Money Week: Private Money Continued with Robert Orfino

TRE 16 | Private Money Lending


There’s a great deal of confusion when it comes to private money and hard money. What is the ultimate distinction between the two? Jason and Robert dive into what private money lending is and go more in-depth into how it is different from hard money lending. As they list down the types of private lending loans, find out what a rate sheet is and the trick on MLS. Also, discover the route to starting relationships with private lenders.

Listen to the podcast here:

Money Week: Private Money Continued with Robert Orfino

More Private Money

We’re talking about money and how to use the money to buy real estate. On this episode, we’re talking about private money. We are usually at the Quest Trust building. I like to refer to our office as the crown jewel. On Tuesdays, Quest Trust here in Houston hosts an education seminar. They have a networking event that takes place afterwards and we are hanging out. We’ll have people in and out of our office talking about deals, lending, borrowing, joint venture, partnerships and all that other stuff. It’s a good day for private lenders.

Let’s talk about what a private lender is. In Texas, it’s a little bit different. If you’re going to borrow money for a piece of real estate, let’s say I’m going to go buy my first house. Typically, your loan is backed by the federal government, Fannie or Freddie. That’s your 30-year fixed rate mortgage. In Texas, we make a distinction between two types of lenders, hard money lenders and private lenders. There’s a group called AAPL. I went to the AAPL PRIMA National Conference. It was dubbed a Private Lender Conference. I’m like, “All these private lenders are all in one place.” Outside of Texas, a private lender also means hard money lender. In Texas, we use this term a little bit differently, at least this is how we’ve used it.

A hard money lender is an “asset-based lender.” They’re typically used to buy properties that are physically distressed and operationally distressed. They help you acquire the asset, turn the asset around and you can apply for long-term refinancing. We call it the take out. The difference between hard money lenders and private lenders is private lenders do the exact same thing. Hard money lenders typically have their own company. They’ve got their own office. They have sale staff. They have a bookkeeper. It’s a real enterprise. It’s a real going concern. Private lenders are guys like you and I. We lend money out of our IRA to go do deals. That’s what we call private lenders. Those are the two types of short-term lenders out there.

It’s important to start working with them as early as you can inside your investing career and start building those relationships and you need three. Once you find three or four, unless you’re building the biggest building in town, you don’t need a dozen of them.

We built that 100 house buying a year company and I had maybe at the peak seven lenders. If you’re churning in quick, people think, “I need $10 million.” No, you don’t. Even at that clip, three to five, surprisingly it’s not a lot. The idea here is that you refinance these properties so that then you can go back to your private lenders. You’ll refinance those private lenders out. Let’s say we go do a deal. The private lender puts up $100,000. It’s $80,000 for the purchase, $20,000 for the rehab. The property, when it’s all fixed up, is renting for $1,400 a month. It’s a good deal but not an uncommon deal.

For those of you who missed out on the webinar, I’ve been a little stressed. This 27-unit is messing with my head. I did weight lifting. I had dinner. I took my two kids to Boy Scouts. My wife was at the Astros game. They had fantastic seats. They had a great time. I decided for the webinar, “Let’s open up MLS and let me show people how to buy houses on MLS.” I decided to do that from the hot tub. I’m at the hot tub literally sitting there with a laptop. As soon as you got off your webinar, I’ve got online and we did the hot tub MLS offer system. If you go to my personal Facebook page, I’m downloading the video. I’ll add it to the American Real Estate Meetup members only page. I’ll add it to the Mr. Texas Real Estate page as well. It was a lot of fun. I was sitting there with an adult beverage in the hot tub. There are some great deals.

One might move from California to Houston to find deals that are plentiful.

When I first started the webinar, I was like, “We’re going to start teaching these people how to find deals. There are deals everywhere.” There are many deals out there. The trick is on MLS is you have to work with a team of agents that know how to negotiate in the contract. That’s the real secret. It’s different than a yellow letter campaign or a postcard campaign. With the stuff that we’ve bought on MLS or HAR, for those of you who are in Houston, we’re talking about HAR now. I like it. I’m dealing with pure professionals. It’s much easier. I much rather work with a real estate agent than I would with a homeowner. I’m not opposed to working with homeowners, but working with your brother and professionals is always easier. We did that looking at deals. Let me go back to the hard money, private money piece. You find a great deal. We found a handful of good deals. We looked at maybe 20 to 25. We’re going to write offers on. I’m willing to bet we’ll get somewhere between five and ten under contract. It’s not bad for an hour and a half worth of work in a hot tub with a scotch in one hand and a laptop in the other. It’s not a bad way to make a living.

