JF1341: Putting Together The Best Loan Package To Secure Better Financing with Heather Dreves

Heather is the Director of funding at Secured Investment Corp. She has helped many investors secure revolving lines of credit, and has over 15 years of experience. She also invests in real estate herself and has a lot of tips for how you can get better rates on your lending. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Heather Dreves Background:

-Manages Funding with Secured Investment Corp and provides private lenders and real estate investors

-Manages the loan-processing administration and originated $8 million in revolving lines of credit for hard-money

-Provides private lenders and investors the ability to connect and build powerful and profitable strategic alliance  

-Based in Coeur D Alene, Idaho

-Say hi to her at www.securedinvestmentcorp.com

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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.

First off, I hope you’re having a best ever weekend. Because today is Saturday, we’ve got a special segment for you called Situation Saturday, and here’s a situation – you’ve got an opportunity and you need a loan, so the outcome of our conversation today is to help you learn how to put your loan package together and sell not only the opportunity, but also sell yourself to the prospective lender.

With us today to talk through that is Heather Dreves. How are you doing, Heather?

Heather Dreves: I’m doing great, Joe. Thank you for having me.

Joe Fairless: My pleasure. A little bit about Heather – she provides funding to private investors. She manages the loan processing administration, and has originated three million dollars in revolving liens of credit for hard money. With that being said, Heather, first do you wanna give a little bit of context for your background and then we’ll dive into the loan package and selling ourselves and the package?

Heather Dreves: Absolutely. Well, as Joe said, I’m the directory of funding here at Secured Investment Corp. We currently have revolving lines of credit that I’ve raised money into actually exceeding 8 million dollars collectively. In just shy of six years that I’ve been with the company, I’ve deployed over 30 million dollars in notes. I have been in the private money industry for a little over 15 years. I have done everything from servicing notes, processing, originating, but most of my time has been in packaging the notes and selling them to prospective lenders. So that’s just a little bit about my background.

I’m also an active real estate investor. I have been active in fixing and flipping, and most recently in acquiring rental properties.

Joe Fairless: So as our Best Ever listeners want to put together a loan package, and they’ve got a deal and they wanna sell themselves and ultimately the opportunity, will you talk us through the process for how we should approach that?

Heather Dreves: Sure. I think that things have actually changed a lot in the private money industry. Back when I got started, most investors – and I call the investors the end lenders, so the end lenders used to look at the equity position. After the markets crashed, I think that people look at notes a little differently now. it’s not always just based upon the property and the equity position, but there’s a lot of emphasis put on the borrower and their ability, so I think it’s really important to show the benefit in the property as far as the equity position and the potential for an equity position if it’s what we call an after repair value loan – that’s what we do a lot of here.

COGO and Secured Investment Corp provides funding for purchase transactions, and then also on the other side of that provide the rehab funds to rehab the property in order to increase the value, and a lot of end lenders can see that upside. So I think it’s important to point out the condition of the property as it sits. I think it’s very important to paint a very clear picture of what the rehab is gonna entail and how that is gonna increase the value in the property, and then ultimately show the end result of the rehab.

I also think it’s important to sell yourself, whether that’s yourself or someone else you’re trying to obtain funding for. One of the things a lot of our end lenders wanna know is “What is the past history of this person? Have they done this before? If they haven’t done this before, what kind of education have they gone through?” We here at Secured Investment Corp provide education on how to find the deal, how to rehab it, how to be a broker… So if they don’t have experience – or you don’t have experience – it’s important to explain or show what education or training that you’ve been through to help you be successful as a real estate investor.

The other thing that a lot of people and lenders look for is ‘What is the borrower’s financial strength? Do they have the cashflow to (number one) service the debt?” Our notes here – we require people to make payments, so it’s important to display that they have the ability to make the payments. A lot of rehab loans are what they would call reimbursement style loans, meaning the borrower has to front the cost of the rehab, they go to the lender and say “Hey, I’ve completed this on the project, and I’d like to get reimbursed for the money that I’ve fronted…” So they have to have the ability to pay contractors, pay subcontractors, buy materials, whether that’s through liquid funds that they have… Some of our borrowers borrow through their IRA’s, so they need to be able to have the ability to pool many other IRA’s to front those costs… Or on credit cards, a lot of them are active real estate investors; they have Lowe’s and Home Depot cards that they use… But basically, they need to show that they have the ability to front those costs, and show that they’ve been successful at it.

I don’t think personally that credit score is as important, however a lot of our end lenders like to see people’s credit reports to just see if people have had hiccups and have low credit scores is it something that was a one-time situation? And let’s be honest, it’s not uncommon for real estate investors this day and age to have some hiccups, especially if they were active in the market when it crashed… But they need to be able to explain it. Or is it just a habit? Do they just always pay everybody slow, and they have judgments and liens? Those are things that are harder to get over, but really just building your strength as a borrower, and showing “Hey, I can be successful at this”, whether that’s because you’ve done it before, you’ve been through training, you have a mentor or you’re partnering with someone… But really showing that you’re gonna be successful and you’re gonna be able to exit the loan successfully. I think most end lenders’ biggest concern is are they gonna get their money back?

I can’t tell you any end lenders that I deal with that are really looking to foreclose, and that worst-case scenario, but really building the strength and the equity position in the property, and building the strength of the borrower are the two biggest things that I see end lenders looking for really in a deal.

Joe Fairless: The two high-level things then is showing the potential in the deal, and that you’ve thought through the details, and then showing that you know what you’re doing, and hopefully having some proof points to support that. Is that accurate?

Heather Dreves: Absolutely. When I get borrowers that come to COGO Capital that say “Hey, here’s some deals I’ve done, here’s some HUDs” – that is proof on the pudding. Having a deal like that with the exhibits that I can go to an end lender and say “Hey, this guy/lady has done this before. Here’s a couple HUDs where they’ve shown that they’ve made profit”, and some examples… If  you are an experienced real estate investor, put a portfolio together, put a couple HUDs in there, put a little one-page loan summary of deals you’ve done to show that you’ve been successful, and that goes a long way with end lenders.

So really just putting a professional package together and saying “Hey, here’s all the facts, here’s the things to support what I’m telling you, the exhibits… Do you wanna fund my deal?” Those are the kind of deals that I get funded very quickly here; the ones where there’s just unanswered questions, you’re not really sure if they’ve done it before, they don’t really have any evidence that they say they have – those are the tougher deals.

Joe Fairless: The loan package that is put together – what are all of the sections? And we just went through high-level and got some specifics, but what are all the sections of the actual package?

Heather Dreves: When we put a loan package together at Secured Investment Corp to sell our note — first, it’s important to understand these are notes that we’ve already closed on our equity funds, so we ultimately have two opportunities to deploy money with our company. One is through one-off notes, just buying one note here and there, or you can go into our equity fund. Those are for passive real estate investors that have some money to deploy; they don’t want to deal with foreclosure, they don’t wanna deal with picking and choosing what note to fund, but they like the security of the note. Those are our equity funds. So there are notes that we’ve already closed. That means we’ve fully underwritten them, we’ve closed the transaction, we have filed a lien against the property, a first lien; then my department goes on and we put what we refer to as a loan package together.

We take all of the information that we collected at underwriting and we put it in a very matter of fact order. So we put application in there, we show evidence of the entity, that it’s in good standing, we provide evidence about the personal guarantor, so the individual; we put credit in there and we put their bank statements to show their cashflow. We wanna see three months of bank statements, because as a real estate investor, we understand there could be some months that are better than others, so we assume that taking a three-month sample of the most recent bank statements will at least show an average. Banks statements are in there.

We provide the end lender with a current appraisal, so we require all of our loans to have an appraisal ordered on that, and if it is an after repair value loan, we need to show as-is values and comps to support that, and then also after repair value comps to support that.

Now, the only caveat to that if you’re trying to do this yourself would be if you’re dealing with a local end lender. A lot of those guys will just drive out to the property and make their opinion what the value is, but I personally think an appraisal looks a lot more professional. It shows that you’ve gone the extra mile to do your due diligence.

In addition to the appraisal, you’re gonna see the rehab bit in there. We wanna know exactly what they’re doing to the property. Our end lenders like to see that – “Okay, great, they’re replacing the entire kitchen, and flooring…” They wanna know exactly what’s being done. And then another added level of security that we do in addition to the appraisal is we do what’s called a baseline inspection, and Bill (our manager at COGO) might have told you a little bit about this… If it is a bid of more than $20,000, we will send a company out with a contractor’s bid and give them instruction to let us know if they believe that the bid is viable… Meaning “Do they have enough money in it?” Because the last thing that we wanna do – and it’s important to get our end lenders the rate of return they’re looking for on notes, but it’s also important to make sure we’re putting our borrowers in a good deal, that they’re gonna make money. The worst thing that we could do is close a loan and they don’t have enough money to finish the rehab.

