Alfonso: When you have exhausted the traditional lenders as you grow your portfolio the area of private money comes up. The replay of this webinar is covering this in detail with three experts from the private lender space.
Also Claire Drage shares a market update about mortgage deferrals and credit bureaus.
Claire Drage
Susan Flanagan
Reid Quan
Sarah: Yes. I'm excited. I'm excited to learn about private lending. Now, do you want to go through the agenda?
Alfonso: Yes. I'm going to cover a little bit above the agenda tonight, first off, right off the top, we're going to do a little bit of a market update. So, for those that were attending the live events of The REITE Club, we were all together in a room and we could give each other high fives instead of digital ones on the clapping machines. But Claire always had news you could use. So, this is going to be similar to that. A little bit of market update on what's going on with credit bureaus, deferrals updating and just how the banks and lenders are dealing with that.
And then she's going to join Susan Flanagan and Kwan on our panel. And we're going to be talking all about private money. We've had some amazing questions. So, thank you guys. All the members of The REITE Club nation that have sent in your questions ahead of time being on this, having these amazing people on our panel, get those questions.
If you do have questions tonight, make sure that you put them in the chat, start them with the queue, and if they are directed to someone specific make sure that you put their name there as well, too. Okay. So, we only have one hour, we're going to try to get to all the questions, but if we don't, we're going to have plenty of time.
You're going to see all of our panelists' contact information up on the screen, and you'll be able to reach out to them and get contact with them. Without further ado I think we're going to we're going to bring on Claire and where she's going to give us a little bit of an update on what's going on with credit bureaus, all those mortgages that were deferred when we were talking about an April and May and how that's coming out in the wash and how real estate investors, housing providers, how we should be aware of that and what to do. Claire, are you ready?
Claire: I definitely am. How is everyone? It's so good to see everyone and miss you guys, a virtual hug right now. So, it's yay high five. So, we have a really important sort of subject matter to discuss, and that is a deferral of payments. So, remember back in March, we were all super excited and we're not excited but concerned.
There was an offer, lenders and creditors. Initially it started with mortgage payments where you had the option or was definitely encouraged to defer mortgage payments with your lender up till six months. Now the whole plan of mortgage deferral in particular was to really try and minimize the biggest financial burden for those Canadians that were directly and financially impacted by COVID-19.
They'd already lost their jobs. They'd already had their hours cut. Maybe they're on the brink of financial disaster anyway. And just one week of less pay was enough to tip them over now. Also real estate investors might've looked at mortgage deferrals as a great way to try it. Get extra cash flow, but also let's face it. There was a lot of fear back then.
There were a lot of, we didn't know if her tenants were going to pay. We didn't know if we'd be able to borrow more money. There was so much uncertainty. So, not only did regular Canadians that should have deferred, but also hundreds of thousands of regular Canadians that could differ did.
As we all know, hundreds of thousands of Canadians are deferred mortgage payments, and it also followed into a line of credit cards, car loans, student loans, where you were allowed to defer your payments. Now, we always know nothing's free in this world. There's going to be consequences.
We know of course, one of them would be having to pay a little or even a lot more interest down the road as you have to catch up eventually. And the other repercussion was, or consequence if you like, was that banks need cash flow to as real estate investors. We love cashflow, but banks need cash flow too.
They need money coming back that they've loaned out by way of interest and some principle so they can relearn it out again. So, we did see a few lenders that started to change their lending guidelines in order to help mitigate their lack of cash flow coming in now we didn't really know. No one knew no one we'd never come from because this before no one really knew what the impact would be on our credit reports.
As mortgage brokers and we have some great people on the panel today, also mortgage brokers where we are now starting to see how different payments are reporting on specifically the Equifax credit bureaus. So, here's the scoop for every debt or creditor that you deferred a payment to.
There is now a narrative that is added against that individual account on your credit bureau, not the narrative simply states that your payment history has been affected by nature or declared a disaster. And it will also record for how many months. So, a lot of you might know that each account on your credit bureau is ranked from one, which means yay, mortgage payments have been paid, or payments have been paid on time. You have a one rating, a one meeting, or it can be as bad as a nine, which is a collection. We're not seeing that impacted, that's not changing. It's still showing us one.
The credit score is not impacted, but the credit report is, and the reason being is because all current and future creditors, those that might extend you a mortgage or a line of credit or a credit card are going to clearly see all the deferrals you made. So, for some people, this might come as a surprise, but my bank told me it wouldn't impact my credit score. That's true. It doesn't impact your score, but what it does impact is how a new creditor or a current creditor extends your credit in the future. And the fact that they're going to ask, why did you defer? What was the reason?
Let me give you a few examples. We've recently had a client who wants to purchase their fifth rental property. They already own a principal home. In essence, it's six properties. They had very quickly decided they wanted to defer all mortgage payments and also a couple of high-end lease payments, not because they had to, they weren't in financial hardship, they still had hundreds of thousands of dollars of cash in the bank. Tenants were still paying, but it was really out of sheer panic, really just not sure. And let's face it. Everyone else was doing it.
For some, it became bragging rights on how many mortgages you could get deferred. So, the impact now is they are buying their fifth property and we need to explain to a new bank because they've kept with their existing bank, a new creditor. Why did they differ what's changed and why don't they just pay? Because they had hundreds of thousands of dollars in a bank account. So, in this particular case, we had to go through four different lenders before we found one that was willing to accept their application.
