6 Ways to Spot a Scam Artist Lender


As you start growing your real estate business, you will likely get to the point where you will need to find more money to fund your deals. Even if you started with a lot of money, leveraging OPM (other people’s money) decreases your risk and offers the chance of an infinite return. So, regardless of your financial starting position or your real estate niche, everyone should have the capability and understanding of how to raise capital.


When most investors reach the point where they need to find more money, they get nervous. They think accessing capital will be difficult. However, with a few quick Google searches, you’ll find a flood of people who need to deploy their capital quickly.


That’s great, right? Well, not exactly.


Ross Hamilton, who is the CEO of Connected Investors, an aggregator of crowdfunding portals with 250,000 investors, said “we work closely with all of the real hard and private money lenders around this great country, and the number one complaint and the biggest competitor of lenders is not other lenders. It’s scammers.”


So, with a plethora of scam artist lenders, how do we distinguish between the real and the fake? In our recent conversation, Ross explained how to screen lenders by looking for the six red flags of a scam artist lender.


Related: How to Qualify for a Commercial Real Estate Loan


What is a scam artist lender?


Before outlining the six red flags, let’s define a scam artist lender. Ross said that a scam artist lender is “going to be people who are actually trying to steal your money, and other people who are just completely and totally wasting your time.” So, a scam artist is the Zimbabwe King that emails you asking for your personal information so they can send you millions of dollars, a newbie lender that doesn’t know what they’re doing, and everything in-between.


When screening a new lender, what are the red flags to look out for?


#1 – Do they want you to wire the down payment?


“If a lender ever asks you to wire them your down payment money, run,” Ross said. Typically, down payment transfers are handled by your attorney, which the lender should know. Therefore, if they ask you to personally wire them money, that is a huge red flag.


#2 – Do they ask for your social security number or other personal information?


Ross said, “Giving away your social security number or any of that information before you’ve vetted a lender” should be avoided and should raise your alarm. This includes bank account information as well. Provide this information and risk having your bank account emptied or your identity stolen, both of which Ross has experienced. If these are the first things they ask for, consider working with another lender.


#3 – Do they have a business email address?


“Using a Gmail [email] address [is a] red flag. This person’s not really in business,” Ross said. This is a quick red flag to spot. If the lender doesn’t have a business email address, that’s a sign that you’re potentially dealing with a scam artist.


#4 – How well is their English?


Ross said another red flag is if “their English isn’t very proper. You can hear the accent come across in the e-mail correspondence.” However, that doesn’t mean that foreigners are the only scam artists. “The people who will waste your time are inside the U.S., the people who will steal your money are typically outside the U.S., because it’s tough to track those people down.”


If improper English is the only red flag, then you are likely in the clear. But if there are other red flags as well, like a Gmail email address and they are asking for your social security number, they may be a scam artist.


#5 – Do they have a website?


“Make sure they have a website. A lot of these lenders have very bad, fake websites (they’re easy to see through) or they just don’t even have a website,” Ross said. This is an obvious red flag that is applicable to any potential business partner. If someone doesn’t have a website in this day and age, something fishy is going on.


#6 – Do they have examples of past deals?


If the lender passes the first five red flags, the last test is to ask for referrals.


Ross said, “A big thing you want to do is you want to vet the lender and you want to say ‘Hey, can you give me some examples of recent deals that you’ve funded?’” If they are the type of scam artist that wants to steal your money, you probably won’t hear back. If it is the incompetent scam artist type, they will either disappear, or they will back pedal, both of which will be obvious to spot.


Related: Pay Attention to These Five Loan Components to Maximize Your Apartment Returns




There are a lot of lenders and private money investors looking for deals to fund. However, a portion of them are scam artists.


In order to screen lenders, Ross Hamilton tells us to look for these 6 red flags:


  • Do they want you to wire the down payment?
  • Do they ask for your social security number or other personal information?
  • Do they have a business email address?
  • How well is their English?
  • Do they have a website?
  • Do they have examples of past deals?


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Pay Attention to These Five Loan Components to Maximize Your Apartment Returns

Multifamily syndicators focus so much on getting equity for current or future deals,
but then they go with the first bank that offers them a loan, especially on the first few deals. In reality, the type of loan we put on the apartment is just as important as raising equity for the deal.


