The Interest Rate Is The Wrong Question In Private Money Lending | Ep 143

James
Usually the first question that a private money lender asks is, well, how much is the interest rate gonna be? And I'm here to tell you that's the wrong question to ask. You should be asking some other stuff, which is way more important.

It's not a bad question, but it's the wrong one to start with. Uh-huh. Take that.

We're gonna talk about that today on the Furlo Capital Real Estate Podcast, where we dive into the intricacies of passive real estate investing. And our mission is to equip people, to invest wisely at 12% or 10% or 8%, it doesn't matter. So that um we can I don't know.

Grow our wealth and improve housing. Ah yes. Uh I'm James and this is my wife, Jessi.

Jessi
Questions. I

James
just

Jessi
reminded me of it. Uh our son has this friend who asks questions like nonstop. So nonstop.

James
So many questions.

Jessi
Like to the point where like our our nine-year-old son was like Dude, you ask so many questions like

James
just so

Jessi
I was like someday this is gonna serve him very well.

James
Totally.

Jessi
He will be very inquisitive and get a lot of information and lots of learning.

James
Uh-huh.

Jessi
But wow

James
So my favorite story is so we're watching Back to the Future. And kids haven't seen it before. And he knocks on the door because he wants to play and Sam 's like, hey, I'm watching a movie.

Can't come play. And he goes, Oh, what movie are you watching? He goes, Back to the future.

He goes, Oh, I've I've seen that recently. Sounds like cool. And he goes, so are you at the part where and and I'm and I'm st I'm kind of standing there just kind of watching over this and I go, dude, no spoilers.

He goes, yeah, yeah, of course. So are you at the I'm like, what the

Jessi
heck? Real for real.

James
And I was like, dude. And and so it's like and so he's like, you know, is he has he done the clock stuff yet? Oh my word.

And Samson's like Yeah, yeah, he goes, cool. Well what about and I I let him like like it was like a third one like dude what are you doing? And I'm like this question This is a roundabout way of doing spoilers.

I thought it was really clear. I f I cut them off. I was like, hey, we're done.

Stop asking questions because of the way that you're like you're slowly walking through the movie seeing what parties at, which I appreciate it, partners like if I could trust him, I'd be like, come walk in, look at the frozen scene, get an idea, and then leave But that's not how it would roll. Oh yeah. Super funny though.

I was like, dude. But also like

Jessi
hasn't learned the nuance yet to be like, what party at? Right. Just wait.

James
Right.

Jessi
No.

James
He

Jessi
has to ask and then do a follow-up and then do another.

James
Oh, so funny.

Jessi
Asking questions. It's a good thing.

James
Yeah. The other kind of annoying thing that he does is we've got some echoes in the house. And he loves to ask it questions, but like shouts at it.

Like is it all grandma? Alexa, what's this thing? Play this song!

Alexa! Play this song! Alexa!

Like dude, dude, just give it a chance to go to space and talk to the internet. Like, come on man. Just shouting at it doesn't it's pretty funny though.

But yeah, no, he asks a ton of questions. Which again, assuming he gets himself under control, like it's a fantastic skill to have to be inquisitive. Asking questions is thank you for bringing it back.

You got me totally off track. That was great.

Jessi
Interest rate.

James
Well, that is a good question. Like, hey, what's the rate that I'm gonna earn? But you see, the thing is, that is you asking about the upside the what's the best I could possibly do.

Jessi
Sure. And I think you want to know that.

James
Right. But what you really should be investing in is like on the other end. So Question for you first. What is a private money lender? Probably should have started with that one.

Jessi
Someone who gives you money who's not a bank. Yeah, but they don't give you money. Well they loan you money.

James
Okay.

Jessi
Right. They lend it to you. Yes. And then you have to pay it back And I'm sure you signed some agreements about like how you're gonna pay it back and when and with interest and

James
all the things.

Jessi
And what happens if you don't pay it back and all that kind of stuff.

James
Mm-hmm. Mm-hmm. Mm-hmm. Yeah.

Jessi
So it's a non -bank loan person.

James
Yeah. I mean it technically is kind of in some ways a mortgage by definition of being a mortgage is a loan that's backed by actual real estate. So you know in that sense. Yeah. Yeah. Um

Jessi
but there are rules about like it can't just be anybody for any amount of money. Oh.