Now, the reason for that is you've got to understand that right now, believe it or not, all banks and lenders are busy. They also still have cash flow issues, just some non-performing rental properties do. So, they're being picky. The bottom line is they're being picky. Mortgage brokers will tell you that there's guidelines, there's exceptions to the guidelines and there's pixie dust. If you've deferred your mortgage payments then pixie dust might not be there.
Exceptions might be limited. They might be sticking to the guidelines. So, what do you do? So, if you've delivered your payments, because you could not because you should, because you weren't in financial hardship. My recommendation would be to get back on track. Now, get those payments restarted and be prepared that when you apply for new credit to answer the question, what were the circumstances? Why did you do it? And how quickly did you get back on track? And as long as you're proactive with that explanation, it shouldn't have any impact on your future borrowing.
You've just got to be prepared to answer the question. Common one we will hear is I just panicked. I didn't know. There was this whole thing about, tenants weren't going to pay. And I was really worried. I always say the bottom line is a deferral is better than default. So, sometimes the response could be, you know what? I was concerned that my tenants wouldn't pay and it would impact my ability to keep my payments up to date. Again, deferral is always better than default.
If you can get back on track, let's see those credit reports having that narrative is going to remain, but we really want to make sure that we have a good short-term reason on why you did it so that when, even more than does open up, you have access to future credit. That was what I really wanted to make sure we covered this evening was really the real impact now of payment deferrals for the right people. It's good. You just gotta have a good explanation.
Sarah: Awesome. Thanks so much Claire. And that was really insightful. And this is why having a great mortgage broker on your side is going to make or break how you scale, how much you can scale. So, don't go straight to the bank guys, work with a mortgage broker and Claire, in my opinion, is one of the best. So, thanks for all your insights. Awesome. And Claire will be on the panel.
I'm going to introduce our panelists and then we're going to be asking them some questions. And one of the things that we do often is ask our panelists to give us some really cool facts or like little fun facts. And so I'll introduce Claire Drage, since Claire you're on right now and you just finished speaking, but guys reach out to Claire if you need anything mortgage related financing related from The Windrose Group. And here's some fun facts: in 1987, Claire and her new hubby moved to Tenerife, one of the Canary Islands, in the Canary Islands and stayed for 11 years. Pretty cool.
One of her favorite movies is Willy Wonka and the Chocolate Factory. And apparently you absolutely hate peas, but you love brussel sprouts. So, fun facts for those of you that know Claire, but may or may not know those things. But welcome, we're really excited to be asking you some questions tonight, Susan, how are you, Susan?
All right. So, Susan Flanagan, Private Money 4 Mortgages, loves cruising, especially to warm places. She has a two week transatlantic cruise booked for Europe from Europe to New York in December, 2020. You're a passionate golfer. And if Susan could, she would be on the golf course five days a week.
She was also an ER nurse for over 30 years back in her prior world before starting Private Money 4 Mortgages. Welcome Susan. All right. Reid Quan, is from Breakwater Investments and he knew that he had a passion for real estate investing as early as age seven. Another fun fact, he studied in a university and played college level hockey in the US. He's an AVID freshman who has moved over 10 times. So, we just thought we'd throw some fun facts so that you guys can get to know the panelists a little better. So, we're going to start with our questions.
Alfonso: Awesome. Welcome aboard. Thank you guys so much for joining us tonight Claire, Reid and Susan, and yeah, we're going to get right into it. And we've had some amazing questions from The REITE Club nation. We always rack our brains with some questions. So, we're going to start off the top with some general information for all of the panel here. The first question is what are the pros to borrowing and or lending private money? Susan, let's start with you.
Susan: Okay, excuse me. The pros are, it's easy money. If that'd be the easiest way to put it, it's accessible. Whereas sometimes going to the banks, as people know, you're jumping through many hoops. So, private money is a lot more accessible. But one of the cons of both private money is it's much more expensive. Those are the two simple facts I would say right off the bat.
Alfonso: Okay. And Reid, do you have any, maybe additionally in terms of pros to borrowing private money or lending private money?
Reid: Absolutely, I truly believe private money is a really good vehicle. I think the opportunity to help on last minute transactions or things help someone, grab that property, that it's a hot ticket item. Getting that money fast as a short-term vehicle. I really liked the way private money can help there. I think there's a lot of creative people and a lot of flexible people who are private lenders.
I think they could think outside the box and make deals work that whether it be a conventional bank and something like that maybe does not experience doing it. I also love the fact that there's a lot of specialists too. And they like to specialize in a certain asset type or something like that, where you know who to go to .
Alfonso: That's right. If you're feeling like a good steak from your favorite steak house, if you want sushi, you go to the sushi, and there they have their different preferences. Those are great points by Susan and Reid. But Claire, you had mentioned, there's credit score, there's credit report and maybe private lenders are any other pros that you can add to Susan and Reid, that's a really critical thing that private lenders ask for.
Claire: I think that, when you go to a regular bank, they have the five C's of credit and their big focus is obviously the collateral, the credit score and the ability for the borrower to make the payments. That's still really important for a private lender, but it allows a lot of private lenders to be more flexible with really focusing on character and your ability to follow through.
My biggest promise, I think from borrowing, is economies of scale. If you're a big time flipper or doing bearers, and you're doing 4 to 10 a year, a month or a week, you don't have the time to go to the bank every five minutes and get me qualified every time you want to make a change. So, it's the ability for economies of scale.