Large commercial loans are not the same as the cookie-cutter residential loans. There are a multitude of options when it comes to commercial financing. When you are dealing with multimillion dollar loans, the difference between two loans can have a huge effect on the cash flow and fees at sale.


Steve O’Brien, an investment officer who was responsible for the acquisition of over 20 multifamily assets totaling close to $200 million in the last five years, understands the different components of the loan and how they can affect an investor’s bottom-line. In our recent conversation, he outlined the five components of the apartment loans multifamily syndicators need to be paying attention to prior to selecting a loan.


1 & 2 – Interest Rate and Loan-to-Value


The two loan components that even the first-time syndicator is aware of are the interest rate and the loan-to-value. “Those are the two most important that everyone focuses on,” Steve said. “It basically determines what your costs are going to be, what is the debt service and how much money you’re going to need from an equity standpoint based on what amount they’re willing to lend you.”


3 – Recourse


While those first two components are relevant to residential loans as well, this next component is not – recourse vs. nonrecourse loans. Steve said, “with most banks these days, given the crash, they want recourse. What I mean when I say recourse is that they want you to guarantee some or at least a portion of the loan that you’re getting personally.” However, a lot of lenders will offer nonrecourse loans as well. Steve said, “on our entire portfolio that we’ve done of about $100 million in financing, we have not signed any recourse, meaning that if the deals were to go bad, the most the lender could do is come after you for the property itself, so you can technically lose your equity in the deal.”


Of all the loan components, recourse is the most important because it can come back to bite you bigtime. In fact, this is one of the things that happened with the real estate crash in the late 2000s. “A ton of people put up recourse and all their loans went bad, and it caused bankruptcies and other issues,” Steve explained. “Not all the lenders will do all the math on all the recourse you have. So you may have guaranteed 150% of your assets, and if everybody comes calling them at the same time, that can be a real problem.”


With a nonrecourse loan, you are personally protected as long as you don’t commit fraud (they are called “bad-boy carve outs”).


Steve said, “In general there are a lot of options for multifamily investing in particular that do not require recourse, and as long as you stay at a reasonable loan-to-value, you can get a nice healthy 75% loan and still remain recourse.” And if you go low enough on the loan-to-value ratio, depending on the lender, you can avoid the bad-bay carve outs too.


4 – Terms


Another component of the apartment loan to pay attention to are the loan terms. “A lot of banks will want to do a 35-month loan, or a 36, or up to five years with extensions,” Steve said. Your ideal loan terms will depend on your business plan. For example, if you plan on a long-term hold, especially with the historically low interest rates, it may make sense to pay a high interest rate and lock in a 15-year loan. If your business plan is to add value and refinance, a three-year bridge loan may be the best option for you.


5 – Prepayment Penalty


A final component of the multifamily loan to pay attention to is the pre-payment clause. If your loan has a pre-payment penalty and you want to sell early, you will have to pay the lender a large fee. Another form of a pre-payment penalty that may be triggered at sale is yield maintenance, meaning the bank will make you buy an instrument to pay them back the interest rate that you would have owed them if you completed the loan.


However, Steve said, “ultimately, that’s a decent problem to have because it probably means that you’re doing well, but it just limits your flexibility.”


Best Ever Loan Advice


Steve’s Best Ever advice for how to approach these five components is “You’ve got to pay attention to your goals. Is your goal to buy and improve a property and then flip it? Well, then don’t put long-term debt on it. If your goal is to buy a property and hold it forever, well then you may want to consider not doing a three-year bank loan with two one-year extensions and going to a longer-term lender that will do a balance sheet loan for you, like a life insurance company or an agency (Fannie Mae, Freddie Mac, something like that) in order to lock your returns in for the long-term, because it’s a nice, warm blanket to have a low interest rate that you know doesn’t mature for 10 years, unless you want to sell it, and then you’ve got a pre-payment penalty. So it’s all very determined based on your goals, and I think that’s what the key is – to set your strategy and your goals for the asset and try and find debt and equity that best mirrors your strategy and goals.”



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How to Qualify for a Commercial Real Estate Loan

Ready to make the transition from residential to commercial real estate investing? If so, it’s important to understand the difference between a standard residential mortgage and a commercial loan.