James
Yeah.

Jessi
Is it only a private money lender if they're lending towards real estate?

James
No, I mean

Jessi
Or like if I give you five bucks And said, hey, invest this and then give it back to me, would I be a private money lender?

James
Yeah, I guess so. Yeah. Interesting. I guess by definition. Yeah.

Jessi
I thought there were like more rules about who could give you money.

James
Or the types of loans. Like if you're if you're giving money for someone to move into a house that they're going to move into, that's that's like you suddenly start getting the Dodd Frank type of stuff. But interesting.

Yeah, for like investment things. It's different. It's the Wild West in a way.

Yeah, cool. All right, you got it. Um, so again The first question that people tend to ask is, well, what rate should I charge?

Which usually it's me who defines the rate and tells you, hey, would you be willing to lend me money at X percent interest, like twelve percent interest or whatever? Which Is good to know, but realistically, the difference between say like a 10% and a 12% on a 45-day loan It's really not a whole big difference even on like a six-month loan.

Jessi
Okay.

James
Depending on the amount.

Jessi
It would probably make more of a difference if it was a very long-term loan.

James
So let's say, let's see here. Let's say that you loan someone, let's try to do easy math, okay? Uh $100,000 is what you loan.

And at 12 %, that is going to be $1,000 a month. Right? Because it's 1 % a month.

It's $1,000 a month. Cool. At 10%.

That's going to be eight hundred and fifty, nine hundred, yeah, ish. I don't know top my head. I mean that's that like so we're talking a difference of like six hundred dollars.

off of making let's say over a six month time period, talking about a difference of six hundred dollars between like six grand And it's just it's the it's just not huge. And again, if it's even less, if it's like, hey, I need this for a month and a half, like 45 days, like you don't even you don't even notice it. So instead What you really should be asking about is what's my minimum?

What's the floor that you're going to be making?

Jessi
Okay.

James
Okay. So like uh I was hoping you would be like, what do you mean by that?

Jessi
Oh

James
well

Jessi
opposite of what's the highest. Well, it's like I what my interpretation of that is just am I gonna lose money? You know, like what's the

James
downside? No, that's uh this is different. Like what's the minimum I'm gonna make off of it?

Huh. So like I might tell you, so for example, I might say, yeah, um you're gonna make uh it'll be Whatever. It's 12%, you know, per m uh annually per month, but I'm gonna pay you a minimum of say like three percent.

Or Three months.

Jessi
If it's twelve percent annually, why do you need to specify a minimum? Like are

James
good for that? Well again, if I if I pay you twelve percent and I only have your money for six months, I'm actually gonna pay you six percent Like that's the total.

Jessi
Oh, because you can pay early.

James
Yeah, yeah.

Jessi
I understand. So if you pay it off early, I have to think of Not getting as much interest.

James
Yeah. Yeah.

Jessi
So really you're just giving me a range based on like uh

James
no, I mean I guess in a

Jessi
'cause it's always it could always be I don't know. Yes.

James
Because every month you're going to be able to do that.

Jessi
might want the fluidity of like getting my money earlier.

James
Ah, we're gonna talk about that a little bit later on. That's an important distinction, right? Because yeah, what if I was like, can I just have your money indefinitely until I'm ready to give it back?

Jessi
Ray.

James
Yeah.

Jessi
Which that should be specified. A timeline should be specified in there.

James
Which is a great question to ask. Like, is there a timeline specified?

Jessi
Because I suppose if you didn't have one then you would have to worry more about what's the minimum and what's the maximum because you could change the timeline on me, but I'm like I don't know. The minimum's always zero because it's like, well, yeah, you could borrow my money and just give it right back and I've got zero interest. But you're not gonna do that.

James
I don't know. Like sometimes it's hey, I just need the funds to get this thing under contract And then once I actually go to closing, I'm gonna get my own separate financing for it. But I just need I need like my earnest money down. I need 10 grand for earnest money.

Jessi
Huh.

James
And so I need that for like two, three months, that's it.

Jessi
I feel like you'd specify that though. Yeah. I don't know. Maybe they should ask. You should ask no matter what. Because it's like

James
Yeah. Yeah. So we've done that so like we did a deal where we we offered twelve percent interest on it and we said you get a minimum of six percent on it.