So the baseline inspection company will go out there, they’ll come back and say “Hey, we think everything’s in line, they can get this done for this”, or sometimes they come back and say “You know what, we think it’s a little light. We think they need a little bit more in these areas.” We’ll work with the borrower, see if we can get them enough money to get it done if there’s enough equity in the deal, and adjust the bid accordingly. So that baseline inspection is included in there, and a lot of the end lenders really like that, because they have concerns with that, too… “Hey, do they have enough money in there? Is this really a $30,000 or is it more likely that it’s gonna cost 60k?”

So all that information is put in a nice, big PDF, and we send that to our end lenders and providing the checks and balances in there – those types of deals get funded really quick. If there’s a lot of unanswered questions, those are the deals that tend to get longer to get funded.

Joe Fairless: On that note, on the ones that have a lot of questions that are harder, can you tell us a story about a tough note that you’ve worked on?

Heather Dreves: Sure. We’ve had one recently where we had an individual come to us, had a great deal, there was a ton of upside in the property, he’d had it under contract for a great price, so he was gonna make a great profit, but he was the challenge. He had extremely poor credit, he had foreclosures in the past… However, he had gone through some education, so we know that he had at least a vested interest in being a successful real estate investor. But because of his credit and his financial situation, it was really tough to get over that hurdle with him.

What we ended up ultimately doing is going back to him and saying “We believe in your project, but unfortunately because of your credit issues and lack of finances…” He was the concern. He actually went out, found a partner, someone that had successfully done this, partnered up with him, and we were able to close the deal. He found someone with better credit, more strength, more financial resources, and we felt comfortable about doing the deal. He was the biggest issue. And providing he is successful at this… He has up until now made his payments, he’s working on the project, but once he exits the loan, then we take it back; we have a lender committee, and then at that point we can say “Hey, this guy did what he said he was gonna do, and we have a little more confidence in him.” We call that reputational capital. He’s done a deal with us, he has paid as agreed, and he paid us off. So his credit issues moving forward are things that we may be able to overcome, but he was the big issue.

And sometimes it’s vice-versa – it’s a strong borrower, but a really weak property. More often than not, it’s one or the other. So that was a real situation that we just dealt with a couple months ago, but we were able to get a deal done for him; he was able to bring in a better partner, that had better credit, and we felt more confident in him being successful at this than we did with him just being on the loan.

Joe Fairless: What’s your favorite part of your job?

Heather Dreves: You know, I must say that it is helping our real estate investors that maybe not a bank would put their neck out there to help them be successful. We have people coming to us from all walks of life, whether they are at the end of their professional career and they’re looking to just do something in retirement, or create wealth for their family to leave a legacy…

I think the most fulfilling thing that I do is helping them get the funding that they need to accomplish their goals, for themselves and their families, because it’s really important. They may be the type of borrower that a bank isn’t necessarily gonna lend on, and especially in an ARV situation, most conventional banks don’t do that. But we’ve had a lot of success, and we see people that will make 20k, 30k, 50k on a deal, and they come back and they’re doing their second and their third deal. That is what is fulfilling for me – helping them accomplish their dreams and build wealth for themselves and their family.

Joe Fairless: What’s your least favorite?

Heather Dreves: Well, I have to say I also oversee our servicing department, so… [laughter] I manage the collections department, and that’s a tough one, because you’re torn; you’re dealing with a lender that trusted you enough to buy a note that we all thought was a great deal; we wouldn’t fund it if we thought it  was a bad deal, right? And then you at times have borrowers that have gotten themselves into a sticky situation.

I have a lady right now that I am trying to help her, and she got a loan from us, she did a cash-out refinance on a property that she owns, she trusted her brother, gave him the money, he took off with her cash, and she cannot exit our loan, she can’t refinance, her credit is too poor, she doesn’t have the cash to pay us off, and I come to find out her son’s actually living in the property. She doesn’t have the heart to sell the property, because he has nowhere to go.

So those are the kinds of situations where you’re trying to do the best for the lender who owns the note, but we all have a heart, and… She trusted a family member, and leveraged her property, and unfortunately it didn’t work out the way she thought it would.

Those are the kinds of things that are hard, because we have a fiduciary duty to our end lenders to do what’s best from a servicing perspective, but you also don’t wanna take someone’s home, so you have to work with them to help them exit it, and we’ve got some ideas to help her get out of it, but those are the hard situations.

Joe Fairless: Anything else that we haven’t talked about as it relates to preparing to get your deal approved, with your loan package, and preparing to showcase yourself in the best light?

Heather Dreves: Really just do your homework. Make sure it’s a viable deal. Make sure there’s profit to be made in it. If you can show that and express that, and express that you have the ability to finish the project and exit the loan and present yourself in the best light, that’s the best that you can do, because a lot of end lenders are looking for that. Sell yourself.

If you have the experience, highlight that like crazy. Like I said, put a portfolio together of deals you’ve done. If you haven’t done it before, highlight that you’ve gone through some education. Maybe you’re being mentored with somebody, and if you are interested in those types of programs, we have those here at our company… But really sell yourself. I would say sell yourself before the deal almost, because it’s a relationship thing, and I’m here to tell you, if you can get in good with a lender, especially one in your local market, that is your golden ticket. They will do deals for you all day, because there’s a lot of people out there looking to deploy money, a lot of one-off lenders that like to fund notes, and if you treat them well, that will be your golden ticket to be able to do multiple deals.

Joe Fairless: How can the Best Ever listeners get in touch with you?

Heather Dreves: You can reach me a tour corporate office at 800-971-5988, or you can e-mail me at hdreves@securedinvestmentcorp.com. You can visit our website at securedinvestmentcorp.com, we have all of our notes available for funding to be able to be purchased, uploaded on there, so you can actually click through them and get quite a bit of information. If you have interest, you can let me know and we will send you out that full loan package that I spoke about. We encourage our end lenders to do the due diligence before making a decision whether they wanna fund something.

Joe Fairless: Outstanding. Well, certainly from a loan package standpoint and selling ourselves, we are better off having had this conversation than not, from learning the main things that we need to pay attention to and include in the loan package… Basically, show that there’s opportunity in the deal, and back that up with substance.

Then from a selling yourself standpoint, proactively thinking about what will the objections be of a regular, reasonable person if I were to ask them to let me borrow money for this, and then I proactively address those or mitigate some of those by partnering with others, as you gave the example of what that one borrower did… Or just being transparent about it and saying “This is what I’ve got” and then see what the lender has to say about it.

Thank you so much, Heather, for being on the show. I hope you have a best ever weekend, and we’ll talk to you soon.

Heather Dreves: Absolutely. Thank you, Joe.

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JF1331: Hear What This Lender Wants To See Before He’ll Lend To You with Bill Koder

Bill is a manager of COGO Capital, a private money company. If you’re in need of capital or maybe would just like another option for funding deals, you should listen to what Bill shares in this episode. We’ll hear how he’s able to be more creative than a lot of other lenders and banks. He also tells us what he needs to see from his borrowers before he’ll lend to them. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Bill Koder Real Estate Background:

  • Manager at COGO Capital, a private money company
  • November 2017 Bill took over his current position as the Branch Manager of COGO Capital
  • Former Senior Loan Officer at COGO Capital by closing more than 350 loans to date
  • Based in Coeur d’Alene, ID
  • Say hi to him at https://cogocapital.com/lp/
  • Best Ever Book: How to Win Friends and Influence People

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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, Bill Koder. How are you doing, Bill?

Bill Koder: I’m great, how are you doing?

Joe Fairless: I’m doing great, and nice to have you on the show. A little bit about Bill – he is a manager at COGO Capital, which is a private money company. He’s been there four years. It’s based in Coeur d’Alene, Idaho, and we’ve got the company’s contact info – you can just click that link and go check their company out.
With that being said, Bill, do you wanna give the Best Ever listeners, a little bit more about your background and your current focus?

Bill Koder: Yeah, background includes eight years as a conventional lender. I started out with HSBC, moved to MetLife, and moved over to COGO Capital in 2014. In the past four years I’ve closed over 400 loans with COGO Capital to private money investors who are looking for funding on fix and flip properties or buy and holds.

Joe Fairless: Got it. What type of loan is your sweet spot? We’ll start with that.