I'd also add that a lot of people go the joint venture route. Because they think private money is too expensive without just doing the math. I'm not saying, I'd say it's another option. It's an alternative. I think we've all heard great successes with having a joint venture partner that qualifies for regular rates. But if the property is not bankable and it's not up to standard and it's not all compiled, it's not AAA plus, then the disadvantages you can probably get declined at the last minute. If you're a lender, you're loaning against bricks and mortar. So, it's a great way to invest in real estate without being a landlord.
Sarah: Absolutely, some great pros for sure. And there's probably many others as well and utilizing private money. And I will say Claire, like you said, sometimes that's a better route than JVs. If you've got a longer-term plan and you can still do it. And it makes sense using private funds.
Now, there are some risks and there are some cons. Just like every strategy, loaning and borrowing has some cons when it comes to private borrowing or private money lending. Now, Reid, why don't we start with you? What are some of the downsides when it comes to private lending?
Reid: I'll start with, maybe it could be the elephant in the room for some people I'm not too sure, but at least coming from the lending side. I think there are bad apples in the industry like many others. So, I think you have to be really careful who you work with. I think it puts a bad taste on the good guys, tasting notes, I should say. And I also think about the risk of not having a good broker. I think Claire, you summarize a ton of great stuff in that opening statement and everyone's chimed in as well, too.
So, having that right broker, who has those good relationships with solid private lenders? I think it's a great option. I wholeheartedly support it. I think that's a really good way to make sure you're mitigating the risk there.
Sarah: All right. That's great. And Susan, what are your thoughts on some risks when it comes now? You do just for the audience, are you on the lending side or the borrowing side?
Susan: Excuse me, I'm dealing with both sides. I have a huge list of lenders. And then people are calling to get the mortgage as a broker. I'm looking for a lender for them. So, some of these people are actual people like you and I had, it could be an investor that has a portfolio, but also has registered funds.
They want to be lending, but it also could be somebody like Reid that represents a huge portfolio of money. But it's all private lenders that I work with. I don't do regular mortgages at all. Just the private side.
Sarah: Excellent. So, now what are some of the risks and the downsides of private lending fraud, both sides then?
Susan: First, if the bank said no, now the private lender steps up. And in many cases, the bank might've said, no, for reasons that are ridiculous, but in some cases it really is warranted. So, you're a higher risk. So, that in itself, people have to realize if they're going to be lending their money that they have to cover it.
They have to have security there. They have to have a good loan to value the house. They have to know the location, like there's different aspects that they need to look at if they're going to lend their money. And I always say to people, it's, you gotta look at first off the story has to make sense.
The property has to make sense. Whether it be not just the loan to value where it's located, how marketable it is. And the third thing is the exit strategy. And if those three things are obvious that can work, then I will present them to my lenders. There's many that come across my desk, that nobody even hears about because I won't touch them. They're too risky. So, Claire, I see her shaking her head. Yeah, I look at it then I'm representing a lender, but I'm also representing a borrower. I'm trying to make it a truly win-win situation for both sides.
Sarah: Thank you. Thanks for sharing. Very true Claire, anything that you'd like to add to that question?
Claire: I think the only thing I would add, they're all such hugely valid points. I think I'll take some words from Danielle, she says, trust, but verify, trust the information you're given, but verify, and that verification isn't just my word for it. I promise they're good. They'll pay you back. That's not good enough.
A lot of people will say, private money, it's less paperwork. I would actually challenge myself. It's just as much, if not more, because we need to build that character reference. But also as a borrower and a lender, you need to trust, but verify your lender. And the borrower has many great retouches on it. There are many great lenders, private lenders, individuals that I've spoken to. And I talked to them about, what's your penalty, what's your payout? What's your lawyer's average legal fees. And, I've heard that if they pay it early, it's a $7,000 fixed penalty.
You got to know the payment, the interest rate going in and the interest rate to get out, as well as the entire fee structure. I've had lawyers charge $5,000 for one end and I'm like, you've got to trust, but verify. So, we have a very stringent qualifying process and we will actually qualify the lender's lawyer because we need to be sure that we understand the lender's lawyer side of things that can get out of control. So I guess, trust, but verify, and that verification should be from third parties, not just my word for it.
Alfonso: That's great advice. And I think, being an industry like rent to own where, there's negative connotations and things around it, and then you hear private money. Listen, I'm an Italian from Hamilton. So, when you hear private money, you think of the godfather movies and all this stuff that you hear. And those kinds of things.
Definitely do your homework and understand what's available. Having track records both ways if you're borrowing and if you're lending, right? Because like you said, those fees out up are those costs that are unseen.
Those can basically make me sometimes make or break and impact margins on profits, on deals. I guess that's a good segue in terms of what's available out there today and I know that's a really general question, but these are the general questions. So, maybe like some real life examples, like some projects that are coming across your day in the last couple of weeks or so, in terms of the rates and the points and the borrowing fees and all that kind of stuff. How about we start with you Reid on this question?
Reid: Sure. Yeah. And I'll actually just completely segue to our shop, cause COVID is a topic right now. I'll use that as part of it because it's true. It's the fact of the matter, it's true. Typically our organization is lending at around 7% rates and 1.5%, 2%.
