Rules to Live By When Dealing with Private Lenders Print
Written by Alan Cowgill   
Monday, 01 March 2010 19:31

Alan Cowgill's Personal Rules When Dealing with Private Lenders...

This is my business. After many years in a corporate job working for others, I left because I wanted to run my own business my way and that's exactly what I am doing. I am using my business skills to create the kind of company I want. Along with creating my own rules, procedures, and systems within my real estate business, I have rules that I follow regarding my private lenders. A couple of my rules are:

a) Make interest payment when property sells
b) One private lender per mortgage
c) I keep my word

Let me further explain what I mean on each of these...

a) Make interest payment when property sells...
I didn't start out that way. I thought everyone would expect monthly or quarterly payments, so I started paying some early lenders monthly. But after a conversation with a RE guru, I quickly changed and now pay when the property sells. What a huge benefit to cash flow and what a BIG help with the office paperwork. Not only is this a matter of less paperwork for the staff, there is another practical reason for doing this. When a lender's money is applied to a property at closing, the clock starts ticking. The interest rate starts. However, it may take a couple months to renovate the house and find a buyer or rent-to-own tenant. So the cash flow from the property will not even start for a couple months.

In addition, when you sell the house the lender gets a bigger chunk of money to lend back to you for your next project. Everybody wins.

b) One private lender per mortgage...
The #1 question I get from all over the country is "can I pool lenders money". The answer is maybe.

You cannot "pool" lender's money unless you fill out some paperwork with your state.

So, if you need more funds to purchase and rehab a property, then the 1st lender (the one with the most money) gets a 1st mortgage on the property and if you need more money to rehab the property, bring in a 2nd lender and they get a 2nd mortgage.

They are your "Bank" and they get a mortgage (lien) on your property.

You take possession of the property in a land trust and you get the deed. The lender gets a mortgage. These are the two key documents on any real estate transaction.

Actually, you can have as many mortgages (1, 2, 3, 4, etc.) as you like on a property as long as you don't over leverage the property.

c) I keep my word...
I follow my agreement with each lender exactly. I run my business with integrity. Like I said earlier, my rule now is that I make interest payments when the property sells. But there are a few early lenders with whom I made the agreement to pay monthly.

I will stick to my agreement with them regardless of how long they invest with me. And, since they love those checks, they'll probably be around a long time -- and that's great as far as I'm concerned.

Alan Cowgill is a national speaker, author, and real estate entrepreneur. Alan had bought or sold over 200 investment properties. His step-by-step system "Private Lending Made Easy" teaches Real Estate investors and mortgage brokers how to find private lenders.