Michael Reinhard, a long-time commercial mortgage broker, wrote the successful book Commercial Mortgages 101: Everything You Need to Know to Create a Winning Loan Request Package. In our recent conversation, he provided a crash course on what lenders look for when qualifying a commercial loan.


The first thing Michael emphasized is “that a commercial real estate loan is an entirely different industry than a residential loan.” Residential loans are provided to an owner-occupied buyer or an one to four unit investor, whereas a commercial loan is provided to a five unit or more investor. Michael said, in regards to the residential loan, “Everything you know about and any experience you have with that type of loan – forget about it. Don’t even try to make a comparison. It’s a completely different industry.”


Related: The 4 Multifamily Asset Classes Defined


How does a commercial lender qualify an investor for a loan? Here are the five areas the lender looks at.


#1 – Credit Scores


One of the main differences between a residential and commercial loan is the amount of weight the credit score holds. “It’s always good to have a good credit score,” Michael said. “[For] residential mortgages, it’s almost like everything hinges on your credit scores only, and of course income. But with commercial real estate loans, credit score is not the top consideration. It’s almost not important.”


However, if your credit score is below 600, it will raise some eyebrows and require further explanation. If it’s below 500, qualifying for a commercial loan will be difficult.


#2 – Net Worth


When applying for a commercial loan, one of the first things a lender will look at is your net worth. Your net worth is the difference between your assets and your liabilities. Lenders want to see a net worth equal to or greater than the loan amount.


For example, Michael said, “If you’re wanting to buy a $1,250,000 apartment building … in a 80% loan to be a million dollar loan, they would like to see your net worth equal to a million or more.”


However, a net worth equal to or greater than the loan isn’t always the rule. For the example above, you could have a net worth of $600,000 or $800,000, but you need to make up for it with something else. For example, if you have a high income, then net worth isn’t as important.


#3 – Liquidity


Liquidity is also really important. For a $1,250,000 loan, if covering the $250,000 down payment exhausts all your liquid cash, Michael said, “the lenders will look upon that as a little weary because you have no cash left. They don’t like to see someone use up all their cash after a closing and then not have anything for an emergency, such as a $10,000 to $20,000 deductible for an insurance claim.”


The liquidity requirement varies from lender to lender. “The general rule is 10% to 20% of the loan amount,” Michael explained. “If you’re wanting to borrow a million dollars, you have to have at least $100,000 after closing; $150,000 or $200,000 is even better.” Other times lenders may require 6 to 12 months worth of principle and interest payment. If the monthly payment is $10,000, for example, a lender may want to see $120,000 in liquidity.


#4 – Ownership and Management Experience


The lender will also want to know about your ownership experience. Michael said, “Owning a duplex or three or four single-family rentals, or maybe 10 or 12 (you could even have 30 of them) – that’s even better if you have a large portfolio of single-family rentals. But if you’ve only had one or two, and maybe a couple of duplexes, that’s not the same as a multifamily because it’s a little bit different animal.”


If you are purchasing “anywhere between 5 and up to maybe 50 units,” Michael said, “they pretty much allow you to self-manage the property because there’s not a lot of third-party management of that size; it’s just too small and they don’t make enough money on it.” Therefore, since you will be self-managing, the lender will want you to have previous management experience. Do you know about leasing? Do you know how to perform credit checks, verify employment, and run a background check?


if you aren’t managing the property yourself, however, ownership experience will be more important than management experience.


#5 – Income


Finally, the last area a lender will be asking about is your income, whether you’re self-employed or a W2 employee. If you already own a portfolio of properties, they will want to look at your global cash flow, which is how much cash you earn after debt service. If you experience a hardship on one property, they want to make sure you can move cash around to keep all your debt service intact.


Michael said, “There’s really no ratio on [global cash flow]. People ask me about your debt-to-income ratio, [but] they don’t really use that in commercial real estate. They just look at the property’s loan-to-value and debt coverage ratio, meaning how much does the net operating income exceed the monthly principle and interest payment.”




Commercial loans are a completely different animal than residential loans. When applying for a commercial loan, the lender will take the following into account:


  • Credit score
  • Net worth
  • Liquidity
  • Experience
  • Income


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Top 3 Questions to Ask When Interviewing a Mortgage Lender

Unless you are paying all cash from your investment properties, you are going to need a mortgage lender on your team. So the question is, how do you find the best lender in your market?