You’ve got these great deals. You’re buying it for $80,000 and it needs $20,000 in rehab. It’s $100,000 deal. It’s worth probably $130,000 to $140,000. Once that property is all fixed up and it’s purty, you’re going to then take that asset to a bank and you say, “Can you refinance this into a long-term mortgage?” The gold standard out there is a 30-year fixed rate mortgage. It is the most beautiful piece of finance that I’ve ever seen next to the joint venture. You can’t beat a joint venture. The only thing I beat is a 30-year fixed rate mortgage and I don’t know what the rates are for investors. I know they’re below 6, 5.5, 6.5. You’re going to refinance that property and when you refinance, your private lender gets there $100,000 back.

You as the borrower is thinking, “That’s awesome, I got their money back,” but here’s what your lenders are thinking, “They sent my money back. Now, I got to find another deal to put this money in.” What we do with a lot of our lenders is they put $100,000 as a promissory note and a Deed of Trust, just like you have on your personal residence, if you have a mortgage on that. Instead of it saying Wells Fargo at the top or Quicken Loans or The Money Store, it’ll say something like, “Jason Bible Trustee, Quest Trust account number, whatever.” That’s what the note will be in. It’ll be in my Quest Trust account. The borrower will pay interest to that account. As soon as the borrower pays me off, then it’s like, “Now I got to go find another deal.” The way it works well is that if I, the borrower, am consistently producing deals, that lender doesn’t have to go anywhere. We keep their money at work the whole time. We go from deal to deal and keep refinancing them.

That’s the goal. Let’s talk about the types of private lending loans. There’s the first position, which is what the majority of that Quest room is looking for. There’s a second position or joint venture. We have to be careful with joint ventures. We have to know the people and then we have a fund. There are three ways that we work with private lenders for a number of different reasons. We have about three first position loans that will work with private lenders on. We’ll be able to move forward on that stuff. We have three others that are Airbnb in which we do either a second or joint venture. Usually, there’s enough equity in the property that we can secure their second position. We can move on that. We have the American Recovery Fund, which we haven’t made our big announcement for it yet, but the paper works are coming over.

Our attorney said, “Open the bank account and put the money in there.” We have a fund. For those of you who are interested in becoming a true passive real estate investor. Not “I own rental properties that are passive,” that’s not passive. Just put your money in a fund so we got a fund. We’ll talk more about the fund.

Banks are as temperamental as a toddler. Click To Tweet

We’ll talk about communicating with investors and a lot of them want to see the hands-on product. We have a field trip coming up which should be fun. We have some of our projects that we’re doing right here in Houston that we opened the doors for. They can’t show up at any time. We talked about that before. They have to schedule it to make sure they’re not walking through the floor.

I’ve got a question on the Facebook feed. “Jason, can you talk about the $50,000 hickey you’re about to take?” This is like the deal that won’t die. We’re throwing two lifelines. I’m like, “Let’s either do it or kill it.” This might work. I think it’s going to work. We’re going to have to bring a lot more cash to closing, but it’s significantly more. We’re going to be all in at 1.25% like the full project. We’re going for the whole enchilada at 1.2%, 1.3%. It will be worth 1.9% inside of eighteen months. Even when it hits 1.9%, we’re going to refinance it to get our cash out and hold onto it. That’s a gold mine sitting down there.

We’re going to do an hour-long show with Jet Lending on how they saved this deal. We got left at the altar on another deal. I do most of my borrowing and lending from private individuals. I don’t use banks for one particular reason. Banks are as temperamental as a toddler. They don’t tell you until it’s the absolute last minute where it’s like, “I got a pile of cash in this thing between earnest money and due diligence.” At 4:46 on Good Friday, I get an email and I happened to be looking at my email in the woods, which I was surprised I got an email out there. I fired an email back at 4:48 and I immediately get the out of office reply. I’m like, “If you were in Texas, I would be strangling you.” The deal is still alive. We’ll see what happens. Jet came up big on a deal that we’re doing, our thirteen units. We got the preliminary. There’s one little hickey on the title we can fix, which is no big deal and then we’ll close.