Bill Koder: I would  say our niche market, our sweet spot is for the investor who is looking for purchase and rehab funds, typically under $500,000. Anything more than that, we have a lot of due diligence that we have to take care of… But anything under 500k, we’re able to get those funded really quickly, with little to no effort.

Joe Fairless: What do you do with above 500k that you don’t do with below?

Bill Koder: As far as what we do with loans that are above 500k versus below – we are very unique in the fact that we sell all of our notes to one-off investors like yourself or myself. Those investors typically don’t have an appetite for jumbo style loans. We have partnered up with other lending institutions out there to get those larger deals funded.

Joe Fairless: And what about below 500k underwriting – what do you do?

Bill Koder: Loans below 500k as far as the underwriting goes, what we wanna look at is first and foremost the property itself. We wanna know the value of the property, and how we determine the value is a full appraisal. We wanna look at both the as-is and the after repair value on these properties to determine which loan structure works best for our clients.

We also wanna look at the client himself/herself, and we wanna make sure that they have the capacity to service the debt; we wanna make sure they have some reserves. We wanna see if they have any experience (that always helps), and we also wanna look at their contractor, making sure that they have a qualified contractor that’s licensed and bonded. We find that that definitely expedites their rehab portion.

Joe Fairless: Yes, contractors are important. I’d love to dig into each of these categories – the property itself, the client, the experience and the contractor. As far as the property itself goes, you said you want to get the appraisal for the as-is and the after repair value to determine which loan structure works best for the client… So what loan structures do you offer?

Bill Koder: We can lend both on the as-is and the after repair value. If somebody’s purchasing a property that’s got minimal to no rehab required, we’re gonna be looking at the as-is value most likely. The as-is value is gonna get you a little bit better rates, because it’s less risky for us to lend on the as-is value, since there’s no construction. And if we’re looking at the after repair value, we wanna take a look at the contractor bids, submit that to the appraiser, so the appraiser knows which comps to pull from to determine his value.

Joe Fairless: Okay, makes sense. With the client piece, you said they should have some reserves – specifically how much?

Bill Koder: Specifically, we require that they have three months’ worth of payments in an account somewhere that they can show us. So if your payment is $1,000, we wanna see three thousand in one or all your accounts combined. We also wanna see 10% contingency for the rehab, so that you can get the project started so that we know that you have enough reserves in case something goes wrong, that you have some funds to contribute to the transaction.

Joe Fairless: And three months of payments for the mortgage, or what?

Bill Koder: Yeah, for the note itself.

Joe Fairless: Okay. So you’ve gotta have three months of payments for the note itself, plus 10% of whatever the contractor is estimating for the repairs.

Bill Koder: That’s correct, and the 10% contingency for the rehab does not need to be liquid; it can be on a line of credit, for example.

Joe Fairless: What about the experience? How much do they need to have?

Bill Koder: Experience is not required. However, if you do have experience within the last 24 months and you can show the HUDs when you purchased it and the HUDs when you sold it for a fix and flip, that would give you better pricing.

Joe Fairless: What are the ranges (just giving us an idea) of beginner with no experience, to someone who’s got a couple under their belt, in terms of price differences?

Bill Koder: As far as rates and terms go, we start at 9% in one point, and go up based upon the risk associated with the file. I would say our very experienced rehabbers – they’re gonna be looking at the 9% and one origination point, versus our brand-new beginner that might be looking at a 12% and three points.

Joe Fairless: Got it. And with the contractor, you said make sure they are licensed and bonded… Is that the only qualifier that you look at, or do you look at other things?

Bill Koder: As far as the contractor goes, that’s all we require – that they’re licensed and bonded. Now, there are some counties that don’t require contractors to have a license, which is fine; that’s no big deal. We just need evidence that that’s one of the counties.

Joe Fairless: So if it’s a contractor who just created his/her company, they have no experience but they are licensed and bonded, then that would be fine?

Bill Koder: Yeah, that’s correct. No season requirement on licensing or bonding.

Joe Fairless: What’s been a tricky loan that you had to work through? I mean, you’ve done over 400 of them… Can you tell us a story about that?

Bill Koder: I can tell you that every loan is unique and individual in itself, which is why I like the challenge of private money versus conventional. One of the most unique transactions that stands out to me is I had a property in Chicago, Illinois, that was in one of the (I guess) rougher areas of the neighborhoods of the town – Englewood, you guys might have heard of it…

Joe Fairless: Up to no good…

Bill Koder: Yes, yes, but we have some issues with theft. So I had a borrower that went out there, and it was a large rehab; he purchased a property for 70k, he was putting 150k into it, and it was gonna be worth 400k after all said and done. However, everytime he would buy materials and bring them on site, there was theft; somebody would break in and steal, whether it was copper pipes, whether it was windows, whether it was drywall… So we actually had to go and redo the loan and budget in for a property manager, so somebody would be there around the clock to make sure that everything stayed on site.

Joe Fairless: That could be fairly pricey, I think. How much does the property manager cost around the clock to make sure no one steals stuff?

Bill Koder: Well, the property manager was actually someone that we knew and we had close contact with. He basically just took a percentage of the equity when the property was sold; he took a percentage of the profit. They negotiated out a term on that.

Joe Fairless: Okay, cool. So it ended up being an equity partner, so there was no out-of-pocket cost; the person putting the deal together just made less money.

Bill Koder: Right, right. We had to go back and buy more materials, obviously, with the theft.

Joe Fairless: Right, that’s true. With the over 400 loans, describe the differences in your process, from your first loan with this company, with COGO. Obviously, you had previous experience coming to COGO, so I get that, but I’m sure your process has evolved, from your first loan with COGO to now over 400. What’s the difference in your process?

Bill Koder: The difference in the process would be just the documents that we require. When I came aboard we didn’t have the structure that we currently do now. We have underwriting guidelines that we never had before… Just general practices to reduce the exposure of us as a lender. We wanted to make sure that our default rates were lower than they were when I came aboard, so we put practices and procedures in place to ensure that our default rate was lower for our investors.

Joe Fairless: Those underwriting guidelines – what in addition to what we’ve talked about comprises of the underwriting guidelines?

Bill Koder: Previously when I first came aboard, we didn’t require an EIN letter for your business entity. We do lending to businesses only, so you have to have an LLC, a trust, a self-directed IRA or a corporation in place for us to do a loan… And when I came aboard, we didn’t require the documentation to prove that you were, say, the sole member of the LLC or you were the sole member of the corporation. We didn’t require documents like the operating agreement that reflects the ownership percentage or by-laws for a corporation that reflected ownership percentage. That’s just one example of our underwriting, [unintelligible [00:10:02].19] things up and making sure that we can watch our default rate and decrease that default rate.

Joe Fairless: Why would you want the borrower to have an LLC, versus borrowing personally? Because I think borrowing personally, you’d be able to go after them if they were to disappear, versus LLC?

Bill Koder: Well, for us it’s a licensing issue. We can only lend to LLCs and businesses for licensing purposes – we can lend in 44 states without having to hang our MLO or NMLS license in every state. So it gives us the freedom and flexibility to lend in states that we don’t have anybody or a brick and mortar in place.

Joe Fairless: Oh, okay. So this is a bit of a sideways conversation I’m about to take us on, or maybe it’s just a question… So for someone who wants to lend money to a local fix and flipper – say a Best Ever listener is listening, and they’re like “Oh, this is great. I’ve got some money, I’d like to lend it. I know Samantha has a fix and flip, she’s always asked me to lend her money, so I’m gonna do it.” Just someone who is a regular person, not a lender, other than they just have the money – should they adhere to that? Should they only lend to Samantha’s LLC and not actually Samantha?

Bill Koder: That’s up to the individual. I would obviously check with your attorney and run the transaction by your attorney first… But that would be up to the individual if they wanna lend it out just to Samantha or Samantha’s LLC, or require Samantha to have an LLC. That’s totally up to them.

Joe Fairless: Okay, got it. What’s something else that would be helpful for the Best Ever listeners who are real estate investors to know that we haven’t talked about?

Bill Koder: Some of my best advice that I would give out to investors would be, first and foremost, know your market. Don’t just count on your realtor to provide comps for you. Make sure that you do your due diligence, understand your market, and know exactly what you can and can’t offer if you’re buying a property. So you wanna know what the values are, you wanna know how to put an offer in that’s gonna yield you the returns you’re looking for. And like I said, you don’t wanna trust your realtor; appraisals are far different, versus CMAs, versus BPOs.

The second piece of advice I would say is find a good contractor. The biggest thing I see as far as the lender goes is if that contractor walks or the borrower has a disagreement with the contractor and they have to find a new one – that’s always challenging in the middle of trying to get a transaction funded, or even give them the rehab money that’s put into an escrow account for the rehab purposes.