Stephanie Weeks, who has been a mortgage lender for more than 13 years and is in the top 1% of loan officers in the country, finds that the best way to find a lender is simple – ask them pointed questions.


In our recent conversation, she provided the top three questions an investor should ask when interviewing a potential mortgage lender for your team.



The reason why you want to find the best mortgage lender possible is fairly obvious. Stephanie said, “If you’re investing in properties, then that’s your business, that’s part of your livelihood. And time is money. And wasting money on appraisals and inspections is also a waste of money. So, my best advice is that if you’re an investor and you are going to have mortgages when you’re purchasing these properties, team up with the best mortgage lender that you can find. [One] that is going to do everything they need to do to get you to that finish line. So don’t take that decision lightly.”


No two mortgage lenders are that same. To find out who is the best of the best, Stephanie provided the top three questions you should ask a lender before obtaining a mortgage from them and/or hiring them for your team.


Question #1 – When was the last time you read the guideline book?


The first question you should ask is when is the last time you read the guideline book? Stephanie said, “this sounds [like] kind of a joke, but it’s kind of funny and kind of true. For me and my team, we actually review guidelines on almost a daily basis, because on almost a daily basis, guidelines are changing. We actually get the guidelines printed out… We are learning how everything works, how it is done, how it puts us all together.”


When I asked her when was the last time she read the guideline book, her response was “yesterday.”


Stephanie said, “It’s kind of mean for me to say, but I still think it’s funny. You should see their face, or here them stutter, because unfortunately, most loan officers have never picked up a guideline book. That’s frustrating to me.”


This is a great question to determine their level of passion and how serious they take their profession. While this may not be a deal breaker, it’s important to know if your lender is staying up-to-date on the updates and changes that are occurring constantly throughout their industry.

Question #2 – What kind of added value do you bring?


Any mortgage lender is capable of providing you with a loan (assuming you meet their requirements), so you want to know what else they have to offer that is unique to them. For example, Stephanie said, “If someone asked me, ‘Okay, Stephanie, what kind of added value do you bring?’ I would say, ‘Well number one, the mortgage industry is broken, and I wanted to change that, so I wrote a book on mortgages. The second thing is I’m going to treat your money like it’s mine. The third thing is I’m going to advise you on your overall situation based on a five-year plan that you tell me that you have, your goals for closing costs, cash out-of-pocket, monthly payment, etc. I am going to shop [around for] insurance for you to get you a good deal.’”


Ask this question to a potential loan officer and see how they answer the question. If they have trouble explaining what they bring to the table that other lenders do not, that may be a sign to pass and find someone else.


Question #3 – How many __________ did you help last year?


Fill in the blank depending on what your investment strategy is.


  • How many families did you help?
  • How many investors did you help?
  • How many closings did you do?

Why is this important? Stephanie said, “According to the last stats that I read last year, the average loan officer closes 1.4 loans/month… If the guidelines are changing on almost a daily basis with updates, and there are a pretty decent number of programs that are out there and available, and you’re closing less than 2 loans a month as a loan officer, how are you going to be the best in your field. How do you know how to put that file together? How do you know how to get that approval? How do you have the experience to know how to work around the problem if you haven’t done it enough times?”


While the more loans isn’t necessarily the better in all cases, if the lender isn’t doing high volume, it may point to a lack of experience or expertise that you want for the lender on your team.




The three questions you want to ask when interviewing a potential mortgage lender for your team are:


  • What is the last time you read the guidelines book?
  • What kind of added value do you provide?
  • How many (families, investors, etc.) did you help last year?



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The Difference Between Debt vs. Equity Investing?

It’s been over three years since I raised money for my first multifamily deal. During that time, my knowledge about syndication, apartments, and real estate investing in general has grown substantially.


I remember after my first deal, I was talking to other investors and they asked me, “Did you raise debt or equity,” to which I responded, “Um, I just raised money. I have no idea.” I was very green at the time, but through experience, education, and mentorship, I’ve learned the answer to that question, as well as the answers to many more.


Amy Kirsch, who has over 10 years of financial services experiences, currently works for a crowdfunding company and is responsible for handling over a thousand inbound questions a week from inexperienced real estate investors like I once was.


In our recent conversation, when I asked her what types of questions she received, she mentioned that the question, “What is the different between debt and equity?,” was very common.