We're typically private first mortgages. We do the odd second. But we're also very conservative. So, we're only 65%, 70% loan to value on most, almost days, both residential and commercial and across Ontario. I would say pretty competitive and a lot of spaces and with COVID and things happening, we're starting to see other people not lend, but ourselves we're trying to mitigate that.
We're probably closer to, I don't know, 9%, 10% right now. Maybe, if we are going to lend, we've been on the sidelines quite a bit. It is creeping up for a lot of lenders in terms of if they are interested in lending their money and you have to pay the price as well to do that, which is good and bad. But in most cases, people are hesitant to pay that.
Alfonso: It sounds almost like a fundamental economic right, supply demand. Who's got it? Who wants it? Kind of thing back into, so, Claire, how about yourself? What are you seeing with some of both sides borrowing, lending? What kind of rates points?
Claire: Yeah, with the private lending, we were rather like Reid, primarily first mortgages. We've picked our ideal borrower and our ideal borrower is not your regular homeowner. It is a flipper or someone who's doing BRRRRs. They have to meet three criteria. It must be their full-time gig or be closely related work in industry closely related.
They must own their principal home and they must have good to excellent credit. And the reason for that is we want to see that they've got more skin in the game because we will lean against more than one property for a higher loan to value. So, for example, we're going to 80% loan to value, very similar to Reid. We're looking at 7% to 8% interest rate, 2% lender fee and 1% broker fee where we're getting into the 90% loan to value and even blanketing and going a bit higher than that.
We're adding a couple of points, not to the broker fee. That's still 1%, but typically you're seeing an extra 1% or 2% added in combination with the interest rates and a lender fee. Bottom line up to 80% loan to value. You're looking at around a 9% to 10% APR. If you want to go 90 to a hundred, and then you're looking at 10% to 12% APR, plus a 1% broker fee.
Alfonso: Awesome. And Susan yourself?
Susan: Okay. Actually, my most common mortgage coming across my desk is similar to what Claire was saying. It's from real estate investors, because that's mainly who I network with as well. I'm doing a number of second mortgages as well as first. And they're usually ones that somebody is taking from a property.
They already have access to those funds to maybe use for their down payment and rental costs of another purchase. So, there's really two transactions going on there. For the most part, I'm just suggesting to people that they're already organized beforehand with numbers, thinking of worst case scenarios on a first mortgage.
I think to themselves 10%, even if I could get them to say 7 or 8 and 2, or 8 and 1 or whatever, but I say, run your numbers at 10%. And on second mortgages, run your numbers at 12% and 13%. But ideally I try to get a first mortgage for people anywhere between 7 and 10 in a second, between 10 and 15 would be the maximum that I'm looking at because we won't go for anything too risky.
The thing I am noticing, it's funny in one breath. Yes, as Reid said, lenders are being more cautious. We're seeing that the loan to value might be lower than normal. What they would have lent on 75% might be 70 right now, or 65. And the rate might be the point, or there might be an added point on the interest side, just because they're, they're a little nervous, but on the next side of things, what I'm really seeing is more and more lenders are coming into the picture these days, because people are not happy where their money is elsewhere.
As people are relaxing about COVID they're not they're not as nervous as they were marching. Because I had a number right now of people that are like, come on, hurry up, get me a mortgage. If I have more lenders happening now, then the mortgage is a happy balance at times you need to constantly do. So, I'm just finding it interesting that everybody now is trying to get their money out there in a mortgage rather than in the mutual funds or the stock market, like they were.
Sarah: I'm finding that too. I think now it's going to be okay. We've got to find the right deals in order to go and access the private money. But as you guys can see if you're listening to this as Claire, as Reid as Susan mentioned, like money is easy to find. You just need to know where to go, but it's very accessible. And some of you have talked about the next question with how lending is changing or how it was affected during these times.
But I do want a little bit of a clarification cause we're talking about points and we're talking about rates and we don't mean we may not all know what a point is and I think it would be important to at least clarify that.
Everybody that is new or that may not have worked with private money or lenders before understands what a point is and what a rate is. And maybe Claire, you can talk about that, but then even take it a step further and say, when is it better to have less points versus more points or higher rate or lower rate? Because it doesn't make sense.
Claire: Absolutely. So, obviously, you've got your interest in it. So, the interest rate in this example, let's say it's the first mortgage at 7%. And then the lender might say I want 200 points. So, we work in like basis points, which is basically 100 basis points is 1%. So, when someone says, I want two points, I want 200 basis points. They basically mean the same thing. They want 2%.
If I take a one-year term and I have a 7% interest rate and I have, let's just keep it simple: a 3% or a three point or 300 basis points in a lender. That's equivalent to 3%. Now, that's 3% on an annualized basis if I keep that mortgage for one year. So, in essence, my one year rate, my cost of borrowing, I should say is seven plus three.
10% now, yes, technically you need to add on your broker fee, your legal fees, appraisal fees, but my kind of interest cost. If you're alone it is a combination of the interest rate and those points. Now, if I only have the money to borrow for a year, but I only use it for six months, then I still paid that lender fee. Those points, whether I break it in six months or I use it for the whole year.
So, in essence, the shorter time you have private money, the cheaper it is on an annualized cost of borrowing basis, but you have to understand the points or the lender fee or the basis points. However, it's communicated to you. That is a fixed, flat cost that you don't get back. If you pay back early, it's almost like the lender's premium.
