JF1455: Helping Real Estate Investors Revitalize Neighborhoods by Lending $150M with Jeff Levin
Jeff has overseen over $1.5 Billion in loan originations. Around the time of the great recession, he founded Specialty Lending Group. With this company he has lended over $150 million to real estate investors in the Washington D.C. area. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Jeff Levin Real Estate Background:
- Real estate investor, author, and President/Founder of Specialty Lending Group
- Lends private money in the Washington D.C. Metro region
- Has a book coming out this fall titled The Insiders Guide to Private Lending
- Based in Washington D.C.
- Say hi to him at www.jeffnlevin.com
- Best Ever Book: Daring Greatly
Best Ever Listeners:
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Jeff Levin. How are you doing, Jeff?
Jeff Levin: Good, Joe! Thanks for having me.
Joe Fairless: My pleasure, nice to have you on the show. A little bit about Jeff – he is a real estate investor, he’s an author, and he’s the president of Specialty Lending Group. He lends private money in the Washington D.C. Metro region. He’s got a book coming out this fall, titled “The Insider’s Guide to Private Lending.” Based in Washington D.C. With that being said, Jeff, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Jeff Levin: Yeah, absolutely. Joe, thanks for having me, and hello to all of the Best Ever listeners. I’ve been in real estate for (gosh), just about three decades, 30 years… And I’ve seen the real estate industry evolve, I’ve seen it grow, both at a large and kind of a micro-level, within the private lending arena.
During the past 30 years – as a background on me – I’ve invested in my own properties; I’ve done both buy and holds, I’ve done fix and flips, and one fact about me is I’ve overseen the origination of one and a half billion dollars of loans.
Around the time of the Great Recession I founded Specialty Lending Group, to help real estate investors revitalize neighborhoods in the DC Metro area. And since 2008 I think we’ve lent real close to 150 million dollars, specifically in the Washington Metro area, literally revitalizing neighborhoods.
Most of the housing stock – and I’ll speak specifically to the geography of Washington D.C. – needs to be remodeled. There are a lot of people, as you know being in this space, that nobody really wants to buy if you’re [00:04:54].08] Or actually, not no one, but very few people; it takes a special type of person to see the end of a project when you’re seeing paint that’s old, and some places — you remember when people used to have wallpaper, right?
Joe Fairless: Oh, yeah. Not everyone has a vision, right?
Jeff Levin: Yeah, so that’s what we do… We’ve had a lot of fun doing it, and right now we’re specifically targeting the Washington Metro area. I’ve been in D.C. for nearly 30 years, and really have watched D.C. evolve as a city.
Joe Fairless: Your book coming out this fall is titled “The Insider’s Guide to Private Lending.” What does that entail, the Insider’s Guide?
Jeff Levin: In the Insider’s Guide to Private Lending — it is really an insider’s guide… I’ll walk our readers through the private lending process. People look at the private lending process and they think it’s in a foreign language that they don’t understand, and in the book we go through step by step how to find borrowers… I share a lot of personal stories about a borrower who was on the verge of bankruptcy that I lent two million dollars to, and we’ll talk about — and hopefully on this call I’ll be able to share some of the transactions that I’ve had the privilege of being involved with throughout my career.
But the Insider’s Guide to Private Lending really teaches the reader about the opportunities in private lending.
Most people think through a 401k – which hopefully most people have and are saving for their retirement – that they can only invest in stocks. We teach in the book that you can start a self-directed IRA and actually invest in private loans. So we cover the gamut… It has a lot of really good stuff for beginners, and a lot of really good stuff for people who have been in the industry and can relate to some of the stories that I share in the book.
Joe Fairless: Let’s talk about that example; you’ve piqued my curiosity, and perhaps some of the listeners’… You had a borrower who was on the verge of bankruptcy, and you lent him two million dollars. Please tell us that story.
Jeff Levin: You might think I’m crazy… A lot of people do, but let me start from a global perspective. When evaluating private real estate transactions, you look at a number of things to vet the transaction and make sure it makes sense… Whereas I may look at a transaction and consider it very low-risk, a banker might look at the transaction and consider it very high-risk.