Joe Fairless: What is the number one reason why borrowers run into trouble after you lend to them?

Bill Koder: The number one reason that I see that borrowers run into trouble after the loan has been signed is their budget. They don’t have a contingency, their budget is very thin. What I mean by thin is there’s not enough room there in case they find some other things that go along with the rehab process. You don’t know what’s behind the walls really until you get in there and take a look.
So what we find the biggest mistakes that our borrowers are making is they’re not giving themselves enough wiggle room to make additional repairs that are gonna be needed on the property.

Joe Fairless: And what’s the process with you on that? You just lent to me, and I’ve got my loan, I just tore open some walls, found some stuff, I don’t like it, didn’t have that in the budget… I have that 10% reserve in my bank account, but it’s gonna be about 50%, so I don’t have that 40% difference.

Bill Koder: Right.

Joe Fairless: I don’t know what to do. I call you. What happens?

Bill Koder: Well, I can tell you right now there’s gonna be some issues, as far as — we need to take a step back and look at this. For us as a lender, we have to protect ourselves; we have a draw schedule that the borrower or the contractor creates. We have to hold them to the draw schedule, because if we don’t, it seems they never finish the project. So if they do get inside the wall and they realize that something is terribly wrong and they need additional funds to fix that project, I would encourage them to looks at possibly — if they don’t have the money and they can’t borrow it from a friend, family, anybody else, I would encourage them to possibly look at getting a personal loan or even possibly some sort of line of credit to cover the additional expenses, the unforeseen expenses.

It happens. It’s obviously not the best for the borrower or the lender, but those situations happen, and at the end of the day we want our borrowers to be successful, we wanna make sure they can get out of these loans… We’re not a loan-to-own program, so we don’t want the property back, we want them to be successful and come back to us again and again.

Joe Fairless: It makes sense. I know you said, to quote you, “Some of my best advice ever”, but I’m gonna ask you THE best advice, and then I’d love your thoughts. What is your best real estate investing advice ever?

Bill Koder: My best real estate investing advice ever is to know your market. You have to know what you can put in as an offer in your market, you have to know how much the rehab is gonna cost you before you put that offer in, to make sure that you’re getting the return on your investment. So the maximum allowable offer is the best piece of advice I can give. Make sure you know that equation, so you know that there are unforeseen rehab/repair budgets that are gonna pop up; you have to know that you’re gonna be able to make money at the end of the day, otherwise you’re not gonna be rehabbing for very long.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Bill Koder: Sure!

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:16:06].05] to [00:16:48].06]

Joe Fairless: Best ever book you’ve read?

Bill Koder: How To Win Friends And Influence People, by Dale Carnegie.

Joe Fairless: Best ever transaction you’ve been involved in?

Bill Koder: Best ever personal transaction I was involved in was with my second flip. I made $180,000 by finishing my basement in my primary residence, and staying in there for two years and then selling it.

Joe Fairless: Will you elaborate on that deal? Tell us a little more about it.

Bill Koder: Yeah, so I purchased a home in Spokane, Washington, right out of college – my second home – and ended up finishing the basement. It cost me a lot of labor, a lot of friends to come over and helping me, but at the end of the day I was able to sell it for $180,000 profit… And since I was in it for more than two years, that avoided capital gains for me.

Joe Fairless: Beautiful! Cha-ching! What’s a mistake you’ve made on a transaction?

Bill Koder: First mistake I made on a transaction was my first fix and flip, and I overpaid for it. I didn’t know my market, I thought that I could get more on the sale after I completed the rehab, so I ended up losing about $25,000 on that deal. That taught me to know my market, which is my best advice I can give.

Joe Fairless: Best ever way you like to give back?

Bill Koder: The best ever way I like to give back is I like to give my time. We educate a lot of individuals here at our corporate office. I like to be able to step in and give my time, and help those people and teach them the mistakes that I’ve made over the years and some of the best practices I’ve seen from other investors to ensure that they are successful and come back to us.

Joe Fairless: How can the best ever listeners get in touch with you?

Bill Koder: You can call my office, 800-473-6051, or you can shoot me an email. Email address is bkoder@cogocapital.com.

Joe Fairless: Well, Bill, thank you for talking to us about your expertise, first and foremost, and talking about how you and your team underwrite the deals, the four categories, the property itself, the borrower, the experience level of the borrower – the borrower’s cash position, and then the experience level of the borrower, as well as the contractor, and getting into the details and specifics of each of those four categories… As well as the number one reason why borrowers run into trouble, on the rare case when that happens, and things we can do to mitigate that from a budget standpoint. And then when pressed into a corner, in that scenario, some potential solutions to do.

Thank you so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Bill Koder: Thanks for having me.

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JF1314: Raising Capital & Finding Funding #SkillSetSunday with Lee Arnold

Lee has raised more than $400 million for projects through his different companies. As real estate investors we can almost always use more money for deals. Getting creative with how you structure deals and partnerships can also be equally important. Lee has been through that process many times and has great advice on how to structure deals and partnerships, and also how to make sure you keep your investors happy. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Lee Arnold Real Estate Background:

  • CEO at Secured Investment Corp & Manager of the Secured Investment High Yield Fund
  • Secured Investment Corp is one of the fastest growing companies in the private money marketplaces in the United States
  • Lee connects investors to lenders from all over the United States and Canada
  • Featured as an investment strategy expert by Forbes, the Boston Globe, Market Watch, Reuters and Business Week & taught for Donald Trump Companies
  • Based in Coeur D Alene, Idaho
  • Say hi to him at: www.securedinvestmentcorp.com

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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, Lee Arnold. How are you doing, Lee?

Lee Arnold: I’m doing fantastic, Joe. Thanks for having me.

Joe Fairless: Yeah, my pleasure. Nice to have you on the show. Well, Best Ever listeners, first and foremost, I hope you’re having a best ever weekend, and because it is Sunday, we’ve got a special segment for you, Skillset Sunday, where we’re going to talk to you – or I’m going to ask questions, and our guest, Lee Arnold, will talk to you about the skill of raising capital, so that you can hone this skill, and either acquire it, or hone it if you don’t have that skill yet.

Lee has raised more than approximately 400 million dollars in equity for deals they’re working on. He’s working on a 50 million dollar development deal right now, and also more as an equity broker lender to fund other individual investors deals. If you wanna hear his best ever advice, then go to episode 1009; it’s titled “Need money for your deals? Talk to this guy!”

Today we’re gonna be specifically and strictly focused on the skill of raising capital, so Lee, how shall we begin?

Lee Arnold: Well, as far as raising capital, Joe, I have found over the years that one of the greatest errors that investors who are looking for any sum of capital make is they go in search of capital long before they ever have identified the investment opportunity, and it’s contrary to what we’ve been taught, because conventional wisdom says “If you need to borrow money, you first go down to the bank and you see how much you can qualify for”, and then based on your credit score, your income, past experience, then they give you some number, and then you go out and you shop for something that fits within that criteria.

Well, those rules only exist for the end user, owner-occupant that doesn’t subscribe to your show and doesn’t have access to the tools that say that all of that is completely false. To raise capital efficiently, you first have to identify what is the opportunity, as in are you buying something that you’re gonna renovate and bring the value up through forced appreciation through sweat equity? Are you finding a piece of vacant land and developing something on there that’s gonna produce a preferred rate of return to an investor, and if so what is that return? And you do your financial modeling, you do your acquisition costs, you do your rehab costs, you do your time costs, so that there’s an understanding of return on investment of capital.

Once you’ve identified all of those numbers and put them together, now you go out seeking funding, because one of my favorite quotes in business is “Money is attracted to opportunity, not people”, and the mistake that investors make – and this is true whether you’re been investing for six months or 60 years – the mistake that most investors make is they seek capital too early, before they’ve identified the opportunity… Because money is not interested in people. People make terrible investments, they skip town, they don’t communicate, they die… Whereas when my money is secure to get in first lien position against real property, and I have a deeded ownership interest in that asset, no matter what happens to the person, my money is safe and my money is secure, and that’s what money is attracted to.

So  to successfully raise capital, you have to be concerned with what is your investor gonna get on their money? There’s one question that investors care more about than anything else – do you have any idea what the question is, Joe?

Joe Fairless: Well, what are the risks involved?

Lee Arnold: Okay, what are the risks; any other questions you can think of that an investor might ask? Let me put this in perspective for you, Joe. Let’s say that I come to you and I say “Joe, I need to borrow $500,000.” Do you have any questions for me?