The original lender wanted two loans so Kim’s like, “Make up your mind.”

We’re going to have to send a big gift basket to closing team three over there because I think between the RV park, the 27 and 13 units, we had aged them double dog years.

I’m out of the RV park. I looked at it again. It was too much work.

He sent me the termination of earnest money.

I’m out. You found someone to take that.

It’s a weird deal. Is there a number that works? You don’t want to do it.

It’s dirty. It’s filthy. It’s too low-end. It’s an E property. It’s an E class. We’re not talking Mercedes Benz.

It’s not great. We’ll talk about that deal. I’ve got to update some lenders. I thought I’d heard something, but I didn’t. The 27 units as far as we know is still alive. We’ll see what happens. The four beach houses, we walked those. It’s beautiful. I love the property. We’re making an offer on another property down there. We’re flirting with the idea of looking at lots. That’s a very under-served market.

There’s not a lot of lots there though. We drove. It’s pretty developed.

TRE 16 | Private Money Lending
Private Money Lending: A 30-year fixed rate mortgage is the most beautiful piece of finance next to the joint venture.


There’s not a lot of inventory down there. Wait until summer gets kicked up.

There are six agents. Most of them are doing rentals. That’s how they make their bread and butter there.

You go down there and there’s that one hotel, that’s it. You said it best when we were driving back. You said, “This place is deceptively wealthy.” Here’s an 800 square foot house and you’re like, “Why is this $400,000?” and you’re like, “Because that’s what they go for down here.”

We’ve been to other beach communities that are overtly wealthy. There’s a golf course and there are timeshares. It’s like, “I get it. There’s a lot of money here.” Then we go to that beach and it’s like, “This is still $300,000 and it’s a shack.” You’re like, “I get it. There’s money here.” This is the market.

Across the water is a massive petrochem. You’re like, “What’s driving all of this?” It’s a beach community with a robust industrial working class. That’s what’s driving the prices on these things. It’s interesting to watch. That’s a fun market. I liked those kinds of markets. Let’s go back to private lenders. Bankers can be so temperamental, “It’s a great deal. We’re going to do it,” and then, “Never mind.”

They’re like, “We’ll need it until Tuesday. We’ll get this wrapped up. It’s no big deal. On Tuesday, send the wire and we’ll be good.” A week and a half later, “We’re not comfortable with the collateral.” Here’s the thing that drives me nuts about bankers. I’ll call and this was the excuse I got, “It doesn’t fit our risk model.” I’m like, “You must not have read my resume,” because I know what that means. You tell me what level of risk you’re willing to accept. Is there a dollar value here? “No, we don’t like the collateral.” You wouldn’t lend a dollar. You’re arguing with the wrong guy.

I’m being spiteful because I’m angry. I’m arguing because I’m angry. This is a complete waste of time. “You guys don’t want to do business with us, fine. I don’t care. You should have told me three weeks ago. Because I would have raised private money to do it anyway.” I’m getting to the point now between our fund, our private money lenders and some of our joint venture partners or I’m doing everything 100% private and then we refinanced. That way, if they wanted to jerk us around on a refi, take their sweet time, I don’t care because the thing is cashflowing and we’re all making money. It’s not that big a deal.

On the acquisition side, literally I have aged double dog years in the last few months. It’s been ridiculous and there are good lenders out there. The other challenge is when you get into the portfolio size we have, it’s challenging for these guys to underwrite it. If we’re buying a $10 million, $20 million, $30 million apartment complex, the underwriting is pretty simple because it’s all on the asset. You have years of financials. When you get into some of these smaller apartment complexes, there’s no P&L. It’s a lot of cash. It’s disappearing. It’s all kinds of craziness.

We understand why the gurus say avoid this class. Avoid that 5 to 100 units because it’s mom and pop. We like it because it is a mom and pop. We can negotiate with mom and pop and we can figure some things out and we can move forward. It’s not clean. We’re still slugging it out here in the swamp of these eight units, 30 units and 20 units. Here comes another one. We’re going to be looking at them, I’m sure. There’s going to be no P&L.

What’s wild is when you look at how much we make per door, the margins aren’t even close. They’re so much better than the larger multifamily stuff.