If they're going to loan you a hundred thousand dollars and they're putting in a 3% lender fee or 300 points, then they're only going to send you through the lawyer, 97,000 on closing, but you are going to pay your 7% on the full a hundred. So, you're basically going to get less on closing because that lender fee is going to be deducted. So, hopefully that wasn't too long-winded.
Sarah: No, it was good. And I thank you for clarifying it because I think it's important as we keep talking about this, that everybody has that ability to grasp the fees, the upfront fees, the points and the rates.
Alfonso: You guys here on this webinar then in your lawyer's office or on a virtual call cause I'm putting my hand up there, cause I got that lesson the hard way with a private lender, very similar numbers, but better than you guys hear it here in a lawyers office side.
Susan: Can I add to what Claire. That also too, because there are two different things, really. That's why it's so important from our perspective to really hear the full story from the borrower of what their true needs are. Because if this is somebody that they really need that they have a cat that they're not paying as much right up front, we try and organize everything that, yes, the lender still gets the fees they want, but it can be set up differently. It may not come out as a lender fee. It might be added there. There might be a different setup with penalties if they pay out earlier. Like again, you're trying to make it that it's a win-win.
Sarah: Yeah, absolutely. So, the next part of what we're going to go through is just individual questions for each of you guys. But before we do that, I do want to ask a question from the audience. And I'm going to go ahead and pick one from Ellen who asked when evaluating a revenue property, do private lenders consider the borrower's salary and credits as a more important factor or the property's revenue generating ability more important? Or is it something else who wants to take on that one?
Reid: I'll start on that one. Just and feel free for anyone else to prove me wrong or to say it wrong. It says still do care. Okay. We're equity lenders. For us, we really care more about the property. We want to see what it's producing, where it's located and the pros and cons of it. We want to see the structure itself, whereas some other lenders may be more focused on how much that borrower has available or how much. More like the nuts and bolts of it, I'm going to call it as opposed to us where we're truly ESB care boat criteria. And we do have a criteria. We have a board profile much like Claire mentioned there, but it's a little different as true equity lenders or more so inequity lenders than it is for others that are a little more concerned about some other things. Okay. Awesome.
Sarah: Susan?
Susan: I would agree exactly what Reid said. Most private lenders are looking more at the property, but the reason that the borrower's salary could be important and their credit is that we're looking at the story with their credit first off. It talks a lot about character as well. And so, we still have to look at it, but it's not going to be as big an issue, but the reason you have to be able to prove that you can service them.
If sometimes the lender might want to see that you also can step up to the plate, if your revenue generating property can't pay. So, it is still looked at, but not like Reid said not to the degree at all that a bank. Do we still need to talk about it? That's all.
Reid: You're absolutely right. That's totally fair.
Sarah: And this is also an interesting question. So, I'm just going to go ahead and ask it. It's from Brian. Do you guys lend on properties held in corporations? Yep. Yeah, from Claire. Yep. Yep. There we go.
Susan: Absolutely.
Sarah: All right, good. So, we're going to ask Claire, we're going to start with you. I'm going to ask you a few questions and then we'll move on to Susan and then read Claire first and foremost. How can a mortgage broker assist with private lending? How do you support?
Claire: I think the key thing is we have the ability to qualify the borrower. So, especially investors, if we qualify you and we say, yep, you're good for private lending. We understand why you want private lending and you don't qualify at the banks or why you're using it. What are you going to do with it? And how do we control it and how are you going to pay it back?
The first thing would be qualifying the borrower. The second thing, which I think is. Forgotten is qualifying the lender. When we talk to potential lenders, they can just be individuals that have a couple of hundred thousand in their RRSPs or their TFSA or a combination. And we want to make sure that we qualify the lender because sometimes someone says, oh yeah, I've got money. I'll loan you a private mortgage. But if they haven't been qualified as in what if they're that private lender who forgets that their only obligation is to keep you in quiet possession of the property. And have the money. That's the two obligations of a private lender, but instead that private lender feels they have a right or an opinion to that flip, you're doing all those renos you're doing, or why is the grass not cut?
It's really important that we qualify the lender too, because some of them can, it's just not right for them. Or they feel that they now own the rights to the access to this property because they don't really understand what private lending is. So, qualifying the lenders is just as simple.
Sarah: Yeah. And the other thing too is you don't want that $100,000 or $200,000 to be that person's only money. And then all of a sudden something happens and they need it, but it's not that liquid.
Claire: Exactly. Like we don't send an opportunity until they get money in the bank. I need proof of that money in the bank.
Sarah: Good. So, what is that like one of the biggest mistakes that you see people make when they're borrowing, or maybe when they're lending money? What are some good examples of what not to do?
Claire: I'd say the biggest example. In my case, I talked about, we do a lot of flips and BRRRRs. I think the biggest mistake, some people, some borrowers will do with private money is not understand the weekly cost or carrying cost of that private money. For example, if someone's doing a flip and the, they really need to calculate okay, for each week, that's costing me 2000. In carrying costs, that's interest that is utility is insurance, property taxes. Sometimes insurance is a bit higher. If you have a private lender, obviously insurance could be higher because you have a flip.
If one of your trades says I can't start the job for three weeks. And that holds everyone up. You need to know that's costing you $6,000. So, is it going to change your approach to the whole project? If you're like we'll stage it next week or the week after it's July. Let's wait till August.
That'll cost you $8,000 or you get an offer. It's a great offer. It's a high price, but it's a four month closing. So, now that's costing you another $15,000 - $20,000. Was it really a good offer? So, I see the biggest mistake is overleveraging and not understanding with any borrowing your weekly carrying costs if you're flipping and BRRRRng.