Joe Fairless: Yes, I would ask what is the business plan and what is my money secured by, what type of asset? What type of experience do you have doing what you are projecting you’re going to do? What risks do you believe are associated to the project? Those are some of the top things I can think of.

Lee Arnold: Okay, good. And all of your responses, Joe, are based on what you know to be true as an investor, and they’re all the same questions that I would ask if I was the investor presenting this project to a potential investor, the person that’s gonna write that check. But after 20 years of raising capital and putting deals together, the question that all investors want to know above and beyond any other question is “What is my return of investment?” It’s not return ON investment, and too many investors lead with if I wanna go out and raise $500,000, my lead-in, Joe, is going to be “Hey Joe, if you give me half a million dollars, I’ll give you first lien position on this piece of property, I’m gonna give you an 8% return, or a 12% return.” But for the sophisticated, savvy investor, the person that can write a check for 5-10 million dollars, the number one thing they are concerned with is “How are you going to give them their money back?”

So as you’re building your presentation deck – it’s called a pitch deck in the business – as you’re putting this deck together to explain the investment, to explain the opportunity, the upside, the return, slide number one needs to be “Investors, you’re gonna give me half a million bucks, and this is how I’m gonna give you your money back, this is when I’m gonna give your money back, and this is the return you’re gonna get as a result of allowing me to utilize those funds for X periods of months or years.”

So return of investment is the one thing that every investor misses in their presentation. Exit strategy is everything. You mentioned on the top of the call this 50 million dollar development that we’re working on… I broke this up, so I bought a 13-acre parcel, I’m breaking it up, it’s all zoned commercial, and it’s gonna have on the 13 acres a 50,000 square foot storage facility, a 200-unit apartment building, a 64-room hotel, and two 10,000 square foot commercial pads. So everything involved in this is tied to this development.

Now, the first thing that we’re gonna develop is the storage facility, so what is the return on the investor’s money? Well, we build it, and then we go out and we get a 504 loan, which is a storage unit loan that only requires 15% participation from the developer… So as I’m putting my deck together to raise the 2,5 million dollars necessary to build this out, I’m showing my investors “Look, here’s the blueprints, here’s the plan, here’s the timeline, here’s the return, and here’s the take-out financing”, and I’m gonna show them a pre-approval letter already from the lender that’s doing the take-out, and showing them that we’ve got 15% liquidity, so the take-out of that loan is gonna be no problem.

Now, on the apartment building, FHA has got an amazing program now for large multi-unit – usually 200-300 unit – apartments. FHA has an amazing loan take-out program, so the entire emphasis of the presentation is gonna be based on the take-out financing… First and foremost. Before we show them the proforma, before we show them the rent rolls, before we show them the appreciation based on desirability and demand for that marketplace, we’re gonna show them how they’re getting their money back… And if the listeners here will make it a point to always emphasize return of capital, they’re gonna have a much easier time raising money.

Joe Fairless: Basically, you’ve got to talk a little bit about the business plan at the beginning though, because then you’ve got context for how you’ll return the capital, right?

Lee Arnold: Right, but that comes in a very short, one-page synopsis. That’s slide number one. So when you go in front of a group of investors, you’re gonna say “Investors, I’m here today in search of ten million dollars. I will utilize your funds for 36 months, and I will return it in 36 months based on this take-out financing, this private family home office that’s financing the finalized construction, or this bank is taking you out. Now, with that said, let me tell you about the project.”

See, the minute you settle their nerves about how you’re gonna give them their money back, they suddenly just kind of relax and sit back and listen to the presentation. But if you don’t tell them early how you intend to give them their money back, they are on pins and needles through your entire presentation, and when you get done, the first investor that raises their hand to ask a question is gonna ask “How are you paying us back?” And they didn’t hear a thing you said throughout your 20-minute pitch.

Joe Fairless: Yeah, very true. Capital preservation and return of capital is most important. What if you’re not doing a development deal, and it’s just (let’s say) a fix and flip? I guess it’s just really straightforward, “I’m doing a fix and flip, and I am going to sell to exit you out.” So I guess it’s pretty simple in that scenario…

Lee Arnold: Yeah. And I’ll explain it this way, because as you know, with [unintelligible [00:11:46].17] which is our lending entity – we lend hundreds of millions of dollars and we write thousands of loans… And what’s interesting is when somebody comes to our website and says they wanna borrow money, and let’s say it’s a simple little 3-bedroom 2-bath house in the Midwest, the after-repair value on it is 120k, they’re buying it for 50k, they’re gonna put 20k into it, so they wanna borrow 70k – okay, that seems like a very great deal. Now, they can check one of two boxes. If you look at our application, it says “How are you going to pay us back?” If they check the “I’m gonna sell it” box, all I look at is the comparables for the neighborhood.

I’m gonna look at what they’ve got, versus what the surrounding inventories are, what the inventory counts are, and what is the likelihood or probability that they can indeed sell this house for the 120k price that they’re telling me it’s worth… And within five minutes I can tell you whether or not they’re gonna get the loan.

Now, if they check the box “I’m gonna pay you back by refinancing” – okay, this springs up a whole new can of worms, because if they’re gonna refinance, now I suddenly have to be concerned with their credit score, how much money they have in the bank, whether or not they have a job, whether or not they’ve been filing their taxes, if they’re self-employed and have been showing zero income on their tax returns to avoid paying taxes… There is no way in the world they’re ever gonna be able to refinance that thing, and I’m gonna deny their loan.

So I’m not saying make false representations, but I will say it this way – if you are somebody who’s relatively new to the investment space and you have not done a responsible job of managing your paper resume, and what I mean by that is you don’t show any income on your taxes, you aren’t current on your tax filings, you have multiple banks accounts and you run money through all of them, so there’s no one bank account that has any sizeable inflow or outflow of, do not buy property to hold where your exist strategy is long-term financing… Because everything about that loan is tied to you, the individual.

So better for that particular listener to focus on buying and flipping or buying and wholesaling, or just putting things under contract and wholesaling. The goal we have for our customers is we want you to fix and flip, and take out at least a quarter of a million dollars in liquid capital. Once you’ve got a quarter million dollars in liquid capital, the opportunities are wide open to you, because now you can show somebody that you are who you say you are and you will accomplish what you say you will accomplish.

Money has a strange way of validating people, as in if you’ve got money, you must know what you’re doing. You and I both know that that’s not always true, but this is how most banks look at you. If you can show money and income and tax returns that say you generate revenue, you’re gonna get funding. If you can’t show those things from a paper perspective, then focus and build a business that is cashflow-heavy, that is quick in and out turns where you’re gonna maximize your capital, so that you then can go in and attract cheaper capital to yourself… Because at the end of the day, it’s not the investor that can find the best deal that’s going to win, because there’s too many investors in the marketplace, there’s too much competition… So in most markets, you’re having to pay pretty close to premium pricing to get some of these investment properties, especially if you’re going after low-value apartment buildings – 12, 24, 36 units. There is such an appetite and demand for those types of properties that you’re gonna pay close to retail.

The only way you can make those facilities pencil is if you can attract cheap, cheap capital. And by cheap capital, I’m saying prime +1 or lower. Any private investor out there, whether it be a hedge fund or a family home office is looking for prime +5, prime +6, prime +7. So you’ve got to make sure that you’re structuring your financial portfolio in such a way that you can eventually attract bank financing, cheap financing. Otherwise, you’re always gonna have to give away a dramatic portion of the equity in the deal to attract capital, and now you’re working to get half the profit.

Joe Fairless: And on the exit strategy front, just to come back to that real quick… It’s a thought process that I highly recommend every passive investor go through, and that is “What is the exit that is being proposed to me, and what are the ways that that couldn’t work?”, which is what you did when you talked about the refinance, because that opens up a whole other can of worms, versus being able to sell at whatever they’re projecting it will sell based on market comps.

So when you introduced the refinance option, then you listed out a whole bunch of stuff that could go wrong, or at least you’d have to qualify. So that’s a necessary question that every investor should ask whenever they’re approached about investing in something, is “What is the exit, and then what are the ways that that couldn’t work?”

Lee Arnold: That’s exactly right. And it’s important regardless of what the current status of the listener here today is – I don’t care if you’re a first-time investor or, as I mentioned, you’ve been investing a long time  – the goal of every investor is to eventually become a lender. I just got out of a meeting with one of our private equity fund investors, and I asked him if he was actively buying, fixing and selling real estate. He says “No, Lee. I’m like two years away from death, I don’t wanna hassle with all of that. All I wanna do is put my money into loans and lend it to the guys that wanna go out and actively fix and flip real estate”, because he’s at that stage where he’s just looking for that passive income where he can rely on a pretty consistent 7%-12% return on equity. And that’s where all investors ultimately are looking to go to.