We’re the guys that renovate it, rehab it, get the rent rolls up and then we sell to the folks in California. That’s the whole purpose of us at least me being here. There’s a pipeline back to California for these properties. They’ll eat it up.

The fun thing is if you are interested in doing all this stuff tax-free, there’s a way to do this in your Roth so you’ll never pay taxes on it. You buy it in the Roth, rehab in the Roth and get the rents. It all takes place in a Roth and you don’t pay any taxes. You live off that great investment. We have a money class coming up. We do these classes from time to time. We do them a couple of times a month and it’s all online. You could sit there in your hot tub and watch the class. Rob, your class is what?

TRE 16 | Private Money Lending
Private Money Lending: A rate sheet is the rules to the game. It is the key to the castle.


It’s on Saturday. It’s online. It’s from 9:00 to 3:00. It’s called Money Coaching. It’s one of our better ones. People find a lot of insight into it. We break down the difference between a true hard money lender versus a broker, which is one of those things you have to identify.

My favorite is when you bring up a rate sheet. People have no idea what a rate sheet is. They have never seen one. They have been in real estate for ten years and they’re like, “What is that?” You’re like, “That’s the rules to the game. That’s the key to the castle.”

When I have a loan officer come in, I was like, “Come by the office and bring your rate sheet. I want to take a look at it.” They go, “What are you talking about?” “Yeah, the rate sheet.”

 You and I both know what we’re talking about. “I have this pretty bi-fold with this loan on it.” “No, just bring the rate sheet.”

We’ll go into that. We’re still talking about private lenders. Obviously, communication is important. We need to do that, get better at it and serve the lenders that we have. If we’re doing Facebook Lives from their projects all the time, they understand the stuff we’re moving. The one that we have over in Independence Heights. That one is moving. I think the electrician is done. We’re moving on the paint and cabinets.

You guys are going to hit that at the right time.

We’re definitely going to hit it at the perfect time.

That’s one of those areas of town that every summer the ARV jumps up by 10% to 20%.

It’s for sure a seasonal fluctuation there.

It is weird. It’s not like people are sending their kids to private school over there in Independence Heights. You are going to be hitting that one right. That would be a pretty sweet deal.

We have the other one that we’re doing in the front. The eight-unit down in Corpus, that’s moving along. That’s a test balloon if you will. We’re going to raise that balloon up and see who in California looks at it because that should be good out there. We have a deal I’m working with another private lender down in Texas City. That’s a short-term rental. The Wi-Fi is going in and shortly after that security system will go in.

Have you already bought furniture and everything or no?

Experience is what you get when you didn't get what you want. Click To Tweet

No, we have that sourced.

Why would you want to do that, Rob? Why would you want to do short-term rentals?

I can make $1,300 a week in Texas City. I’m still in my life driven by the naysayers. Because that was a deal that you looked at and Dean was looking at or Mr. Texas City guy and he said, “You’re not going to get $1,400 a month in rents there.”

I looked at it too. I was like, “I don’t know.” The $1,400 for long-term rental, I don’t see it.

That could possibly be true but I have a $78,000 house, 1,500 square foot house at Texas City. I have to do something with it. We are probably going to do short-term rentals, not Airbnb. We’re renting out by the week for $650 plus $50 a week in cleaning. I’ll have a maid service there once a week to clean up the place. I should be able to get 100% occupancy for most of the year. There will be a few weeks works down and I’ll be grossing over $5,000 a month.

What’s your net going to end up being, $3,500?

It’s close to $3,000.

I want to make sure everybody gets this because we’re getting a little hate. We’re getting a little shade thrown our way for short-term rentals. You can buy a house in Texas City. You’re all in for $80,000 plus I’m sure you got to buy furniture. Let’s call it $100,000. One asset, $100,000, that’s going to make you $36,000 a year net. It’s a 36% rate of return if you paid cash for it.

I have a second JV partner on it. He’s going to do fantastic. He wants to do another one once this gets up and running. That’s a lot of fun.

Why do you do short-term rentals? Easy, because we’re making $3,000 a month on $100,000 house.

We’re maintaining it to a much higher level.

That tenants are of higher quality. Everything is phenomenal. Why did we go by four little beach houses down in the South of Houston? Because they’re going to make us $3,000 to $4,000 a month.