This particular borrower, in the height of the great recession in 2008, he was a big developer… And when I say big developer – he’s not buying buildings in every major city, he’s buying buildings locally. And at one point he had, I think, close to twenty million dollars in real estate.
Well, come 2008, and he had done a condo conversion… The bank, like many banks, as you remember, during the Great Recession, decided to call a lot of their loans… Meaning they would make real estate investors pay them off, or they’d foreclose on them… And in many cases, back in 2008-2009, they offered discounts on these types of loans.
So our borrower was in the midst of developing close to 20 condo units in one project, and he had the ability to purchase that note at 50% of the face value… So the borrower was on the verge of bankruptcy, because he could have gone under had he not found me or somebody like me to lend him money to buy the condos, and then finish the condos, and then sell the condos.
He ended up walking away from that transaction I think with close to $200,000 in profit, after almost being on the verge of filing a bankruptcy… And he turned out to be a good friend, too.
Joe Fairless: So the key there was that he had the opportunity at 50% of face value, so he had built-in equity going in?
Jeff Levin: He did.
Joe Fairless: Because if he didn’t have that, he wouldn’t have had the two million from you, right?
Jeff Levin: He would not have had the two million. I analyzed the perceived risk, and the real risk. And the real risk in the transaction was not that the condos wouldn’t sell… The real risk is “Can the borrower complete the renovation?” and that’s where a lot of people in the fix and flip world and the bridge loan world and in the development world – people get screwed up on that.
If you ask me the one thing that can hurt real estate investors, it’s not having the ability to actually execute on the renovation portion of the loan.
Joe Fairless: And how do you qualify for the execution part?
Jeff Levin: One of the things that I do is if a borrower is doing their own renovations, I obviously ask them what they’ve done, I go see properties… I trust, but verify. And if it’s a general contractor that they’re hiring, you’ve gotta do due diligence on the contractor. What type of projects has the contractor done… If you’re gonna hire a contractor to do residential condominiums and they only specialize in commercial office buildings, you’ve got a disconnect. If you hire a contractor to do condo conversions that’s done condo conversions, you’ve got a match… But you’ve gotta do major diligence, and I think the best piece of advice, if I can share with you – and I’m sharing it with private lenders and any real estate investor – I call it the CYA, Cover Your Assets.
There was a situation many years ago, and I explain this in my forthcoming book, The Insider’s Guide to Private Lending, and I also talk about tangible steps that everybody can take to ensure that you’re protecting yourself, so that you don’t make the same mistakes.
So I had a profit share, a joint venture with one of my borrowers, and everything was going great; the borrower finished, and it was time to sell the property, and he conveniently forgot about the profit share, and as a result I was not legally entitled to the $80,000 profit because I had a lack of documentation.
I share this story in my book, and I share it with audiences that I speak to, with borrowers, with anybody I know. It’s so important, the CYA.
Joe Fairless: Well, I’m sure that you had some documentation… So what documentation did you have, that you thought at the time was adequate, but that wasn’t?
Jeff Levin: I guess I’m not embarrassed to say it, because I learned a valuable lesson…
Joe Fairless: It was a handshake, wasn’t it? It was a handshake?
Jeff Levin: It was called a handshake, yeah. It was the handshake. In today’s world–
Joe Fairless: Not even an e-mail? Or when was this, how long ago?
Jeff Levin: This was right when I started…
Joe Fairless: Okay, so 30 years–
Jeff Levin: No, this was 2008. I knew better, but because I was doing so many things, I didn’t pay attention to the detail… And the detail was making sure that I CYA-ed, and I didn’t. I still got paid on the loan, but I didn’t earn the profit that I had anticipated.
Joe Fairless: And I’m just curious, with this individual, when you said “Hey, yeah, we did the loan, but also we had that profit share component…” – did they say “No, we didn’t”, or did they say “Screw you, buddy. I’m not gonna do that”?
Jeff Levin: The latter, but not exactly in those words. “I did all the work. All you did was put up the money, and you’re not entitled to any profit.”
Joe Fairless: Got it. Okay, cool. So they didn’t say that there wasn’t an agreement, they just said that “I did all the work, so now I don’t want you to have a profit.”
Jeff Levin: That’s exactly right.
Joe Fairless: Cool.
Jeff Levin: And that’s why had I had it documented, there would be absolutely no questions.