As you look at the bell curve, you start out as an investor, you don’t have a clue what you’re doing, your credit is terrible, you’re living paycheck to paycheck, and all you have is a dream and a drive. So you start to acquire, you start buying, fixing and flipping, you start amassing cashflow. Now you start buying apartment buildings and commercial buildings, and generating massive cashflow. As you come to the other side of that bell curve, you’re gonna realize that “Even though I’ve got property managers in place and all that stuff, I don’t wanna deal with the taxes and with the depreciation and all of the liability and the insurance that comes with owning these assets, so I’m gonna sell them off, I’m gonna get all of my net worth in cash, and I’m gonna put it somewhere where I can get a pretty safe, steady rate of return.”

You’ve gotta know what stage your investor is at when you’re approaching them for that capital, because not always does it make sense to ask somebody to give you money. It might make more sense to ask them to partner with you in a transaction.

Joe Fairless: A lot of the times that will come to the surface, too. They’ll say “I’m not really interested in this, but how about jumping on the GP side and partnering up or doing a joint venture?”

Lee Arnold: Absolutely, and it really depends on that investor’s appetite. It was interesting – in the meeting I was just in, because he was there with his son, who’s now in probably his early 50’s… And his son is very actively engaged in development – buying, fixing, selling, owning rental property… But his dad has absolutely zero interest. So it’s just interesting to kind of see the difference as maturity brings to desirability about investing and what you have an appetite for.

Joe Fairless: This is slightly off-topic for raising capital, but I am curious because you brought it up… On that 13-acre parcel, I was trying to write down as quickly as you were saying it – you said you’re doing hotel, commercial pads, self-storage… Can you just list out the order in which you’re doing each of those and the reason why you’re doing them in that order?

Lee Arnold: Absolutely. We are starting with the storage facility simply because the cost of construction is $45/foot. The cost of construction on the apartment building is $175-$200/foot. So the capital outlay to build apartments is significantly higher than the capital outlay to build the storage facility so the reason to build the storage facility first is we can get the property cash-flowing much more quickly on the storage facility than we can on the apartment community. So that’s the reason. The demand for storage is high, it’s off of a major highway, we’ve got good frontage, good visibility.

From people storing stuff, we will then create a demographic or a constituency, if you will, that will be most likely tailored to apartment living. As people are moving out of homes, or down-sizing or up-sizing  and they’re putting things in the storage, we then wanna attract them to the apartment community. So the land is significantly more valuable and more stable when we can go to an investor on the dirt, showing that we already have income being generated from the storage facility when we go after the capital for the apartment community.

To put it into perspective a different way, the cost of construction on the storage facility is 2,5 million dollars – that’s 50,000 square feet of storage – which will produce $50,000-$60,000/month in revenue. The cost of construction on the apartment building is 35 million. So always pursue the easier money first, because once you start getting traction and momentum on the development, everything else gets exponentially simpler. So the storage facility is going on the back of the lot, the apartment community is going on the middle of the lot – that will come second in the buildout. The third piece to go in will be the motel (or the hotel), because that now attracts dollars from out of town, which then now we will build out the first commercial pad, which is a 10,000 square foot building, it’ll have five 2,000 square foot units, where now we can attract merchants that would cater both to an apartment living community, as well as a hotel occupancy community. And that’s the logic behind why and how we’re building this out.

Joe Fairless: Great stuff, thank you for walking us through that. This has been very informative, as always, and I’m grateful that you were on the show again. How can the Best Ever listeners get in touch with you, Lee?

Lee Arnold: The best place to reach me is at CogoCapital.com.

Joe Fairless: Sweet. Well, thank you again for being on the show. From a raising money standpoint for our deals, the focus as it should be is on “What is the return OF the investment?” I believe Warren Buffet talks about that, and pretty much every other successful investor. And then the exit strategy, if we’re passively investing in deals, please pay close attention to the exit strategy. Then the focus is on what are the ways that couldn’t work and how is the risk being mitigated? There’s risk in any investment, so what are the ways the risk is being mitigated, and are you comfortable with that?

Then also talking us through the development sequence of a large project. Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

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Best Real Estate Investing Advice Ever Show Podcast

JF1009: Need Money for Your Deals? Talk to This Guy!

He connects investors to the big money, and he is on track to fund $1 BILLION in private equity! Hear where he sources his capital and what deals he funds!

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Lee Arnold Real Estate Background:

– CEO at Secured Investment Corp & Manager of the Secured Investment High Yield Fund
– Secured Investment Corp is one of the fastest growing companies in the private money marketplaces in the United States
– Lee connects investors to lenders from all over the United States and Canada
– Featured as an investment strategy expert by Forbes, the Boston Globe, Market Watch, Reuters and Business Week & taught for Donald Trump Companies
– Based in Coeur D Alene, Idaho
– Say hi to him at: http://www.securedinvestmentcorp.com
– Best Book Ever: How to Win Friends and Influence People

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Financing Real Estate Deals


Joe Fairless: Best Ever listeners, 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, Lee Arnold. How are you doing, Lee?

Lee Arnold: I’m doing fantastic, thanks for having me, Joe.

Joe Fairless: Well, my pleasure, and looking forward to diving in. A little bit about Lee – he is the CEO at Secured Investment Corporation, and manager of the Secured Investment High Yield Fund. He connects investors to lenders from all over the U.S. and Canada. He’s been featured as an investment strategy expert by Forbes, The Boston Globe and a whole bunch of other publications. He is based in Coeur d’Alene, Idaho. With that being said, Lee, do you wanna give the Best Ever listeners a little bit more about your background and what you’re focused on?

Lee Arnold: Yeah, I started investing in real estate about 22 years ago. At that time I was a penniless broke grocery store bag boy making $3,90/hour, and finding deals was easy, but for an investor it’s always about “Where do I get the cash?” So as I had success finding and fixing and flipping houses, I quickly moved into the lender role where I was doing private money loans. From there I started traveling and doing seminars across the country, meeting a lot of real estate investors that we kind of in the same boat as I was, which is I’m finding all these great deals but I don’t have any money. That’s why, Joe, we put together our Secured Investment High Yield Fund 1 and High Yield Fund 2, so that we could lend directly to real estate investors nationwide, so that they could get their start in investing or maybe take their business to the next level. Even those that are utilizing some of their own cash reserves to invest with could be leveraging that cash through our private equity fund, which would allow them to double, triple or quadruple their current volume.

Joe Fairless: Okay, so you are a lender and real estate investors come to you, they get loans and you on the backside make profits from the loan origination, and then whatever interest you make and your investors do as well who invested in the fund?

Lee Arnold: Correct.

Joe Fairless: Cool. So how large is the fund?

Lee Arnold: To date, the fund has done over 100 million dollars in deployed capital for our investors, and we’re on track to do a billion dollars in private money loans.

Joe Fairless: Holy cow! Alright, 100 million dollars in deployed capital in what? What did you say?

Lee Arnold: And we’re on track to do over a billion dollars in private equity loans in the next 36 months.

Joe Fairless: One billion in private equity loans… But as far as the hundred million, how did you define the hundred million? A hundred million in deployed capital?

Lee Arnold: 100 million dollars in deployed – so we have lent out over 100 million dollars to real estate investors across the country.

Joe Fairless: And then a billion in private loans?

Lee Arnold: They’re all private loans, so we’ve lent out over 100 million dollars so that investors could buy a house, fix it up, and sell it for a profit.

Joe Fairless: Got it! So the second number, the billion, is the valuation of the properties in total, but you’ve lent out of pocket 100 million to get to that billion, right?

Lee Arnold: Well, we’ve lent out 100 million and we’re on track to lend an additional one billion dollars.

Joe Fairless: Got it, I’m with you. So it’s the same thing, but you’re just increasing it. I’m with you. So you’re at 100 million, you’re gonna get to a billion… Where is this money coming from?

Lee Arnold: That’s the best part, it’s coming from private investors, or other people across the country that maybe at one point were real estate investors themselves, did very well, and are now looking for more of a passive income. Private money creates a great vehicle for them, because they can deploy 50k, 100k or 200k either into a private one-off note where they are the lean holder lender and they’re getting a check every month and we service that for them, or if they are an accredited investor, they can come into one of our private equity funds where we essentially do all the work, it’s hands off, and they get a check every 90 days.