Sarah: It can get very expensive very quickly. Yeah. Yeah. I've an exit strategy and this is not long-term money. So, Claire, where are some of the best sources to find the funds, the finding private money?
Claire: I think you just look at your screen. I would obviously say networking. I talk about qualifying your lenders. A lot of people will look at friends and family people they know sometimes that can work out super well. Otherwise, sometimes it can't be because somebody that Uncle Bob is doing nothing but talking to you about the money they gave you and what are you doing with it?
I'd say the best souls are qualified mortgage brokers, qualified companies like Reid's and obviously Susan's has a more than qualified mortgage broker where we're licensed to do this. We've gone through the training, we know what we're looking for, where there's licensing with the government, there's mandatory requirements that we have to keep up to insurance policies, et cetera. So, I'd say you can find a private lender. Anyway, you just have to ask someone if they have money, but are they a qualified private lender?
Sarah: I would say looking at your screen is a good example though, of this is how you guys can do it. Reach out to Susan, Reid, Claire as somebody that's also myself looking to loan out some money, like my first call was to mortgage brokers, this is what I have. Here's what I would like. And of course I have a network and I can loan it out. It is first come first serve, you guys are looking at this stuff every single day and you have a big network of people looking to loan, but also looking to borrow. Awesome. So, thanks for the insights.
Alfonso, go ahead with your questions.
Alfonso: Amazing, great points. I just want to add on something really quick is don't do it on a napkin or like on a handshake, work with professionals all the way through. All right, Susan, we're going to get some questions. So, if I want to loan out my money passively what's the best way to do this?
Susan: With mortgages. So, somebody calls me and says I have money. I want to land right now. It starts off. I usually like to have a conversation with them to know more about them, to understand like Claire was saying to qualify them because we also, as professionals we have to, we can't just let anybody be a lender.
For instance, you also have to fill out a lender profile and it asks basic questions and need to know about your assets and how much you make and how much are not necessarily how much you make, but what you have, because if all of a sudden you're lending money, and now this caused you hardship, and there was an issue involved, it could come back to us.
As professionals go, wait a minute, you let them loan money that was coming from their line of credit. And they were in big trouble because of that. There's things that we watch for, and it's basically to make sure that lenders aren't lending when they shouldn't be.
Alfonso: So, basically that you're not bringing on more weight to the ship or, I think of the elevator scenario, when you look up there, it's like only 10 people out on the elevator. You're like that guard. That's like not letting 15, 20, so that it breaks this whole elevator. Who let them do this, right?
Susan: I have to say though, people need to understand this because quite often I'm sure Claire has had the same thing happen. People don't worry. You don't need to know all those details. I have so much I want to lend you a go at it. Doesn't quite work that way. Now, if you're doing that with your friend or your neighbor, that's your business. But if you're truly going to do it through a licensed broker we have rules we have to follow, and it is truly for everybody's benefit that we found.
Alfonso: Yeah. Some cases protecting people again from themselves. Yeah, definitely. So, the next question and this is something that we've always been talking about: where do we find these? Sarah mentioned it, it's about the quality of deals in good projects that people want to invest on and that you guys are vetting and you guys are looking at and say, yeah, this all makes sense.
This is something that we've seen before. We're soon launching our forums or sorry our marketplace where, there's going to be, we're hoping to have lots of people posting some amazing deals up there, but besides the REITE club marketplace, we're other places to find good deals and good projects to lend out.
Susan: For myself, like I say, a lot of it comes through the real estate community of investors, but I also have a lot of other brokerages get a hold of me mainly because this is all I'm focusing on. So, they know at the end of the day I have lenders. I have, like I say, more lenders than I do mortgages at times.
And so many of these situations aren't going to be from say the right community or other real estate networks. I'll get another broker or an agent to get a hold of me with their situation. And we work together to help fund that person.
I don't advertise though, as far as on the street I think that's what people thought about private lending in the past. You'd see these cheesy advertising and oh yeah. Fast money, blah, blah, blah. And I know there's still ones out there, but we're not in that category. All three of us are here at all.
Alfonso: Yes. You guys are matchmaking right. With legitimate business owners, project managers. And bringing on some money and putting it to work at the same time. Yeah. Awesome. Okay. So, last question, Susan for the people that are on your receiving some comments now I want to lend, I'm going to be a lender now. And like you said, there's a lot more people coming to the table. When it's private lending, not a good idea, or when should you be lending out money?
Susan: I would say it's not a good idea if you need your money fast. Like some when I say fast, private lending is short-term anyhow. Most of them are set up for a year term, but I've had some people call me. They go, yeah I have some money and I only want to lend it for the next three months and make it well, I don't know if I can help you because I can't guarantee that person is going to only need it for three months.
That is a time I would say it's not gonna work. Another time I would say it's not going to work. Like I said, so if somebody, people here of their friends, oh yeah. They lend money from their house line of credit and it's all exciting. In reality that can happen. I did it. I do it quite often, but I've also got some experience behind me. So, somebody right off the bat thinks they're going to use money from a line of credit and lend it out.
They also have to realize if something happens that you don't get your payments for certain months, are you okay? Can you handle that? It's all about, I would say it's all about getting more and more educated and this podcast, webinars, obviously, hopefully helping people to get a bit more education as they go along.