No matter what. Even if we hold on to it. Even if we only do the deal for a month, you're gonna get paid as if it was six months.

Okay. I understand. And in that case we end up holding on to the property for three and a half months.

And we still paid out six percent, which was an amazing it was like twenty-six percent, you know, annualized return because we ended up paying it early, which all of our investors were like, that was awesome. Let's do that again.

Jessi
You said a minimum Like why would you do that?

James
It's just a pain in the butt to have to transfer funds, fill out the paperwork, do all the work. So as a private money lender, you're like, no man, I want it Another way that people handle this is they just charge points. And they say, yeah, whatever, it's 12% or whatever, but I'm gonna charge one or two percent just right out the gate.

Okay. Which is another way of handling that exact same scenario. And in some ways it's cleaner and if I've thought about just doing something like that.

Yeah. Um Okay.

Jessi
That makes more sense why you would ask about the minimum.

James
Okay. Yeah. So I think that's why so I think uh like real pros are gonna be like tell me more about that minimum like what are we getting out of it? Ours is pretty generous, so we don't get a lot of pushback on it, but uh you could Uh all right, the next question that you might be asking is why not just take equity in the deal? Why do a loan?

Jessi
Well, you might not be offering

James
Well let's pretend I give you a choice. What would you I mean you can negotiate anything, right? You could say I'm not gonna give you a loan, but I'll have an ownership interest.

Jessi
I suppose.

James
Yeah. Do you know the pros and cons of that one?

Jessi
Well, equity is only paid out when the property sells.

James
Yeah. That's typically true of the debt as well. In theory, one of the people what like about blah in theory, what people like about the equity is it's uncapped You know, if the sell if the property sells for a ton of money, dude, you made a ton of money.

Awesome. Mm-hmm. There's that cup that cuts both ways though.

If the property loses money, then you lose. Guess what? You lose money.

Jessi
Yeah, I feel like a a loan with a set interest rate is safer In some ways.

James
In some ways, yeah. We're gonna talk about that. But but you get that guaranteed, like this is the amount.

But if the property does super, super well, this is the amount. But if you end up losing money on the project, guess what? This is the amount.

You're still covered.

Jessi
Mm-hmm. Bless you.

James
Oh, that felt good. Um Yeah, so you're not necessarily paid for um what they usually call it like they'll say like the asymmetry of the risk. You're not paid for saying, hey, I'm taking on some ownership risk, so I get the share on the upside. Instead what you're saying is, no, no, no, no, I I'm willing to cap it, but I want to get paid first.

Jessi
For equity?

James
No, for a loan.

Jessi
Oh for a loan.

James
Yeah, yeah. Sorry.

Jessi
Okay, that makes sense.

James
Yeah, yeah, yeah. So what do you think now? Are you like, am I are you an equity person or a loan person? I

Jessi
it depends on the deal, I feel like.

James
What do you tell me? What does it depend upon?

Jessi
Like if I knew that you were gonna take a property and add a lot of value to it, then I might want equity.

James
Oh, okay.

Jessi
But if it was just the short term like you're gonna use my money, get it under contract, I'm like, Well, okay. And then you're gonna flip it right then, you're not gonna really do anything to it.

James
Yeah.

Jessi
I might be like, well, it's just a quick turnaround. Just give me the percentage, give me the minimum, a flat rate. Yeah. And then we'll be done.

James
Okay. Yeah. That's fair.

Jessi
Depends on the property.

James
That's cool. That's cool. Uh here's another one that I think is um interesting to ask about because I think it's just it let's talk about that worst case scenario stuff.

So you want to know what position am I in on the load? That's Quasi important. And there's no money left, you don't get paid.

Jessi
How likely is that?

James
Um

Jessi
I feel like if you're a if you're a legitimate you know, non-shady business investor and people are investing with you, like How how often would that happen that your deal goes south, you had to pay out your first investors, and then you'd like people in second and third positions just get nothing?

James
Yeah, I don't know.

Jessi
It doesn't seem like that would happen very often. Or if it would happen once and then you'd be done. Like people wouldn't give you money.

James
Yeah, that's probably true. Yeah. Yeah.