So what we do, Joe – we actually have a process within our company that we call “The Circle Of Wealth”, and “The Circle Of Wealth” is this – we will take anybody… Anybody who’s listening right now – we can literally take that listener, teach them how to find great deals, give them the money to buy those great deals, give them the money to fix up those properties so that they can sell them for a profit, do that a couple of times a year or ten times a year… It’s really how motivated they are to get to that next level, but our first tier, the first goal we have for every listener is to help them achieve $250,000 in liquid capital. I believe that most investors are missing the mark because they continually have to go back and borrow again and again, and let’s be honest, private money, though great, it’s not cheap; it’s not a bank financing at 4,5%-5%; these notes are gonna run 9%-12% interest. So as quickly as we can, we wanna get our clients off of private money, so that they can retain and keep more of those profits for themselves.

Once they get to that quarter million dollars, now our next goal is to get them to a million, and once they have a million dollars in liquid investable assets, now they become an accredited investor. Now they can start diversifying – they can be buying real estate, they can be buying private equity loans, or they can be investing in one of our private equity funds. So that’s our process or our plan for each one of our clients.

Joe Fairless: 100 million dollars in deployed capital so far – roughly how many accredited investors does that comprise of?

Lee Arnold: Hundreds.

Joe Fairless: Hundreds… So 500-ish?

Lee Arnold: Our minimum investment amount is $50,000. People can invest as little as $50,000; there’s no limit. We have some investors that are coming in at $50,000, some that are coming in at a quarter million, some that are coming in at a million… There’s no limit. There’s a minimum, but there’s no maximum.

Joe Fairless: So 100 million dollars… I know with my investors — my average investor, when I remove one investor who’s invested 20 million, because that would influence the numbers greatly… If I remove him, then my average investor invests about $126,000, I believe. So let’s just say you’re right around there… That means you’ve got 800 or so investors, and these are just rough numbers. How do you find 800 investors?

Lee Arnold: Predominantly through our education. So as we’re outputting on real estate investment seminars across the country, teaching people how to buy these types of investments and how to do it properly, inevitably in every room 5% of the room is somebody that’s recently retired, has a 401k, a self-directed IRA… They’re looking to get better returns that what they’ve been getting in their CD or even what the stock market’s been producing – which has been pretty good lately, but now there’s a fear that it’s gonna turn and go the other direction, so they’re trying to get their profits out so they can get in something safer.

But in every room, there’s at least 5% of that audience that’s going to want a more passive investment experience, so for them we have our one-off loans where they can invest and lend directly, or our private equity fund.

We’ve been in the education space for 15 years and we speak to tens of thousands of people every year. Over the years, the accumulation of those relationships is to where now our database is in excess of over 500,000 people.

Joe Fairless: That makes sense. The education piece, if you’ve been doing it for 15 years, what did it start out with and how has that education piece evolved, either content-wise or structurally, with logistics, like maybe from meeting in a hotel conference room to something else now?

Lee Arnold: In 2002 I was doing a lot of short sales. Now, short sales really didn’t become in vogue until 2009-2010 post-crash, where home owners were literally upside down on their homes – they owed $300,000 on a house that was now worth $180,000. So short sales became household terminology in 2008-2010.

In 2002 my office was located in Salt Lake City, and we saw the Olympics come in. The Olympics came in in 2002, and when they left, they sucked out about 30% of the value of that market, because it’d been overheated in anticipation of this three-week event. So when the Olympics left, we had a lot of properties that were overvalued, and I was doing a lot of short sales. I literally had 400-500 clients at a time that I was in the process of negotiating short sales for them.

Of course, in doing this, we were the largest short sale [unintelligible [00:10:42].01] in the entire state of Utah; I was approached by a marketing company and I said “Hey, we put on seminars. Can you write a book and a tape for us on the right way to short sale?”, which I did. And we took that concept and started putting on events around the country. That then led to short sales, to foreclosures. As the market heated up, foreclosure options were a great opportunity. Then we went into tax lien sales, and then we went into rehabbing, teaching people the proper way to rehab; now we have seminars on the proper way to retail sale, how to market your homes, to sell them in 48 hours or less every time… So there’s so much involved in the process of buying, fixing and flipping a house successfully that there’s all of these niche concepts that come up around it, and we create seminars and training programs around those niches, because as you and I both know, “There are riches in niches.”

Our ultimate goal is to teach our clients the strategy that will allow them to find these really good deals, because ultimately we want to be their preferred lender. So our education feeds our lending arm.

Joe Fairless: Yeah, it all comes full cycle. You do that education, you educate people on how to do these things, then they find deals and they borrow from you, which helps your backend investors make money, and then eventually if they do it long enough and they’re successful, then they become accredited investors and they start investing passively, and it just goes full cycle.

Lee Arnold: You got it. That’s exactly right. That’s what we call our Circle of Wealth.

Joe Fairless: What has been the most recent challenge that you’ve had as the CEO?

Lee Arnold: The most recent challenge has been the market itself. When we started doing a lot of lending — in the 2002-2008 it was me and some investors and we were doing a couple million bucks a year. In 2010, most areas had really hit rock bottom. That’s when we started seeing a lot of investors coming into the marketplace, buying this real estate, and there was such a demand for private equity that we couldn’t raise money fast enough. Now, fast forward seven years, there’s an abundance of money. The stock market continues to close above 20,000, and investors are rich with liquidity, and they are yield-starved. And when investors and hedge funds and private equity is yield-starved, it becomes desperate money, and desperate money will do things for 5%, 6% and 7% margin. So our greatest challenge as a CEO is getting our money deployed and still being able to retain earnings North of 12%.

With all of this available capital, we’re seeing substantial yield compression, where it wasn’t uncommon to get a 14%-15% yield; now we’re excited if we get anything above 9%. So that’s a good message for the listeners to know – if you have an opportunity that an investor could put money into, it’s not longer you being beholdened to the lender; I really believe that the market has flip-flopped to where now the lender is beholdened to the borrower, and that’s an unpopular message for Wall-Street to hear, but that’s true. Wall-Street needs investment opportunities more than borrowers need capital.

It’s a great time to be out looking for capital for larger projects, for commercial construction, for large development opportunities… Capital is cheap, and it’s readily available.

Joe Fairless: And on the “capital is cheap” part, what type of expectations do you set with the accredited investors before they’ve done a deal, in terms of projected returns?

Lee Arnold: Well, our fund is structured in that we give our investors a 9% preferred return, and then we split any upside. We as fund managers are motivated to produce a greater than 9% yield because it’s the only way we’re going to be able to participate in any of that upside.

Joe Fairless: What’s the upside split?

Lee Arnold: The upside split is 50/50.

Joe Fairless: Okay.

Lee Arnold: So we just finished Q1 and our investor payout was 11.3%. The fund produced 13,5% annualized return, investors get 9%, and then we split 4%, so they get 11% and we keep 2%.

Joe Fairless: And then everything above that is 50/50. Is there some sort of provision later down the road when you exit that they get paid their money back that they originally put in and there there’s a split above that?

Lee Arnold: No, because we pay out quarterly, so we’re not sitting on any retained earnings. All earnings are paid out quarterly, based on investor participation… Which is really nice for a lot of people, because we have a lot of investors that are literally living off of their earnings from participation in our fund. Where other funds are growth or accumulation funds where they get a letter every quarter that says “Hey, your account went from 100k to 112k”, our letter is “Your account is still 100k and here’s 12k… Great job last quarter.”

Joe Fairless: What would you say is your number one talent as a business person?

Lee Arnold: You know, in all my years I don’t know that I’ve ever been asked that question. I always turn it into a core competency, and I think it’s the same question. But my core competency is the ability to communicate to the least common denominator and make it understandable. I think that that’s a core competency because I started investing in real estate when I was 18 years old, while attending community college. Once I flipped my first house and got that first check and I was hooked, I decided “I don’t even need college. I’m just gonna be a full-time real estate investor for the rest of my life”, and that’s what I did. So I don’t have the four-year degrees, the BAs, I don’t have the pedigree the Wall-Street wants to see, with the Yales and the Harvards on the wall. I am a community college dropout turned hedge fund manager. Because of that, I can make complex things easy to understand. I would say that’s probably one of my greatest strengths.

Joe Fairless: Lee, what would you say is your best real estate investing advice ever?

Lee Arnold: Don’t be in a hurry to buy anything. The way that you avoid getting yourself into that situation — a lot of people do this; they say “I wanna invest in real estate, I’m gonna become a full-time investor, so I’m quitting my job and I’m just gonna do this. That’s the worst thing anybody could ever do.