Joe Fairless: How about another deal that you’ve done with a borrower, good or bad? It sounds like your book’s chock-full of stories, so how about another one for us?
Jeff Levin: Let me start with a good one.
Joe Fairless: Well, both of these have been real good.
Jeff Levin: Besides the fact that I’ve bought and sold a lot of real estate and I’ve made money and I’ve lost money on transactions, and most importantly I’ve learned… But the best transaction that I’ve ever done and that brings a smile to my face just to think about – the borrower is a friend of mine named Johnson. Johnson also was a big developer in the Great Recession, and had challenges with his married, i.e. he was losing money and his wife wasn’t happy, and his wife said “You can go ahead and do one more project, but you can only invest (I think it was close to) $80,000.”
Johnson had identified a building that was a 14-unit building, I believe (14 or 15 units) and said he was gonna add an additional three units to it. He said, “Jeff, I need to borrow the money for six months. At the end of the six months I will have revitalized, renovated this building, I will have added three units, and I will have a lease with the VA for five years.”
I said, “Johnson, I like you, I’ve lent to you before… That sounds a bit ambitious. Why don’t we do a [00:13:27].13]?” He said, “No, I only want it for six months.
At month six not only did Johnson do everything he said he was gonna do and refinanced… He refinanced, he cashed out his initial down payment, he had $10,000/month of positive cashflow. After, he went to a traditional community bank to get a loan, and he had a million dollars in built-in equity in the building.
Joe Fairless: Wow.
Jeff Levin: That is the best transaction that I have done that was a win/win, and we made some money for my company and for my investors, and Johnson has since graduated, meaning he’s now going to community banks, but he comes back from time to time when he needs money quickly, and he comes to borrow from us. That’s my best feel-good lending story.
Joe Fairless: You said he’s graduated and he’s gone to community banks… What are the key differences between what you offer, private money, and what community banks would offer, generally?
Jeff Levin: I think we as private lenders we offer one thing that despite the repeal of some of this stuff in Dodd-Frank, community banks can’t beat us on speed. If you make a phone call to a private lender, if you make a phone call to me today, within five days, if everything lines up, we can get your money to you and get the transaction closed.
When I say “graduated”, what I mean is community banks typically have lower rates, they take longer periods of time, and they can do loans for longer periods of time, i.e. fixed for five, ten years, sometimes straight amortized over 20… So when I say — a lot of beginning investors start out with private lenders, and then move to community banks… So that’s what I mean when I say “graduate.”
Joe Fairless: What’s a good losing money story?
Jeff Levin: Well, I can tell some stories, not many, about losing money… But there was a time where I made four loans to one borrower, and I was clearly way too concentrated… And I ended up taking small principal haircuts to get out of them. Now, what happens when private lenders lose money is time is money, and that expression is very true in private lending… Because whether you’re lending your own capital, or you’re lending capital on behalf of investors like myself in addition to my own capital – the time value of money. We ended up selling each property at an average of a $10,000 discount, so we lost $40,000.
In comparison to our overall pool, it wasn’t a big deal… But the lesson I learned is “Walk before you run”, and “Trust and verify”, because this borrower said they had done a number of flips… These stories are all from 2008, kind of 9-10 years ago. But it’s not fun to lose money, Joe. It’s absolutely no fun.
Joe Fairless: You mentioned you were too concentrated, but I imagine – and perhaps I’m about to put words in your mouth, but I imagine you have loans, like 4+ loans with one borrower… So was it the too concentrated aspect that got you in trouble with this one borrower, or was it the due diligence aspect?
Jeff Levin: I jumped in too quickly; instead of making one loan to a borrower, I made four at once. At the time, my pool of funds was maybe 20 loans. So I was too concentrated with this one borrower.
Joe Fairless: And that was the first time with this borrower?
Jeff Levin: That was the first and obviously the last time with the borrower.
Joe Fairless: Okay, fair enough.
Jeff Levin: But I think if you ask me, one of the biggest that I’ve made as a private lender is not actually going inside the property… Years ago, I remember when I was pressed for time, I drove by a property that I was going to lend on, but I didn’t go inside. The guy was a paralegal, I thought he was responsible, and as it turned out, it was being used for illicit activity, if you will… So we had to take down all of the drywall after we ended up foreclosing… Not that I know that smell, but you can imagine what the house looked like on the inside… So that’s a good tip for you.