Jessi
Because your reputation would be done.

James
Yeah. No, it's true. Uh

Jessi
but it's good to know what position you're in.

James
Yeah, no, totally. Well, and there's some subtleties, right? If you're in first position It is up to you to defend it.

So if they stop paying, you're the one who does the foreclosure, fills all the paperwork, does all the stuff. Whereas if you're in second position, you're kind of long for the ride. And so there's different responsibilities that come with it than pros and cons and uh with that.

Um yeah. So one of the things that um That we do just to make sure that it's, you know, whatever. It's you're using a deed of trust is the or trusted.

Depends on what state you're in. I think we call it trusted here in Oregon. And um And so that's like that's the official instrument that gets recorded that says, hey, here's the situation and like it's being encumbered and whatever.

Um that's the That's the thing. And you can put different stipulations in there in terms of like can it be cross-collateralized and other stuff? Like it's like, can people come behind me or not?

Like there's all sorts of So you can

Jessi
you can spell out all the different positions of your lenders and what they would or wouldn't get.

James
Yeah. One of the things about Oregon is it's a non-judicial trustee sale, so there's a notice minimum. I think it's like 120 days Um capital gets frozen, which is what's interesting.

Not lost, but it gets frozen until things are figured out. And then you as the uh the borrower, they pay all the attorney's fees if it's collectible. Um so there's some advantages.

But can you give ours up

Jessi
like a real number example that has different people in those different positions and then what might happen? If you if you're gonna pay it out

James
or if you can't pay it out? Let's say you buy a property $160,000 and you're gonna spend $100,000 fixing it up with a goal of selling so you're gonna spend two sixty And then the goal is maybe sell it for like $315. Something like that.

Pretty classic. We've we've done that exact deal um in the past. And so um you what you might have is so you need to raise $260,000.

And so you might say I don't know, the first person gives you a hundred thousand, you have another person who gives you a hundred thousand, and then a third person who gives you sixty thousand. And um and so you got first, second, third position. And is that like

Jessi
you get to choose the position they're in or whoever gave it to you first timeline like time wise.

James
Yeah, it's I mean it's a it's usually um me as the borrower. And I should and I should by the way like I'm usually the borrowing borrower in these situations, so like keep that bias in mind and all my answers. Um Usually I'm the one who will decide, but I'm kind of a hey, first come, first serve kinda gets it.

Sometimes I've done it as whoever's biggest gets first position. Kind of depend. Or sometimes someone will just straight up ask and I'm like, all right, yeah, sure.

Um Kinda it kind of depends on it. And um but it's usually whoever commits first.

Jessi
And then that's written out in that trustede.

James
Yes, trusteed. And um and so Uh hypothetically you could have a situation you buy the property for 160, and then I decide to take my family on an epic vacation to Hawaii instead. You know, we're gonna spend a hundred. We're gonna spend a hundred grand. We're gonna go swimming with sharks and go hike up a volcano and I don't know, buy a boat.

Jessi
Paragliding.

James
Whatever, right? We just obscound of to Hawaii word dunzo. And we go, don't worry about it, just foreclose on the property.

Don't no problem. Don't care. I'm willing to give it up.

Jessi
Uh-huh.

James
Right? I got the boat. Who needs investing now? I don't know, something like that.

Jessi
Okay.

James
In theory, you have a property that's worth a hundred and sixty thousand dollars. Right. So that first person, that first lender would get his hundred thousand That second person would get 60 of their hundred thousand and the third person would get zero.

Jessi
Nothing.

James
Uh-huh.

Jessi
Interesting.

James
And that first person is, I think, I think I don't a hundred percent know. Someone ends up owning the property. I think it's the first person or maybe it's all three.

I don't remember. Oh. Um Well because the first person would have to file for foreclosure.

Yeah.

Jessi
That's why.

James
Yeah, yeah. And I and all three of them would have to file to some degree, but it's the first one who's like has to go through all of it. And so that first one, I believe, would end up with a property, and now they have a decision, right?

Do we just sell it? Yeah, just get rid of it or fix it up. Do we fix it up and try to make it worth more decision time?

I guess messy real quick. Okay. By the way, the way that we get around it is we personally guarantee all of our loans as well.