TRE 16 | Private Money Lending
Private Money Lending: If you are interested down to the hunting ground, you got to be a lender.


That’s crazy how much those are going to make us.

That’s $3,000 to $4,000 on the short-term. We flip it over to Airbnb, it’s almost double that. “Why would you do that?” I’m like, “Because I don’t have to go buy a 200-unit apartment building.

I think we’re going to have $15,000 a month.

Do you think about the summer? That’s crazy. I don’t have to buy 900 single-families. I own that company. I know what that looks like. It’s a lot of work. It’s not passive. I would much rather have ten to twenty Airbnb and short-term rentals before I’d ever want 100 single-family rental portfolios. When people tell you that you should do this over this, I ask them for the numbers, “Show me the numbers. Why would I do that over this?” “It’s going to take you a little bit more work?” It’s ten times the return.

The startup work for what we’re doing is maybe 25 times more. The maintenance of it is nothing. It’s the same. You have to build a team and make sure they understand what they’re doing. Hire the right people, which is always critical and then let it roll.

It’s ten times the return. I can do with one property what a long-term rental will do with ten.

What’s greater one or ten?

It makes no sense. It’s math. It’s not that hard. It’s Jacuzzi math. It’s horse math. If you guys ever see my horse math slide that we do sometimes at these events, it’s so simple. Ten times, $3,000 a month. Have ten of those, you’re making $30,000 a month. I’m going to do a Facebook Live on the way out of the studio. It’s so new. I’m trying to be a Facebook celebrity, an influencer like Gary Vaynerchuk.

You’re buying your kids into college.

I’m trying to build a real estate empire over here. Just do it through Facebook. Somebody told me, “Why would you be on Facebook all day?” Because every time I get on there, somebody sends me some crazy deal. They sent me a deal over at Facebook. I looked at it. I pulled up comps really quick and I said, “The numbers are crazy off on this thing.” I may go by what they’re showing anyway because I liked that side of town, so we’ll see. If I’ve got time I might I do it, otherwise, I might not. I feel like I haven’t been out in the field in a couple of days. I got to go out and drive around a little bit, do a little driving for dollars or something.

We’re doing a little caravan. We’re doing a field trip.

Do you want to talk about that right now?

Real estate investing is a lot more fun in a team. Click To Tweet

We have some investors that are interested in working with us either first position, second or in the fund. Some of them want to see what we’re doing and where we’re doing it. One person very strongly said, “If you’re driving on Friday, I want to come with you.” He was about to deploy some capital. He might deploy some more capital. We said, “Fine. It’s a long day. Meet us at the studio at 8:00. We’re heading down right from here.” He’s going to do it. I have two more seats left.

Rob is going to take two more people. If you are interested down to the hunting ground. You got to be a lender. Somebody who we’re going to do business with. He’s going to take two people down to the hunting ground. There are at least two stops. I hope you like the gas station barbecue. It’s good. It’s not bad. Give them your text number.

If you’re interested in working with us as a private lender, go ahead and text us at (281) 401-9008. We can talk about that. We have 506(c) accredited investor funds. I would love to talk to you about that. If you’re new to this, we have a couple of little times we get together each month and there’s some stuff we do online. We have an accredited investment tool. It’s 506(c) for accredited investors only. We’d love to have a conversation about that.

All you junior want-to-be SEC attorneys that are like, “You can’t talk about the fund on the radio.” Yes, we can because it is registered with the SEC. That will be fun getting them in the Jeep take them down there. I like going down there. It’s three hours there and three hours back. I want to do this overnight, especially when the beach house is up.

When the beach house is up, then I’ll make them rent the rooms. Maybe we’ll have those three suites available for sure.

If you guys want to stay the night, here we go. We’re going to have to find where the best barbecue place down there is. We found a good seafood place. Not close but down the street, one of the other hunting grounds. All you can eat shrimp and fish and catch of the day. It was legit. It was good. We’ve got to find all our little restaurants down there. We’re going to do that with the mastermind too. It’s like, “Come on down.” Everybody stay at the beach house. We’ll rent a couple of other houses. We’ll go to the beach. We’ll do all the fun stuff down there and go down the boardwalk. All that fun stuff. I know a couple of good bars are right there by the Omni because that’s where I used to stay. When I was working down there, I found where all the college kids hang out. Maybe that might not be for everybody, but I’ve had a blast every time I went down there. Live bands and all the college kids like, “This is awesome.” Give them the text number again if people want to ride along with you.

