Successful people are not as unique as we would like to think they are. They possess in them shared qualities that propel them to the top. Much is true when it comes to the private lending space. In this episode, host Keith Baker lets you in on these qualities of successful private lenders that you can easily have. In fact, they are very universal. He lists four key traits that you can take to your practice and rise among them. So pull up a chair and pour yourself a nice drink. This insightful episode is for you.
If you're looking for practical tips and advice on being a successful private lender and building wealth without banks or Wall Street, then you're in the right place. If you want to learn from my mistakes so that you can avoid them, pull up a chair and pour yourself a nice stiff drink because this is for you. This topic was made possible from one of the free coaching calls I conducted. I want to thank everyone who took the time to email me with their questions and taking the time to set up an interview and web meeting and letting me help them define their lending criteria and answer questions or put some fears that they had at bay.
I want to give a big thank you to Steve, who made this episode possible. This was one of his questions that he asked me towards the end of the call. I thought it was a good topic to discuss. What Steve asked me was, “What are the three key traits of a successful private lender?” I, fortunately, was able to write down and go back to my responses and I refined them a little bit so that I could provide them to you. As I was prepping, I came up with a fourth trait but it is not specific to private lenders, but I think the human condition in general, so I figured let's get started with that.
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Our topic is the four key traits of successful private lenders. That first universal trait is self-awareness. I know that seems hokey and some gurus pounded on that, but it is very true. Learn who you are. It's good to know your strengths and your weaknesses. It's good to know where you excel in situations. Is it the analysis of looking at a deal? Is your weakness dealing with people? It used to be one of mine. That's why I joined Toastmasters to be able to speak to sellers ideally. It's helped me immensely with private lending. Being able to sit down and be honest and say, “I'm not so good at this.” I am not so good at record-keeping and that's why I love using escrow services or loan servicing companies because they take care of all that stuff for me.
If you do everything yourself, you need to go ahead and file your 1098 mortgage statements, get the statements with the IRS and provide those to your borrowers if you haven't done that already. Knowing where are your strengths, your weakness, what makes you comfortable and what makes you uncomfortable is also a very good thing to know about yourself and how you respond in those situations. Usually, for me, something that is uncomfortable, I try to push forward a little. Not necessarily loan on that, but if I'm in some due diligence and I feel a little worried, I note that I stop, but at the same time I go back and re-evaluate and say, “What is it about this that gives me a bad feeling?”
That's one example of using self-awareness to know where you're going to be. Are you comfortable with lending to people? Are you comfortable putting your money out there? Are you comfortable with learning the process and getting your hands dirty? Would you rather have more of a franchise model? They show you how to make the sandwiches, provide you everything to make the sandwiches and then help you sell the sandwiches. That's not just for private lending. I'm using private lending and real estate investment examples, but it's a good place to start with who you are as a foundation and as a person. What are your qualities? Are you disciplined? Because that's going to be key coming up next. Are you lazy like me? It's okay to admit it. Own it.
[caption id="attachment_2720" align="aligncenter" width="600"] Successful Privat: When you have a question or are uncertain about a potential loan, the discipline focus will help you keep your money safe.[/caption]
The first key trait of a successful private lender is self-awareness. The second key trait is what I like to call a disciplined focus. It’s not just discipline and focus but a disciplined focus. Those two things together are a very powerful tool. An example is you want to define your lending parameters and stay true to them. Whether that be you loan on the loan-to-value of the finished product of the house or you only loan on the purchase price. Do you only loan on three-bedroom, two-bath brick homes, the typical ranch that is so popular with landlords and a lot of buyers and renters? The reason I stress disciplined focus is once you've set your rules, you've got to be able to stick by them. Otherwise, you can get into some serious trouble.
Discipline is like your touchstone or your source rock through the Ten Commandments because the disciplined focus will help you make it through the long haul. When you have a question or you are uncertain about a potential loan, that disciplined focus will help you keep your money safe. I learned this from an attorney who was presenting me in a deposition. It’s not a criminal case, just good old insurance stuff. What was taught in this touchstone concept was to help me when an attorney had asked the same questions eight different ways from Sunday and is trying to trip you up to get you to answer differently.
[bctt tweet="It's not personal, it’s strictly business. " username=""]
Karen said, “Put your hand on your touchstone.” There’s a table in front of me to help me remember, maintain and use disciplined focus. These are my parameters. I do not lend outside of this. I do not make concessions outside of this. If a clause in the paperwork is triggered and default becomes my remedy, push forward. It's not a question to give them a chance. If the numbers can work out in the situation and the borrower can come back into the game and not put your money at risk, then by all means, consider that. I was looking at it like if they're not going to honor the first agreement, they're probably not going to honor the second one or the chances are even less.
Having that disciplined focus of knowing what you lend on or back it up into self-awareness, knowing who you are, what you like to do and what lender you are. Defining your terms and sticking to those terms and escorting your funds with those guidelines through disciplined focus is the second key trait. There are a few things I'd like to keep in mind when I'm analyzing a loan and in the order of importance is, why am I making this loan? Is it going to be a cash loan? Is it money that should be in the stock market or that I'm pulling out of the stock market? Is it retirement money? Is it play money? Is it some fun money? Where's it coming from? Is it going to be a short-term investment? Is it going to be a long-term investment?