Alfonso: Definitely. That's something to jump into, talk to professionals, reach out to our panel. Definitely.
Sarah: So, question from the audience and I know Claire, Reid, Susan's answering you guys as you post them as well. The ones that we don't get to promissory notes, there was a question about promissory notes. What are your takes on it? Yes or no? and why? So, Claire is saying, yes, Reid?
Reid: We're probably more 50-50, to be honest with you. And it's honestly just preference from ownership all the way down.
Sarah: Susan?
Susan: I prefer not to step into that. But having said that I've utilized promissory notes for my own deals as well, but I think I'm just not as comfortable on behalf of people. I'd rather just put it into a complete mortgage and just keep it there.
Sarah: All right. Awesome. Okay, good. And guys keep posting your questions as well. If you are in the chat, just send it to all panelists and attendees and these guys will answer them as as they can. All right. Good. I think Susan, Reid, a few questions for you. As a private lender, now, before I get into my questions, are you able to share roughly like your average, like annual lending amount or not really?
Reid: Like assets under management kind of thing? Yeah. I would say we're probably hovering somewhere between 20 and 25 million.
Sarah: All right. To loan out and then you're looking at new deals every year with that about, okay guys.
Reid: We were looking to go a little higher this year, but we'll see if that can still happen.
Sarah: Awesome. All right. So, in your opinion what do you think private lending may look like? In the next six to 12 months?
Reid: Such a great question. And I know everyone here wants to have that crystal ball in front of them too. And the prototypical answer of course, but I guess kind of twofold. I think one, I think we're going to see a lot of people actually utilize private mortgages a lot more. So, in my opinion, I think the fear or people who aren't are maybe too proud sometimes to go that route are going to ease up because the banks and the credit unions, it's just a trickle down effect.
They're clogged, they're slow. There's difficulties right now. And so as things keep getting pushed and people stay on CERB and people stay in different avenues to get their money. It's good. I think trickle into the private lending world. And so I think we'll become even busier.
I think it's going to be more competitive. It's off the question, but I've seen people who are commissioned real estate agents. Who've made a ton of money who are bringing 50% loans to value or less deals right now. Why wouldn't a bank do that, but it's because of the uncertainty. So, until there is more certainty is probably the best answer. I think you will see a lot. People use private lending a lot more.
Sarah: Okay. All right, good. On the uptrend. So, what are the best deals are your favorite types of deals that you like, I would loan on this and I would, if I could take, the money that you have allocated every year to loan out, this is the type of deal that I would have. What does that look like?
Reid: Personally, for sure, I'm a commercial boy at heart. So, I'm a sucker for multifamily. I'm a sucker for mixed use. So, those two are my favorite. I just love the uniqueness of a lot of them. I also love the fact that there's a lot of them that an investor wants to go after and own every single six blocks on that street.
I find that incredible challenge. I think that's a great goal. I think it's somebody that resonates to me. I just, I like those types of deals because there's stability in it. I liked that there's some uniqueness and there's ways to be creative. Claire, she touched on, I think that I like as well too, which is blanketing.
I love blanketing deals. I love looking at great opportunities in different geographies up and coming geographies. I think we were talking maybe even really about Woodstock or something like that, and what an explosion they've seen. And there's so many areas right now that are just hotbeds waiting to go.
As a lender, I love to see lenders, maybe loosen their preferences on some geographies, because I know there's a lot of great cities and towns that are just right for the picking and which allow a lot of listeners and people here today to do what they want to do.
Sarah: And just a follow up question to that, like it just in terms of geography, are you mostly within the four hour radius of where you are? Is it all of Ontario? What does that look like?
Reid: Sure. Great question. For us specifically, I would say probably cottage crunchy. I'm going to call it maybe like the Muskokas as like the North End Parry sound. When we are looking at more of a rural property or more of a cottage property. For example to the north, I would say Windsor, absolutely to the West.
We're looking at Ottawa and Kingston for sure to the East and we're based out of Burlington. So, Hamilton, Burlington, Oakville, Golden Horseshoe, Hamilton, Niagara, I should say is definitely a place we love even more to Southwestern Ontario, where we're definitely seeing growth there as well.
Sarah: All right. Any specific deals that you were like? No way I don't want to touch those, these have gone bad in the past.
Reid: Yes, for sure. With certain property types I would say like garages or things that have environmental problems. Like myself and the company, we're just not keen on them. Farmland, we don't have a lot to do with the ag and farmland. That's a specialist in my opinion, as well, too. I think there's really great people out there for those types of deals. I would say the restaurants are a tough one at times too, that we typically stay away from. And once again, there's people out there that will do that.
And unfortunately Breakwater doesn't do as much lending or sorry on land and construction. And we come from the home developments and land development industry. I truly like that, but I have to fight and pick my battles on those ones. So, I'd love to see more of those as well, too with us, but we don't do much of that.
Sarah: All right, sounds good. And last question for you as an investor, somebody that's looking to work with your company and borrow funds, what can they do to make themselves an attractive option for?
Reid: Yeah, I thought about this when I thought it was probably a punch of good answers and everyone's got to have their own opinion with it. But for my organization, I think somebody who comes to a broker that comes with an organized client and I'll actually specify that because those who may not know breakwater or a single family office, so we rely on brokers to bring us our deals.
They're our best friends and we want to keep it that way. But having those organized clients and having those organized investors who have their ducks in a row who know what they want, who are open to working with some flexible ideas or it might cost you this and that is a real sell for us because we want to build those relationships.