Joe Fairless: So you personally go inside of the properties prior to lending on them?
Jeff Levin: One of my staff does. I used to go into every single property. Not only did I go into every single property, I inspected as the work was being done… But as our pool has grown over the years, it’s impossible for me to do that. If it’s close to my office, or if it’s in Metro Washington D.C., I’ll try to get there… But a lot of the neighborhoods I know, but I do have my people go in and take interior pictures, and make sure that what a borrower says that they want to do can actually be done.
Joe Fairless: And I’m glad you’ve mentioned that, because we have a decent amount of Best Ever listeners who are interested in lending their money to others, myself included. I don’t personally do private money lending, but down the road I can see myself doing it, like a decade from now or something, where I wanna put some of my focus toward that. I will still do what I’m doing now, but maybe do a little bit of private lending on the side… So one thing you said, a mistake that you made early on but now you don’t do that is not going inside the property… What are some other mistakes that a first-time private money lender might make?
Jeff Levin: This is a good question, Joe, and I don’t wanna plug my book again…
Joe Fairless: Plug it. If you’ve got answers in the book, please do.
Jeff Levin: The Insider’s Guide to Private Lending – it will share a lot of do’s and don’ts, but the biggest thing is getting to know your borrower, getting to know who you’re lending to. This goes back to the story that I shared about how I did not document the $80,000 profit. Guess what? Had I documented it, I may or may not have gotten it; agreements are only as good as the two people that make them. If I shake your hand and you shake my hand, and you’re a good guy and I’m a good guy, and we believe in the old adages that hard work pays off, good things happen to good people — sometimes bad things happen to good people [00:19:26].25] but you really need to dig deep and get to know your borrower.
You need to look at their credit report, and if it doesn’t say nice things, find out what happened and find out why. That is tip number one – to find out who your borrower is. If they’re an experienced real estate investor, not only look at what they’ve done, look at the quality of what they’ve done. You can learn a lot on the internet about almost anything, and especially about pieces of real estate.
So I guess tip number one, I would say, is to know your borrower. Tip number two is to know your renovator, the person actually doing the job… Because sometimes these renovators don’t do the work, and ultimately, the person who’s gonna do the work is the general contractor… So it’s important to know who the general contractor is, and also to have realistic expectations.
Johnson, though I thought he was overly aggressive, he came through, but that’s few and far between. If you’re a private lender and you think your funds are gonna be out for six months, don’t expect them back for nine; even though it would be great if get them back in six, that can really derail your lending process and in turn your reputation as a private lender, if you don’t have capital for a deal that you’ve committed to do.
Joe Fairless: That’s great stuff. Based on your experience as a private lender, and also 30 years in the industry, what’s your best real estate investing advice ever?
Jeff Levin: Two words – buy and hold.
Joe Fairless: That’s three.
Jeff Levin: [laughs] It is three. My best three words – buy and hold. So I’m a buy and hold investor. Even though I’ve been involved in hundreds of transactions in one way or another – not as a lender, but as an owner – the most value I’ve seen is by buying a piece of real estate, improving it or getting it rented, transitioning it, stabilizing it, and if you’re using private money, which is candidly the way I’ve started this business as I borrowed private money to buy a 20-unit apartment building, and put up at that time all of the assets I had to do it.
Right now, in addition to being a lender and an author and a speaker, one of the things that I do is I like to buy and hold real estate, and operate it, and create a flow of passive income, and that’s how generational wealth is created.
Joe Fairless: Do you still have that 20-unit?
Jeff Levin: No, let me tell you about the 2-unit… This is a funny story. I ended up buying a 20-unit building in one of the roughest parts of Washington, and arguably still a tough part, though D.C. has really gentrified, if you will, meaning in terms of income, from lower income to higher income. So I buy this building… I owned at that time two condos in Georgetown that were lowly leveraged, and I had (I don’t know) a couple hundred thousand dollars in cash. I put up some cash and I pledged both buildings.