So if I was dumb enough to do something like that, they would go, hey James, uh you owe us personally. And then um there's a whole process of suing me and then I have to sell something else and pay it back. So My investors will get whole no matter what.

Yeah. But um plus interest. That was the other one, right?

Like there's no interest that would be in those situations. So

Jessi
I can see if it's if it's personally guaranteed the likelihood that it's gonna get paid back is much higher. Yes. Why w like why would you do that?

James
Right.

Jessi
If you

James
well yeah.

Jessi
You would take care of the money so that

James
Which One of the questions you probably should ask is, do you have any other assets that you could sell that I'm guaranteeing against?

Jessi
Sure.

James
Because they were like, yeah, sure. I personally guarantee with my car. You know what I mean? With

Jessi
my hunk of junk car.

James
Yeah, yeah. I'm like, no, not me. I I don't know I don't know a few more pieces of real estate, it's all good.

So yeah, there's that. Uh yeah, so um here's an interesting one, I thought. And by the way, I'm trying to not go over the obvious questions.

I'm trying to be like, hey, you go a little deeper. Interesting. Should you just take the deed instead of a lean

Jessi
Uh I don't know the difference, I guess.

James
So yeah. Well, there's a trust deed. So the lien is who owns the property.

Okay. And so as the as the lender, you could say, Well, I don't want I don't want to I don't want the I don't want to tr I don't want a lean against the property. Instead, let me just own it and then once you pay me back, then I'll Transfer the deed of ownership.

It's kinda like

Jessi
kind of like a title

James
for car company. Yeah, for car companies.

Jessi
They're like, I'm just gonna hold on to this for you.

James
Yeah. I own it. Yeah.

Jessi
And once you pay it off, I'll give it to you.

James
Yep. And you have a contract in place that spells all that out. Yep.

In theory you could do something similar to that. Which you're like Well, and some of that sounds pretty nice because we avoid all the foreclosure stuff, all the filing, why not do that? But there's a reason why banks don't do that.

Um Imagine you've got a situation where, again, same thing. You hire a contractor, they just walk off or whoever it is, you know, the investor hires a contractor, they leave, the investor themselves, slash borrower, they just vanish. Right.

Now what hap the owner, the person who holds the deed, they take on all that liability for code enforcement, for injuries, for insurance. They had all of that. I don't know, that contractor actually gets hurt on the job or they do something dumb by installing something that's unsafe.

Now, as if you held the deed, you're liable for all of that. Whereas If you're just a lean, nope, that's still all on the borrower. They're at um yeah, they own all of that risk.

Jessi
It does giving you a a little bit of distance gives you More protection, I guess.

James
Correct. Yeah. Less risk.

Less risk? Yeah. Uh-huh.

Uh-huh. Yep. Huh.

Um

Jessi
I wouldn't have thought of it that way. No, owning it is better. It's like, well It it depends.

Like you're not just outright owning it. You're owning it in the middle of this transaction, which is very different. Correct.

Because something could change.

James
Yeah, yeah, yeah. Yeah. So, um Oh, dude, I got more questions.

I was I was ready to We're good. All right, so um I totally You know it's funny I was reading it like I felt like I had more questions when I was doing this Um it's because I did. That's what I got for doing earlier today.

Um all right, so uh more questions. We're gonna speed up just a little bit. I was really dragging it out and we shouldn't have done that.

All right, so um A question uh is about the the next focus is so that was about like worst day scenarios, right? How do you handle the worst case? Now let's talk about the actual person itself.

So is the borrower an LLC or a human? Right? That matters.

Um just because there's certain different rights and stuff that you might have with an LLC versus a person. Um so like when you borrow from us, you're technically borrowing from an LLC, but then I personally guarantee it as a human, so I kind of cover both. Interesting.

Jessi
Yeah.

James
Yeah. Um and it's because You know, like you might like if an LLC in theory, yeah, there's a guarantee against the LLC, but then you only get it when the LLC ever does a payout and they may never do a payout. And so like you never see any money.

You know It's it's fine. It's just one of those like um borrowing the humans is better. Yeah.

Yeah. And so at the very least, what you want to know is who's the person who's actually signing for this? Like Who's that individual who's doing it?

That's the question you want to ask.