Most of our books are investor related. That's a big one, I would say probably. Yeah, like a proactive broker and having a proactive client that they speak the same language and there's really not a lot of back and forth. They're serious about getting deals done. And that's something I personally liked. I'm going to be the company that I, personally.
Sarah: Amazing. Thanks for answering those questions. So, we've got a final question for all of you to be able to answer as one key takeaway. So, here's the question, one key takeaway that you would like to leave us with today out of everything that we discussed, or maybe some things that we did not discuss get to pick one thing, Susan, why don't we start with you?
Susan: Darn it. I needed time to think here. One key takeaway. I guess the biggest thing I would like to share with people is, do not be afraid of private money. Do not get focused on just the interest rate, because if you truly work it out, I know Claire talked about it at the beginning, and I try to emphasize this to people all the time.
In many cases, you do not need joint venture partners for the year, their ability to get the financing. You just need to use private. So, just don't be afraid and then call any one of us or anybody else that you know, that is in the industry and pick their brain, our brain to the story.
I really suggest to people before they even put the offer in call me, let's talk about it. Let's brainstorm. Don't go jumping in all conditions removed on a project that you haven't even figured out how the financing could work for you. So, that's my takeaway.
Sarah: Claire, why don't you go next?
Claire: I would say trust, but verify trust, but verify really simple and then just do it. Yeah, just do it.
Sarah: Simple but efficient. Good, Reid?
Reid: Yeah, I think they're both great. And they're probably a part of my answer, but don't be afraid, but don't be too proud either. There's lots of great lenders out there. There's a lot of great people in the private lending industry that are there to help and not gouge and not be that crazy cowboy approach to lending.
There's some real sophisticated people and really smart people that are there to help. So, don't be too proud and just keep your options open, make sure you're working with the right broker and they're gonna help you.
Alfonso: Amazing. Awesome. What some amazing advice and a great insight from Claire, Reid and Susan. And thank you guys so much for joining on. And just before we say goodbye, I'm going to put out a challenge to the REITE club nation. So, I was asking Claire as we were answering some questions here. So, I hope it's okay. I was putting you on the spot, but the first five people that go on and register for the REITE club website tonight, we're going to get you a digital copy of her book, be the banker.
Get to thereiteclub.com. Show me a screenshot. There's the book. There's a copy of the book right there. You're going to get the digital copy. We have the link ready to go. If you send me a screenshot and send it to alfonso@thereite club.com. First go and register Sunday, send a screenshot that you've registered and we'll make sure to get you a copy of the digital book, be the banker.
Thank you so much, Claire, for offering and doing that. And I was going to put you on the spot.
Claire: So, good.
Alfonso: Awesome. Thank you guys. Thank you, Susan. Thank you Reid and Claire.
Reid: Thank you guys.
Sarah: You guys are awesome and this is how you build your team. You need some great mortgage brokers, but also money partners, money lenders on your team. Claire, Susan, Reid, thank you. And guys, I know if you had some questions that were not answered Claire, Reid, Susan, you've got their emails there that you can reach out to them and connect in. And hopefully, you have a great source for borrowing or lending your money.
Alfonso: Awesome. Yeah, really good insight. And sometimes, people were talking about, they get wrapped up in rates and the terms and the things like that. And you have to know that stuff, you can't be guessing. And you can't let it stop you either, right? Oh, because it's nine in or because it's 10 or it's double digit guys, you have to know your unit. You have to know the investment that you're doing, you have to know the project that you're working on. Maybe 12% is of great interest rate on a project that's yielding way more.
And maybe six is terrible on a project because it doesn't have a margin. So, don't let it stop. You really dig down, learn your project, learn what the pieces are. And like the panel said, do your homework and get it done. Yeah. Thank you guys. Thanks so much to the panelists.
As we wrap up tonight, we want to make sure that we're inviting you to check out and grow with us on all the different ways that you can do that. We have some upcoming events. So, every Friday at 7:00 AM we launch a new episode of the podcast. We've recorded a lot of these, we're doing new ones.
Even through the summer. We've broken our REITE club rule of doing podcasts in the summer, but we're having so much fun and talking to so many people who consume information out there. So, make sure every Friday, the next two weeks we have Jeff Murray and Ara Movsessian coming up on the next day, July 10th and the 17th, and then Wednesdays in July and August at 7:00 PM.
Make sure that you guys are turning in on the 22nd. We have The Mind Estate with Nancy Morris and then mark your calendars for August 5th and 19th. We have some more amazing webinars and projects lining up right through the summer. And yeah, it's been amazing tonight with the panelists. We're excited to bring the experts in the industry and the cruel part guys. If you're on there right now, I'm online on the REITE club website right now, thereiteclub.com.
I'm gonna chill out for a little bit, get on their chat with me. See what to chat with me. See what you liked about the webinar tonight. What do you want to see in the future? This is going to be somewhere guys. Remember the back of the REITE club room. This is it. We're online. We're there all the time, networking, communicating, and having amazing presentations and videos. Our podcasts can hear more about Sarah and I and Daniel and Laurel and what we're doing. Amazing stuff that really checks it out. I can't stress it enough.
Sarah: Now available online. Alfonso and I are spending some time there to see you guys and see you guys and check out the calendar of events and see you soon. Thank you. Bye guys.
Alfonso: Bye guys.
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