As I wrote in my last blog, building a foundation of knowledge was key. Just as becoming a Special Forces Green Beret operator required years of training and untold hours of lessons in a classroom, and out in the field (the woods), becoming a private investor in real estate would require the same amount of dedication. However before I began to seek out knowledge and wisdom for what I wanted to do, I had to know where I was going and how I wanted to get there.
Where did I want to go with this? Well I wanted passive income, and I wanted my money to work for me, 24/7, no breaks. I wanted to control the risk, and be able to mitigate those risk I perceived. I wanted passive income without the headaches of being a landlord. I also wanted to have a career I could do remotely, not be geographically tied to one location. I believed and still do believe that private mortgage, trust deed investing answers those questions and more. However inside the world of private lending there are innumerable ways one could accomplish these goals. Here are a few:
1. Who would be my ideal client? There are basically two types of clients in real estate. Your owner occupied (homeowners) and your non-owner occupied (investors/ business's) I knew that if I made a loan to owner occupied there are a whole set of regulations that TAKE the protective power AWAY from the lender and give that power to the homeowner. Obviously this happened with the last real estate crash of 08' - 10', when alot of regulations changed to protect homeowners and to prevent lenders from making predatory loans. Whereas with non-owner occupied loans, the borrower is typically a business or an investor. According to the US government, these individuals/ companies understand the risk and agree to assume the risk of taking out an investment loan (non-owner occupied) collateralizing real estate (other than their personal residence) So for me, the choice was clear. I would do non-owner occupied loans to entities only. I would not give a loan to an individual and I would not collateralize someones personal residence.
2. Long term loans or short term loans? If I wanted long term loans I should seek 15 -30 year borrowers. Based on my previous requirement, this would mean strictly investors who wanted a loan for their rental properties. These properties should have cash flow and the cash flow should support the cost of the money or the debt that borrower assumes (my loan). However long term loans exposed me to the market fluctuations, also it exposed me to possibility of my borrowers personal finances taking a turn for the worse resulting in a bankruptcy. My mitigating result? I chose to do only short term loans. Now this means I can easily extend a loan past its requirement, but it allows me to pull my money out and place in in safer loans or place my capital into different vehicles within the real estate market. So for me, the choice was clear. I would only do short term loans, typically 12 months, could be up to 36 months or less.
3. Purpose of my loans? Well seeing as my 1st requirement was to only lend to entities, collateralizing non-owner occupied real estate, and my 2nd requirement was to do short term loans of 36 months or less, who was my target audience? Obviously I would only lend to business's and for short term loans. Well most "business's" that would borrow on real estate, would typically borrow against commercial real estate and would need that loan for 7 years or more on average. So those loans did not fit within my criteria. Who borrows money, for a short amount of time, and is willing to borrow that money at higher interest rates? Well that was easy, the real estate investment crowd! These were the renovators and the builders. They required loans for just long enough to rehab a property, or build one and then turn around and sale that property to a homeowner. These homeowners, of course get their loans from the big banks, so it was a win-win-win for everyone! I get to lend my money for short terms and set my rates for the type of return I would like to receive. The borrower gets access to money that they will only use for an average of 6 months to maybe 9 months. The homeowner gets a newly renovated property that increases the value of the neighborhood. This was the business I wanted to get involved with. Now came the BIG question. "HOW, do I do this if I am still in the military?" Especially in a J.O.B. as highly demanding as being a SF Green Beret.
In my next post I'll go over how I began to gain the knowledge and wisdom needed to build this business and build the most important aspect of any business.... the foundation.