like this, or can you simply set up a payment plan with your address to send the payments?
-if after a year, what happens if they can't pay off the original $100k? That is they want to extend another year of interest? Do you agree or say pay?
-what if they stop making payments? Can you begin proceedings against the mortage immediately, or do you have to wait?
-Is there any kind of license needed to to this? (I am in New Jersey)
-is there any reason to only loan to people near where you live, or can they be elsewhere in the country?
-How do you know the value of the home? Do you base it on comps or an appraisal?
- you said you only had to foreclose twice, does this mean they did not pay back the loan so you proceeded in court to take the house and sell it? What is involved in doing this and how much does it cost?



I am sure I will have some more questions.

The borrower signs and hand overs the cheques. You can do email money transfer or EFTs. Really anyway that is convienent for you. I like old school cheques just because the paper trail is easier to follow should any problems arise.
Depending on the circumstances I will renew. I do try to get paid back or reduce the loan amount. If they are having issues I have my brokers try to help them out and get them a Line of Credit.
If someone misses a payment I give them 10 days and then the demand letters goes out from my lawyer and we start filing the paperwork to take the house away.
No reason to wait and no license required.
I have done loans in BC even though I live in Alberta. I only do that because I have lawyers I trust in BC and I know their market pretty well and laws. I would try to keep it as local possible until you get more familiar with the process.
For property value I look at tax assessment and sale comparisons. If I can't put a value on it myself I will accept an appraisal if they have one. If need be I get an appraisal ordered. But If I have to go that far I usually lose interest and wait for something else.
The 2 times I foreclosed it went pretty smoothly and I think start to finish was under 90 days for both. We had open and shut cases so I didn't have to pay my lawyer anything up front. Lawyer just took his cut out of the sale proceeds. I have great relationships with the lawyers I use and I suggest you build the same rapport. Goes a long way and plenty of free advice. I also send them alot of business so I don't need retainers anymore.

How did you find the lawyers you use? What are the qualifications you should look for? Do you know anyone in NY/NJ?

Post: #12

BIG,

Is this your full time job? Did you start out doing this while working somewhere else? The reason this is all appealing to me (aside from the money) is that I could, in principle, eventually handle all the legal work myself.

Post: #13

If you are looking for a lawyer you need to hit the pavement and go talk to some. Also try to find someone who does equity lending just by calling numbers off the ads in the paper. The one real big thing I would look for is someone who has gone to court to foreclose because of a payment default. You want the guy who has been thru it before. All the other things are pretty much standard and done by the legal assistant. So it is important to find a guy with the court aspect of it all.

Post: #14

(09-10-2012 10:18 AM)Menace Wrote:  BIG,

Is this your full time job? Did you start out doing this while working somewhere else? The reason this is all appealing to me (aside from the money) is that I could, in principle, eventually handle all the legal work myself.

No it is not. I do about 4 or 5 different things now. I have no real job, but this could easily be my full time job. You could very easily handle all the paperwork yourself if you wanted to. We just use the same contract over and over so the lawyer barely charges me anything. I also enjoy my freedom and traveling so that is why I keep the lawyers involved. I really think this is one the greatest ways of investing besides options trading

Post: #15

I have been looking for these ads in the local papers, and I have not seen one. What should I be looking for? Do you also use the internet?

Post: #16

(09-12-2012 12:06 PM)jdelisi Wrote:  I have been looking for these ads in the local papers, and I have not seen one. What should I be looking for? Do you also use the internet?

Look for anything that says " need money today " " need money fast " "can't get a bank loan " " Do you have equity in your home "

I use websites as well. I am sure they are different from region to region. In Alberta I use kijiji and in BC I use craigslist.

Post: #17

this shit is too complicating. I'll just stick with nickel and diming people on lendingclub

Post: #18

(09-12-2012 03:26 PM)chyamor Wrote:  this shit is too complicating. I'll just stick with nickel and diming people on lendingclub

Honestly it isn't at all. Explaining it over text or email is. But I could explain everything about it under 10 minutes. Because it is so simple you could have your first deal done the next day.