Equity vs. Debt


“I akin debt to a mortgage like you’d see at a bank,” Amy said. “You’re acting like the bank. You can expect an interest rate payment monthly. It looks like a balloon mortgage, where you can expect a principal after the life of the loan.”


“On the equity side, you look more like a business owner,” Amy explained. “You’re participating in the upside or the downside participation of the property.”


Pros and Cons


The main advantages of debt are lower risks and a steady income. “The debt is secured by a first lien loan, where should something go wrong, we’re able to foreclose on the property.” Also, the debt investor can expect a monthly or quarterly payout at around 8% annually.


The disadvantage of debt, compared to equity, is a cap on returns, which is limited by the rate, or preferred return, of the loan.


For equity, the main advantage is that there is no cap on returns. However, it is riskier than debt. “Should things perform well, you’ll have unlimited upside. Should things go poorly, you will partake in that as well,” Amy said. Depending on the business plan, the equity investor can realize gains on the sale of the property as well.




This is a high level overview of the differences between debt and equity. Debt is similar to being a bank, while equity is similar to being a stakeholder in a business. Debt has less risk and results in consistent payouts, but there is a cap to how much you make. Equity may or may not result in a higher return, depending on the projects performance, which make it more risky.


For more information on the differences, check out this Investopedia article: http://www.investopedia.com/articles/investing/122315/equity-vs-debt-investments-real-estate-crowdfunding.asp



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What’s the Cheapest Loan Program in America?

Steve Bighaus, who has 29 years of experience in the mortgage industry and originates about 300 loans a year, is one of many speakers who will be presenting at the 1st annual Best Real Estate Investing Advice Ever Conference in Denver, CO February 24th to 25th.


In a conversation with Steve all the way back in 2015, he provided his Best Ever advice, which is a sneak preview of the information he will be presenting at the Best Ever conference.


What was Steve’s advice? He explained the cheapest loan an investor can get, as well as the two main requirements to qualify for that loan.


What’s the Cheapest Loan You Can Get?


Steve, like many other lenders, sells his loans to Fannie Mae. In a matter of fact, from January 2009 through December 2013, Fannie Mae provided about $4.1 trillion in liquidity, which equates to 3.7 home purchases and 12.3 million refinances. That’s a lot of loans!


That being said, when Steve originates loans, he must adhere to Fannie Mae guidelines. According to Steve, “I tell people where I like to be as far as minimum loan size is about $40,000. The majority of my competition won’t go below $50,000.”


“I’ve had situations where maybe the appraisal doesn’t come in, or maybe it’s a couple thousand dollars lower,” he continued. “I can actually go down to $30,000. But that’s where Fannie Mae just stops buying loans.”


So, what does this mean for us as investors? With the typical residential investment loan requiring a 20% a down payment, an investor can purchase an investment property for as little as $37,500 and qualify for a loan ($7,500 down payment + $30,000 loan).


Best Ever Advice: Credit and Cash


Steve’s Best Ever advice for real estate investors is to “maintain your credit and keep cash.”


As for as credit goes, Steve explained, “If you own less than 4 financed properties, minimum credit score is … closer to 640.” That is over 40 points below the US average (687).


As far as cash, Steve is referring to cash reserves. “You have to have 6-months principle, interest, taxes, and insurances (PITI) on the subject property. Then, if you own maybe another investment property, 2 months of that PITI.” Steve elaborated by saying, “if you want a primary residence, we don’t count the primary residence.” In other words, he requires the 6-month cash reserves for investment properties and second homes only.


Steve also add that “we can use a combination of cash and equity” to meet the cash reserves requirement.




The minimum loan that Fannie Mae will purchase from a lender is $30,000. So an investor can obtain a loan on a property that’s valued as low as $37,500.


In order to qualify for such a loan, you must have a credit score of at least 640 and cash reserves equal to 6-months principle, interest, taxes, and insurance on the subject property.



Want to learn more about real estate investment lending, as well as information on a wide range of other real estate niches? Attend the 1st Annual Best Ever Conference February 24-25 in Denver, CO. It’s the only real estate investing conference whose content and speakers are curated based on the expressed needs of the audience. Visit www.besteverconference.com to learn more!