Jessi
Even if it is under an LLC.

James
Yeah, you still want to know

Jessi
the person is associated with the other.

James
Uh-huh. And all the normal like track record questions that go with that. Which gets to the second question is do I underwrite the deal or the borrower?

Jessi
The mm yeah, I don't know. Borrower? I mean that's consistent with everything else everything else we've been talking about. But we talked about writing the deal.

James
If you have a good borrower and there's a bad deal Maybe get paid late. If you have a bad borrower and it's a good deal, man, you may never get paid.

Jessi
Mm-hmm

James
So that's uh I definitely I think you go after the the borrower. I mean because the deal like it's a snapshot and things happen. Believe me they happen when they do it. Um yeah, so again uh Yeah, uh it's the person. And if there's some sort of guarantee that happens to you,

Jessi
I mean you still want to vet the deal and obviously try to choose good deals, but It's more important to think about who you're giving the money to.

James
Right. Yeah, yeah, yeah. Totally.

Um The next question is, can I get an extension? That might be a question that I ask as a borrower. Can I have an extension?

And you want to have that figured out. Because maybe there's some who go, I don't know, and they go like, nope, you got ten days to get it done, fifteen days to, you know, to figure everything else out. Otherwise we're gonna default and you know, all sorts of bad stuff.

Potentially. Oh. That's an option.

Um, that's not how I set mine up. Mine is in some ways it's a renegotiation. Like, hey, let's talk about it in that Borrow an hour.

But you put that in ahead of time. Uh-huh. And mine, I technically so Usually the way that is supposed to work is the lender creates the lending docs and then the borrower signs it.

Right? So as a lender, you set all the terms and say, I'm willing to let you Borrow money. That's interesting.

Right?

Jessi
Yeah.

James
I do mine a little bit opposite where I'm like, hey, I went ahead and I put together all the lender docs for you and then I sign it saying this is what I'm willing to agree to. And it's it is a little flipped. I it's mostly because when I am borrowing from people, dude, they don't like They don't know.

That's not the world they live in. There's no reason why they want to be a passive investor. Right.

They don't want to get into all the legal ease, and I've thought it all through and done all the research and Talk to the experts on it and so um so and honestly they're borrowing because there's trust in me. So like yep, just paperwork.

Jessi
Well and honestly it makes sense. Like as as the quote unquote buyer You know, you're the one who's investigating the property and knowing the deal and vetting all of that kind of stuff, which if you were just buying a home, you would be that person. Yeah. But Yep. There's this middle weirdness, so it flips it.

James
Mm-hmm.

Jessi
That's kind of interesting.

James
I know. That's why I asked it. Uh the next one, um, can I get my money back early? I've had to deal with this one actually recently where I had an investor who asked that exact question. Yeah.

Jessi
They're like, I want my cash.

James
Um, because typically, at least the way we set it up, is there's no monthly cash flow. There's nothing until we actually do the exit And sometimes there's a prepayment without penalty, with penalty, that kind of stuff. Um I've set mine up where they can sell or assign the note to somebody else.

But The note exists until the deal's done. Now having said that, I have made the offer. Like again, I had a person who was like, hey, I need my funds back.

And I've essentially swapped them for another investor and did that. I didn't I could have said like, hey, let's just sell the note, which wouldn't have been a horrible idea now that I'm thinking about it. But um yeah, that wasn't how I did it.

Um I just paid them off and then set up a new note 'cause I knew it was gonna be short term anyways. Sure. Um which either either When you do the loan, it's for that fixed amount of time.

Sure. And it could even potentially go over. And there could be issues.

If you were to

Jessi
sell the note, would that original lender still be associated with it? If someone else

James
No. If it's transferred to someone else? No, yeah. So it's the same.

Well in my mind. Right. So let's say I'm the borrower.

You are the lender and so I borrowed money from you.

Jessi
I've given you a hundred thousand. I'm like, I need it back.

James
Correct. For whatever reason. Yeah. I could tell you, cool man, go find someone else who's willing to buy your note for

Jessi
I would have to find that person.

James
Yeah. I mean, I don't care. I've I'm contractually, I don't have to pay you back.

Jessi
Oh

James
I do. I help out.

Jessi
You would.