I buy a 20-unit building, I self-manage it, they’re mostly voucher recipients, so public housing… And I end up buying it, and I thought I was going to continue to buy buildings, and I got tied up in something called TOPA. For those who don’t know what TOPA is, in the District of Columbia it’s called the Tenant’s Opportunity to Purchase Act, and tenants basically have the first right of refusal to buy buildings.
So I got caught up in this lawsuit, and the lawsuit ended up getting dismissed, and defended by title insurance… I had done nothing wrong; when I bought the building, I used hard money, I refinanced it, and that’s when the lawsuit happened, after I refinanced it… So I stabilized it, and I sold that building and I made a million dollars – half in cash, and half in the tax deduction, because I sold it to a non-profit.
What that did for me is that started Specialty Lending Group, and really got me into private lending. I used that half a million dollars, and now we’ve turned half a million dollars in over 150 million dollars in loans.
Joe Fairless: So clearly, what you chose to do with those proceeds worked out. I’m curious though, if you just made 500k in cash on this project, why not continue to do what you had just done to make that money, and buy another apartment building?
Jeff Levin: Good question, and I have since bought multiple apartment buildings. I saw an opportunity. There were people that were calling me that said “I can buy this property, fix it up and sell it. I can buy this property, hold it in my rental portfolio…” So for me it was a win; I didn’t like the location, and that’s why I was okay parting with it, and the top three things in real estate are “Location, location, location.” That area, fast-forward – I sold it 10+ years ago – is still not stabilized.
So the opportunity that I saw in front of me in the private lending space far outweighed holding this one building.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Jeff Levin: I am, let’s do it!
Joe Fairless: Alright, let’s do it! First, a quick word from our Best Ever partners.
Joe Fairless: Okay, best ever book you’ve recently read?
Jeff Levin: Oh, good question. I read a lot of books, so it’s hard to highlight the best one that I’ve ever read… I’m currently reading “Daring Greatly” by Brené Brown. It breaks down about the importance of vulnerability in relationships, and how being open and honest with your team and other people in your life can lead to innovative ideas, better workflow, and so much more.
Joe Fairless: Best ever deal you’ve done that you haven’t talked about already?
Jeff Levin: Good question. The best deal I’ve ever done is I identified a piece of real estate that was off-market, and I told you about the deal that I sold the 20 units — I also sold this piece of property, so I’m talking about two sales, not the other real estate that I own… I identified an off-market piece of real estate and I sold it 13 months later – actually, it was 12 months and two days – and made a profit of a million and a half dollars.
That happened about three years ago, and it happened with the help of my wife, who encouraged me to buy the piece of real estate.
Joe Fairless: Best ever way you like to give back?
Jeff Levin: Best way I like to give back is to our youth. One of the things that I do is I volunteer during the school year at a public high school, kind of with — not so much special needs, but inner-city kids that would benefit from an entrepreneur like myself. I volunteer at Ballou High School; it’s a school in South-East Washington D.C.
Joe Fairless: The best ever way the Best Ever listeners can get in touch with you and learn more about what you’ve got going on?
Jeff Levin: The best way to get in touch with me is by e-mail, and I encourage you to go to Amazon to take a look and purchase or give a review of my forthcoming book, The Insider’s Guide to Private Lending.
I am also starting a personal website, and that’s a website you can view at www.jeffnlevin.com. I think that is probably the best way to get in touch with me, through the jeffnlevin.com website.
Joe Fairless: I’ve really enjoyed our conversation. You talked about mistakes first-time private money lenders can make. One is we’ve got to get to know the borrower, so the mistake would be they don’t get to know the borrower.
Some tips that you have – always look at the credit report, make sure you’ve got the background story of why things are the way they are; look at the experience – not only look at their experience, but look at the quality of the projects they’ve worked on, and know the renovator, know the general contractor (it might not be the same person), and as a lender, have realistic expectations… In order to have realistic expectations, we need to know what realistic expectations are, and one example that you gave is if it’s a six-month project, expect nine months; be pleasantly surprised with six months, and document, document, document the contractual stuff. Handshakes are great, but I think you’ll want to document things.
Really cool hearing about your 20-unit building, as well as what you did with the proceeds when you saw an opportunity in the lending industry… So thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Jeff Levin: Thanks, Joe. Talk to you soon.