Related: Best Ever Speak Brie Schmidt Sneak Peek How to Avoid the Shiny Object Syndrome in Real Estate Investor


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Related: Best Ever Speaker David Thompson 3 Ways to Raise Over $1M for Your 1st Real Estate Syndication Deal


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What You Can and Can’t Do with the Self-Directed IRA


We have all wonder what you could and couldn’t do with a self-directed IRA. Fortunately, Kaaren Hall has come to our rescue. Kaaren is the President of uDirect IRA Services, LLC, where she has helped thousands of Americans invest their IRA into assets such as real estate, land, and private notes. In our recent conversation, she outlined the 4 main rules for what you can’t do with a self-directed IRA.


What Can You Do?


One of the pivotal definitions of the self-directed IRA is that one can invest in assets that are outside of the stock market, also known as uncorrelated assets. Therefore, the IRA account can be used to invest in many different types of assets, including:


  • Real Estate
  • Loan someone money to purchase real estate
  • Performing and nonperforming debt
  • Private stock
  • Precious metals
  • Land


What Can’t You Do?


When the IRS came up with the IRA rules back in 1974, they never stated what you could invest in. They only stated what you couldn’t invest in. The types of things you can’t invest in are very important because most of us are used to investing with cash. Self-directed IRA investing is not the same. It is its own little universe and has its own rules. According to these rules, you cannot commit a prohibited transaction. Therefore, it is a game of keep away from prohibited transactions.


1st Self-Directed IRA Rule


The first rule of the self-directed IRA universe is that you cannot have personal benefits from your IRA. For example, you cannot transfer money from your IRA into your personal checking account to buy a flat screen TV. The self-directed IRA is all about saving for later, not for spending today.


2nd Self-Directed IRA Rule


The second rule of the self-directed IRA universe is that you can’t buy, sell, or exchange assets between the IRA plan and people that are disallowed to your IRA. Disallowed people are your ascendants, descendants, and your and their spouses. Below is an example list of disallowed and allowed individuals:


  • Disallowed – parents, grandparents, your spouse, your children, your grandchildren, and all of their spouses
  • Allowed – aunts and uncles, nieces and nephews, brothers and sisters, and cousins


For example, you cannot use an IRA to purchase a property that your daughter will live in. However, there is nothing that disallows your niece from living in the property instead.


3rd Self-Directed IRA Rule


The third rule of the self-directed IRA universe is that you cannot have one of those disallowed people offer goods, services, or facilities to the plan. For example, Kaaren had an account holder bring them a purchase agreement for a property. When reviewing the document, they found that the broker of record was his father. This broke the rule because a disallowed person – his father – is providing services. The father was also asking for a commission. However, whether he would do it for free or charge a commission, a disallowed person cannot offer services and cannot benefit from the IRA.


4th Self-Directed IRA Rule


The final rule of the self-directed IRA universe is that you can’t invest in collectables or life insurance policies. Examples of collectables are fine wines, baseball cards, art, collectable coins, diamonds, etc.


Consequences of Committing a Prohibited Transaction


If the IRS says that you have committed a prohibited transaction, you will face financial Armageddon. This means that your entire IRA balance can be dispersed to you as a taxable event!



The Four IRA Rules Summarized: (1) One cannot personally benefit (2) Cannot sell, buy, or exchange with disallowed persons (ascendants, descendants, an spouses) (3) Disallowed persons cannot offer goods, services, or facilities (4) Cannot invest in collectables of life insurance policies



Don’t Be a Slave to The Lender

In a conversation I had with Tom Nardone, he explained how he was able to go from being a mailman to a millionaire real estate investor, purchasing over 250 properties! How did he do it? Well, Tom’s best real estate investing advice ever, which allowed him to achieve financial freedom, is to not be a slave to the lender.


Tom’s strategy, which he would recommend to all investors, but especially to those that are just starting out, is that every time you perform a fix-and-flip, take the $20,000 to $30,000 profit and go out to the fringe areas of the town that you live in (where it starts to transition from suburban to rural). Then, try to find a little house where the numbers make sense and use your flip profits to purchase the property free-and-clear so that you never have to worry about having a mortgage company involved. Tom says that if he could go back and do it all over again, he’d stay away from the $300,000-$400,000 properties all together and instead, focus 100% of his energies on this business model.