James
Because it turns out I know other lenders, so I'm not gonna talk to them. But in theory, no. Interesting. And then what you

Jessi
I'd be responsible for covering covering the note.

James
Uh-huh. Uh-huh. And what you

Jessi
would transfer.

James
And what you would tell someone is, hey, I have this note for it's $100,000 principal, but it's for, I don't know, say 12% for a year. So it's actually worth $112,000. This is what this note is worth to me.

Who would like to buy it? There's, I don't know, three months left on the term or whatever like that. And someone might come along and say, sure, I'll pay you $106 ,000 for it.

And then they get that last six for like those three months. Like so something like that could happen. Okay.

Yeah. Yeah. Good.

Interesting. Whatever. Okay, what if What if either myself or the lender, or if the borrower or the lender gets hit by a moose and is no longer around?

Or a bus, whatever it is. I mean it's an awkward question, but it's a good one to ask.

Jessi
Sure.

James
And it's actually uh we talked about this a few podcasts back. It's really sure for you. Do you remember the answer?

Jessi
No. Why would I remember that piece of information?

James
Because it's really critically important. Right. You could just go listen to the podcast, whatever episode.

And listen to it or just type it in the in the chat and be like, hey, this for Lebros. It's written in the document. Yeah, yeah, yeah.

It's a state bound at the end of the day. So if something happens to me, the borrower It's still on the property and whoever inherits the property from me would still owe it. If it's the lender who passes away, it moves on to whatever their errors are.

When I pay it back, I would pay it off to whoever that is. So that's the answer there. Um Yeah, so before you wire any funds over, here's your checklist of things to do.

So read the default and remedies section first. Okay. Yes, the interest rate is really nice to know.

But like What happens? Like the downside. What's the downside?

What's the minimum? Including finding out what that minimum interest floor is. Yeah.

Okay. And if there isn't one You should ask for it. We do.

Um, you want to be able to name everybody, every human person who's signing the note, not just the LLC. Um and you again, you want to know when you're pricing it out, like you want to think at think of like, well, what's the worst case scenario? What could I lose here?

And just be honest. And sometimes it is like, yeah, I could lose everything. Okay.

Like

Jessi
cool.

James
It is what it is. Now I know.

Jessi
I'm still signing this.

James
And you want to assume that your capital is going to be locked until the next exit event. Yeah. Whatever that is.

So um think of it in terms of like you're not necessarily buying some rate, you're buying an exit. I think that just helps with the mindset. Again, you are getting a rate, I get it.

Um And and the collateral that you get is only worth what you can do with it. Okay, that's important. I know a guy, they had that foreclose on, it was a restaurant.

It's like great, now I own a restaurant that's in the middle of construction. Now what Right, and they're working it through and figuring it out. That's hard.

Um, you know, if it's a multifamily, it's a little bit easier. If it is kind of a specialty structure, it's a little bit harder. Um I don't know.

We got a property we're splitting a lot and fixing up one house and building another. I mean, if something happens in the middle and there's a half-built house, great. Someone's got to figure that out now.

Right. The way we do it, we actually pay for it all up front, so it's not a big deal. But still, you gotta figure that out.

Um And you gotta remember the paper, the documents, that's what determines all of the stuff. Not a handshake, not us just talking on the phone. And um yeah.

So there you go. Those are I think those are the good questions. So Just to review, because why not?

What rate should I charge? Is a good question, but not the one you should be starting with. Instead, you want to ask what's the minimum.

And then why not just take equity in the deal? Kind of talked about that. Uh is it what position lean are you in?

And we also asked like why take the don't take the lead, why be the the deed, do the lean instead. Well that's what too similar. Um you want to know about who are those who are the human borrowers in the deal.

And again, you are underwriting the person, not the deal. And you want to know how extensions work. You also want to know how getting your money back early works, which the answer is probably you can't, and what happens when they do.

And again. All of the doc should spell all of that out. Good review.

Yeah, there you go. So there you go. Those are private money lending um questions that I think are worth asking and think it through.

Thanks for having me. Love it. Oh, you're so welcome.

I'm glad it could be helpful. So, with that, if you're interested in being a private money lender and checking out what it's like to invest with us, you can at Furlo. com.

So with that, thanks for listening. Have a great day.