If you want to ride along, that might be fun. It’s (281) 401-9008. We have a lot of things that we were working with private lenders and investors. We’d love to have a conversation with you. I’m not soliciting. All our solicitation is done through paperwork, third party approvals and all that good stuff. This is a conversation about what we have going on and our previous experience.

This is driving around and looking at stuff we’ve got that we’ve already closed or we’re about to close, all that kind of stuff.

My attorney is on her way to Italy, but if she heard this, I’m sure she’d be like, “Shut up.”

We’ll be getting text messages, “Say it this way. Don’t do that. What are you doing?” She’s a little conservative. Private money versus hard money lenders. We keep talking about private money in here. Private money is loans to individuals. You can do any type of loan. It can be unsecured, all kinds of stuff. We have unofficially become the private lender bailout team for Houston. I looked at a handful of deals over the last couple of weeks. I got a call back from the person I’m going to refer him to. I walked that property and then I rerun some numbers. I’m like, “This guy, depending on what his holding costs are, he could lose $500,000 in two houses.”

For sure, he’s out $300,000.

You look at this thing and you’re like, “I wish he’d called me.”

The other guy did. We talked him out of that deal.

I got a text message and the banker calls say, “We need a little counseling on this $2.8 million deal.” I looked at it and I called them back, within five minutes I could tell them, “Don’t do this deal.” They’re from California, $3 million. They do those deals all the time. I’m like, “Don’t do this deal here in Texas. This is not a marketplace you want to play in with that kind of product.” I listed two or three reasons, “Don’t do it for these three reasons.” They were like, “We’re not doing it. Have you got anything else?” I said, “Send me your email. I’ll put you on the Mr. Texas Real Estate list and we’ll save some property.” It takes experience. Experience is what you get when you don’t get what you want. I’ve got enough experience with some of this higher end stuff that I would much rather flip the house in Oak Forest for $350,000 to $400,000 than I would a $3 million house in River Oaks or Piney Point or any of those other places. I don’t like them. It’s too tough.

We’re going to be over at the IRA Quest Trust offices. We’ll be down there. We’ll be talking to private lenders. We have an office upstairs. Some of the private lenders will come upstairs and talk about, “What are you trying to do?” We can talk about funds. We can talk about some other stuff. That’s what we do on Tuesdays. We’re always in the office on Tuesday because there are people coming on Tuesday. If you’re looking for private lenders, you should go to that room. You should go to other rooms like it. If you’re in Dallas, you should go up there and see Haley, a Quest Trust Officer.

If you’re out in Austin, they have a great afternoon event too. They have a good lunch. I’ve been there many times. It’s Tuesday, Wednesday and Thursday, the three cities. If you’re looking to start relationships with private lenders, you go there. You do the same exact thing we talked about. You text them. You take them out to coffee. You do lunch. You start building that relationship so that you understand who you’re working with, what their risk tolerance levels are, what their real investing goals were, that type of thing so you can start building out and delivering opportunities for them that make sense.

Real estate investing is a lot more fun in a team. It was a lot of fun. We borrow from our lenders. I’ve lent to some of the lenders before. It’s a whole lot of fun. We’ve got all new accounts set up over at Quest Trust. You open some up. I opened one up and I funded a couple of others.

Let’s do the twenty units.

We can totally do it. We raise all the private money and do it all in a Roth.

Let’s do one. Maybe we’ll do all equity participation.

We’ll do all equity. It’ll be sweet. I am flirting with the idea of putting together an eighteen-month $1 million challenge. I can put $1 million in my Roth in eighteen months. I’ve got to focus. I can’t be doing a million other things, which is going to be hard. If I focus, I can put $1 million in Roth in eighteen months.

I think so too. I’ll give you administration control over mine as well.

As always, hopefully, iTunes will be up sometime in the future. I have no idea what’s going on. We’re waiting for iTunes to approve our podcast. They’ll get it all figured out. YouTube is already up. I’m supposed to be doing something with the YouTube channel so you guys can start to see some videos and also some video segments. Thanks for tuning in.

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