Tom has lived through and survived two real estate crashes, but unfortunately, his friends, the ones that focused solely on the $300,000 properties, are no longer in the game. Because once the market crashed, these $300,000 properties dropped in value significantly, sometimes as low as $50,000, and were taken back by the banks! On the other hand, if you are purchasing a property for less than $50,000, chances are that it is not going to devalue any less than that. And if you are purchasing them free-and-clear, even if they do drop in value, you don’t have a bank knocking on your door demanding their money or the property, so you have the ability to ride out the storm.


Another benefit of purchasing these inexpensive properties free-and-clear is that if you plan on keeping them from your entire life, once you purchase 10 to 20, you will never have to worry about money again! This is the main reason why Tom recommends this strategy. If you own 10 properties free-and-clear that are renting for $700 to $1000 per month, you’ve created a foundation for yourself and for your family. Therefore, if something were to happen to you, you will have enough passive income coming in to cover the entirety of your family’s expenses!


Once you have this foundation set up, you are essentially no longer on the treadmill of life and you no longer have to worry about how you are going to pay the bills next month. With this type of freedom, you can decide whether or not you want to simply retire and enjoy life, or if you want to move into risker investments. But the best part is that you have the choice to do whatever you want!


How would your lifestyle change if you were able to build a large enough financial foundation that you never had to worry about how you were going to pay the bill again?


Explaining the 221(d)(4) Loan Program in Plain English

2..21. D, 4. SET. HUT…HUT, HUT.

No, the 221(d)(4) is not referring to something a stud Texas Tech quarterback would  call out before being snapped the ball. (p.s. I’ll give you one guess where I went to school)

It is, however, a HUD loan program for “new construction or substantial rehab work of multifamily properties for moderate-income families, elderly and the handicapped” according to the HUD website. It insures the lender against any loss on mortgage defaults (i.e. it takes the risk out of the lender’s court).

There’s surprisingly very little info out there on the program and the info that is out there isn’t the easiest to understand. As of today I have not done one but I am considering it for my next purchase. So I thought I’d take some time to investigate more about it and speak to people who have first-hand experience with this program.

To get the scoop on the program I went to an expert. Brad Armstrong, president of Armstrong Mortgage Company, who has successfully originated over 50 221(d)(4) loans. I also talked to seasoned investors who are familiar with the program.

First, why the heck should you care about the program? Glad you asked.


  • Non-recourse loan (that’s necessary)
  • Up to 40 year amortization (that’s…wow)
  • Loan up to 83.3% of costs (uhhh…yes, please!)

So you can see the benefits are pretty compelling. Because it is non-recourse, the only way HUD can recoup losses should there be a mortgage default is to take back the property. Therefore, they are primarily looking at these two things:

  1. Will it actually be built? Therefore developer and team credibility and past experience is critical.
  2. Are the Pro Forma projections accurate? They want to make sure that once it’s built it will make money.

As far as the drawbacks, when talking to seasoned investors some of them were against the program. Here’s what they said.


  • Takes a long time
  • Lots of paperwork
  • Expensive approval process

As with a lot of government programs, there is a lot of paperwork and it is very time consuming. It is essential, according to EVERYONE I spoke to, to have a HUD consultant. It should be someone who has gone through the process and knows the language and can guide a first-timer through it successfully.

The underwriting process is going to be 180 days total. 90 days for a soft commitment that basically says “yes, we like your project and it will be approved contingent on these stipulations.” And, 90 days for a firm commitment.

For each stage in the process, soft and firm commitment, there is paperwork and reports that are required.

You can download the soft commitment checklist here. And firm commitment checklist here.

As far as it being an expensive approval process, there is an upfront, non-refundable fee when you apply for the program. That fee is 3/10 of a percent of the requested mortgage and half of that is non-refundable. Additionally, during the construction phase, there is a fee of 45 basis pts to review construction. And, after construction is completed, there is an ongoing mortgage insurance premium fee that’s paid monthly of 65 basis pts. (definition of basis pts can be found here)

One other thing to note, if you have investors you will be able to do cash distributions every 6 months or once a year because of the audits that are required under this program. Whereas, with other lenders you might be able to distribute cash to investors monthly or quarterly.

The verdict?

My overall takeaway is that if your project qualifies then the 221(d)(4) program is worth doing as long as you have someone on your team you trust and has successfully gone through the process many times before. All the fees that are charged are outweighed by the advantages and, in the end, you’ll come out with better returns.

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