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Always remember what I like to say is rule number one is the return of investment. Finally, when you're looking at a deal, ask yourself, would you want to own and potentially operate that property if the borrower defaulted and you took it back over? Because if you don't like the property and you don't want to have it in your portfolio as a rental or you got to call a wholesaler to take it off your hands, would you want that property? I'm not saying that in all cases where you have to call a wholesaler is bad. You can still make money, but do your due diligence, be disciplined and stick to your guns. I'm from the undiagnosed ADD generation. Growing up, we got beat. We didn't get doses of Ritalin.
Using disciplined focus as a mantra has helped me avoid several lending disasters when something diverted my attention away from the fundamentals of the loan. Real estate investors are very charming and very persuasive. A lot of these people, they're not doing anything shady, but they are convincing people to move out of their properties at a discount because unfortunately, there's not a whole lot of options left for those people. Real estate investors are usually the last resort before the bank takes up the property back. You have to be very careful and this is why I say disciplined focus. You might have to kiss a few frogs before you get that good deal and that good loan.
Trait number three goes back to parenting. That's being capable of dealing and dishing out tough love. It’s separating emotion from money. Can you look at the numbers on a spreadsheet or a piece of paper and easily tell someone no right in their face? Can you stand up for your agreed rights in case things don't go smoothly and that the borrower doesn't pay? Can you live with foreclosing on somebody when they do not honor the contract that they have agreed to? Even if that person is a good friend or a family member? Can you let others blame you for their lack of planning, organization or leadership on failed real estate deals and still foreclose?
[caption id="attachment_2721" align="aligncenter" width="600"] Successful Private Lender Traits: You've got to be able to dish out and handle some tough love to your borrowers when they do not honor the agreed contract.[/caption]
Oftentimes when I hear a delinquent borrower’s sob story, I always think back to that scene in Goodfellas. Ray Liotta has the voiceover talking about once you go into business with Paulie. I look at the same way if you go into business with me and you sign that legal document giving me the right to foreclose and take that property back. To me, it's the same thing. That voiceover from Ray Liotta says if you went into business with Paulie, then you had to come up with his money every week, no matter what. “Business is a little slow? Pay me. Your place burned down? Pay me.” That's the mentality. Yes, it's a gangster and it's a bit romanticized, but it's in truth what goes through my head as I prepped to foreclose. I only had to do it once, but that's the mindset that I take.
I also like to think of the movie The Godfather in the scene after Officer McCluskey punches Mike and breaks his jaw. Pacino convinces his brother Sonny that he should be the one to kill Sollozzo and McCluskey at the restaurant. He says, “It's not personal, Sonny. It's strictly business.” Persuasive real estate investors will take your money down to the road of hell and they won't have a problem with it. That's human nature. That's why I say this is trait number three. You've got to be able to dish out and handle some tough love to your borrowers when they do not honor the agreed contract.
The fourth key trait of a successful private lender is creativity, inquisitiveness and willingness to try new things. Creative financing starts in a creative mind. As long as the deal is moral, legal and ethical, then why not try to find a way to make it happen. Of course, all the while, you still protect your money or your capital. Demanding your borrowers have skin in the game but offer some flexibility. You can either take points upfront. Sometimes I take points on the back end after the deal is done. My LTV provisions are very low. I'm not doing this at 75% LTV. 45% and 50%, I will certainly consider not taking points upfront and taking them on the back end of the loan.
[bctt tweet="Creative financing starts in a creative mind. " username=""]
Another way to get creative is you can lower your interest rate not only to get around usury, but you could also take an equity position of the net sale. Your borrower gets the benefit of low payment, monthly interest-only payments. When that deal closes, you get a nice lump sum piece of the equity at the end on top of that interest-only payments. Those low interest-only payments or borrower has been paying. You can cross collateralize. You can use other properties or other real estates. I’ve seen boats, cars, jewels and watches. Anything that has a title or anything that has equity or value and it can be tied to a document, the Deed of Trust, a promissory note can be used.
Another thing, you can think outside of the box. That old cliché, “I'm multitasking,” that's the big HR. Back when I was interviewing years ago, right out of college, everybody wanted multitaskers, people who think outside of the box. That runs true a little here too. Let's say you get a deal and you don't have the money or you can't figure out a way to make it work, go partner with under other lenders. If you're utilizing your self-directed IRA, find some other account holders at your custodian. Talk to them, see if they want to partner. Try to find a way to make the deal happen, legal, moral, ethical, keep your money safe and protected and figure it out.
In recap, the four key traits of a successful private lender. Number one, self-awareness. Number two, disciplined focus. Number three, tough love. Separating emotion from money. Number four, being creative, inquisitive, and willing to try new things. Have a can-do attitude. I would like to ask you to help me get the word out there and increase awareness for this show by sharing this on Facebook or Twitter, Instagram, any social media you're onto. Telling friends directly, “This is an episode I thought you might find interesting.” Maybe it's someone that you're trying to cultivate into a private lender for your deals. Provide it to them and say, “Don't take my word for it, read this.” You can connect with me on social media, Facebook, Instagram, Twitter, LinkedIn and much to my children's chagrin, TikTok. I don’t use it that much, but I'm playing with it.
This is the point where I need to beg you. Please leave me an honest rating and review over at iTunes, Google Podcast or whatever platform. I would greatly appreciate it. It helps me fight the algorithms and get more attention. A friendly reminder that you needed to file with the IRS and provide your borrowers with 1098 mortgage interest statements before January 31. As always, I wish you safe and prosperous private lending. Also, I wish you all the best and I’ll catch you in the next episode.