But hey, to each their own. If lending club is your bread and butter than stick with it.

Post: #19

(09-10-2012 10:57 AM)BIGINJAPAN Wrote:  I really think this is one the greatest ways of investing besides options trading

Would you mind doing up a data sheet on option trading? Or posting a link that can explain it clearly? Thanks!

Post: #20

I'm glad BIJ referenced this in another post. Been doing some research on it as far as the legalities in the US.

Apparently the Dodd Frank Act and the SAFE act are things you have to watch out for but it is feasible.

Post: #21

This is what is known in the US as "hard money" lending. And the OP did a pretty good job of explaining how it works.

I work for a hard money lender. We don't use a securitization pool though, like what the OP described. We do all of our First Trust Deeds with private capital, usually no more than 5-6 lenders financing a note. It sounds like whoever does the originations that the OP is investing in is using a large pool of investors, so the percentage of the note that you end up owning is very small. It's a great way for people with not a lot of money to invest to get great returns. My company almost switched to that but decided against it.

The owner of the company uses a very conservative 50% LTV, which is very conservative.

Post: #22

Easy Money,

do you think its a good deal for an investor to become a private lender on a hard money deal? Also, is it a good deal to buy notes from a hard money lender?

Great thread, BigInJapan.

Post: #23

Easy money: I use my own capital for the most part. I like to sell things off though to other long term investors who are also just single individuals, or family trusts. Although I have sold some bigger notes off to pension funds. I like to churn fees as much as possible.

Hotwheels: Even with all the new laws in place I have yet to hear about people unable to do equity lending. I don't talk to american lenders all that often but I have a few friends who are brokers that represent some equity lenders and even in the communist state of California they are still able to do business.

Sucio: I would look into buying notes as a good way to earn passive income. But try to find a lender that will take care of any problems. When I sell a note off I don't look after missed payments or collection of funds after the loan is up. But a lot of lenders will take care of administrated issues if you are an investor with them

Post: #24

(02-14-2013 08:46 PM)sucio44 Wrote:  Easy Money,

do you think its a good deal for an investor to become a private lender on a hard money deal? Also, is it a good deal to buy notes from a hard money lender?

Great thread, BigInJapan.

Yes, absolutely. It's one of the safest investments out there, if done properly. But remember, anyone selling you a guaranteed investment is selling you a bill of goods. All investments have their associated risk, but I completely endorse it. The key thing you wanna look for in a hard money deal is LTV % and the reputation of the originator. See the moral hazard in the industry works like this: every originator makes money two ways: from the percentage of the note they keep (this is called servicing) and the fees they charge to get the loan done (also known as origination fees). Now, the fees is based on percentage of the amount being lent. Its typically in the 2-4% range. So if I lend you 100K at 3 points at say 9%, you're gonna eat 3K of that in points. and the originator is gonna sell that note at 8% and keep 1% of the annual interest for himself. A conservative LTV is how you cover your ass with this investment. Because if property values drop and you've lent more than the value of the property, you're fucked. Most hard money lenders don't report to credit bureaus, so there's no real problem for the borrower to walk away from the property in that situation. So if the originator wants to be greedy, they'll use high LTVs hence getting more money in points. Points are never shared with the owner of the note; they're kept by the originator. So the hazard is that they'll jack up the LTVs to make more on the front end in points, because ultimately the risk is undertaken by the note holder. This all works well and good until the market collapses, which it did, and when it did here in Cali a few years ago 75% of the hard money equity lenders in the industry went kaput because their portfolios went into negative equity (they had lent more than the properties were worth on the majority of their loans and the losses couldnt offset the gains from the loans that kept performing).

(02-14-2013 09:21 PM)BIGINJAPAN Wrote:  Easy money: I use my own capital for the most part. I like to sell things off though to other long term investors who are also just single individuals, or family trusts. Although I have sold some bigger notes off to pension funds. I like to churn fees as much as possible.

How do you market your notes?

Post: #25

What is the least amount of money you can start this with?