You hear it in a similar fashion where somebody quits the job because they wanna go be a real estate agent, so they get their license, and 86% of all new agents will be out of the business within six months. So to be in a situation where you have to make money is a very bad spot to be as an investor of anything, whether it’s real estate, stocks, bonds or mutual fund. You can’t be in a situation where you have to make money tomorrow. So my recommendation to anybody that’s interested in investing is to keep your day job. Do this on the side. Begin to amass a small sum of capital that will continue to feed your investments. And I don’t recommend anybody quitting job to do this full-time until they’ve got at least two years of their current salary saved in some type of an account where they can continue to draw down whatever their current income is, so that as they leave job to go do this business, there’s still that consistency of income. That’s how you avoid getting into a desperate situation where you just negotiate bad deals.

Joe Fairless: For a Best Ever listener who has some deals that they’re putting together and they want to raise money from accredited investors, what would you recommend their approach be when trying to find the investors?

Lee Arnold: Well, there’s so many crowdfunding places now you can go… There’s Kickstarter and some others where you can go and in a short period of time you can raise money. Those platforms have made the process of raising money relatively easy. The problem is raising money is not the challenge. The challenge is taking raised money and getting it to produce returns. I’ve seen a lot of investors that are like “You know what? I’ve gotta put a million dollar fund together” and they can do it pretty quickly. I’ve seen people raise a million bucks in a week, first [unintelligible [00:19:01].24] Kickstarter or some of these other crowdfunding platforms. But now you’ve got this million dollars and the clock’s ticking, because your investors are now waiting for returns and they’re looking to you as “How are you going to manage my money and how are you going to manage and lead the team that you have assembled to develop and deliver returns?” and that’s the part that’s missed.

The first time I put a fund together, I formed a simple LLC – this was back in the late ’90s. I formed a simple LLC and I allowed people to come in at a minimum of $5,000. I spent more time managing investor expectations than I did actually investing investor capital. What’s fascinating is the lower the amount of contributed capital, the bigger the pain in the rear the investor is… Which is why your minimum is $50,000.

Anybody where $5,000 is literally a lot of money, that investor is gonna be a problem. That’s one of the reasons that we’ve never gone the crowdfunding route. We didn’t want to make it available to those that were not accredited, simply because they need to go cut their teeth on buying, fixing and flipping houses successfully, and buying a couple of notes and making a profit successfully. I believe that the ability to make money is learned. It is not a skill that you are born with or you inherit, it’s learned, and you only learn it through doing it.

Joe Fairless: Great points. You mentioned earlier the education piece has been the primary component – in addition, I’m sure, to referrals… But as far as outside people, who aren’t within your sphere of influence yet, the education piece, doing these courses has been the primary component to help you bring in investors. How many courses do you have in this calendar year, roughly?

Lee Arnold: By courses do you mean event dates?

Joe Fairless: Help me define that question.

Lee Arnold: Okay, so to us an event is either a Friday, Saturday, Sunday event at an event city throughout the country and we hold them all over the nation. An event can also be specialty classes where people fly into our corporate office here in Coeur d’Alene, Idaho, and we will put on a three or four-day event here, Monday-Wednesday or Monday-Thursday. Either of those will be referred to as an event, and we have 47 event dates booked this year.

Joe Fairless: What is the cost involved to putting on a three-day event in a city? I know it varies, but just generally what number are you looking at?

Lee Arnold: Our average cost for an event runs somewhere between $35,000-$60,000… Per event, per weekend, per location.

Joe Fairless: $60,000 for a three-day event?

Lee Arnold: Yup.

Joe Fairless: Huh… Do you charge tickets?

Lee Arnold: No, those are free.

Joe Fairless: Those are free… Wow. And clearly, you have a lifetime value of a customer identified… What is your conversion rate roughly for a three-day event where you’re investing $60,000 in putting in together?

Lee Arnold: We look for a 4:1 conversion.

Joe Fairless: So 25% of the people to attend do something with your company?

Lee Arnold: Yeah, that’s about accurate. But when I say 4:1 I’m referring to if we invest 60k, we want to at least generate a quarter of a million dollars from that audience.

Joe Fairless: Oh, okay.

Lee Arnold: And $60,000, a lot of that is gonna be on marketing spend. We’re spending a lot of money on radio, television, direct mail, to bring awareness to that market that “Hey, we are a private equity fund that wants to lend you money. Come and see us and we’ll teach you how for free.” So from a unique selling proposition, I know of other groups out there that are putting on a very similar event and they’re charging $25,000. We’re doing it for free.

Joe Fairless: So $250,000 is your goal for dollars invested in either on the frontend to loan them the money, or on the backend for accredited investors actually passively invested, right?

Lee Arnold: Correct.

Joe Fairless: Okay. Are you ready for the Best Ever Lightning Round?

Lee Arnold: Let’s do it.

Joe Fairless: Alright, first a quick word from our Best Ever partners.

Break: [00:23:19].08] to [00:24:20].19]

Joe Fairless: Best ever book you’ve read?

Lee Arnold: How To Win Friends And Influence People.

Joe Fairless: Best ever deal you’ve done?

Lee Arnold: Converted 20 duplex lots into 40 single-family homes and made $480,000 in three weeks.

Joe Fairless: Will you elaborate?

Lee Arnold: Sure. I had a builder that was selling lots; he’d developed in these duplex lots. Duplex lots are worth less money than a single-family lot, because single-family homes typically bring a higher marginal return. So I bought them, went into the city, got them rezoned to be single-family and sold them to another builder as 40 single-family home lots.

Joe Fairless: [laughs] When did you have the a-ha moment that you could switch them over? Do you remember having that idea?

Lee Arnold: I put them under contract thinking I could do it, but I made the contract subject to inspection, and my inspection was not inspecting the dirt, because that was pretty obvious; my inspection was going to the county and seeing if the zoning would allow it, and they were voting on a blanket rezone the next week I knew that the builder didn’t.

Joe Fairless: Best ever way you like to give back?

Lee Arnold: My wife and I had a nonprofit ministry called HesTheSolution.com. It’s a non-denominational Christian organization, and we have a church at all of our events. So if there is an event over a Friday, Saturday, Sunday, we will have church services at our event.

Joe Fairless: What’s a mistake you can think of on a deal that you’ve done?

Lee Arnold: Moving too quickly, always.

Joe Fairless: Can you elaborate on how you got burned in a specific instance?

Lee Arnold: You make money when you buy, you realize your investment when you sell. It was 2006, the market was crazy hot, and I swung for the fences. I started developing three 15,000 square-foot homes that were gonna be [unintelligible [00:26:04].23] on the backside of a ski resort in Utah. My post-construction appraisal was 21 million, my construction cost was 7 million, and [unintelligible [00:26:15].06] and came to market July of 2008. [laughs] I should have read the market better, and I didn’t. I got caught up in the same euphoria as everybody else, going “Okay, what’s driving this thing?” And I don’t think we have the same bubble presently that we did then. I know that there’s a lot of talk that there’s a bubble – that might be true on the stock market, but I’m not a stock guy so I can’t speak to that. But on the real estate side, I believe this thing that’s driving value and why the market remains hot is there’s such a shortage of inventory because we had five years where nothing was getting built. I believe that that trend is gonna continue.

So where I got burned was not looking at common sense indicators that would have told me immediately that this is the bubble that can’t sustain itself.

Joe Fairless: Where can the Best Ever listeners get in touch with you or your company?

Lee Arnold: CogoCapital.com is our lending arm. If you need some capital, let us know. If you’d like to look at being one of our investors, you can enquire there. That’s the best place for them to go.

Joe Fairless: Lee, I really enjoyed our conversation. Thank you for being on the show. Thanks for talking about the business model that you all have and the cyclical nature of it, where you teach people how to get deal, then they go get deals, they lend from you, and then eventually (hopefully), assuming things go well, they end up being investors in other people’s deals down the line, and it just keeps on perpetuating itself.

Then also talking about the number one talent that you mentioned, the ability to communicate to the least common denominator and make it understandable. It’s important to ask that question, because your team is achieving at a high level, so we’ll wanna know what’s the CEO’s strength to help propel that business and the team – that’s why I asked that question.
Then also the deal that didn’t go too well, the one you just shared, and the one that did, with the builder developing the duplex lots, then you got it rezoned to single-family and you made I think a little over $400,000 in three or so weeks. So thanks so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Lee Arnold: Thanks, Joe.


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JF718: An Attribute that Cushioned a $3,000,000+ Loss #situationsaturday

Today’s guest attempted to develop three large timeshares in the Park City area of Utah at the peak of the market and unfortunately right before the crash. Then it came… Hear how our guest keeps his cool and practices this one attribute to change a most difficult situation into an honest and integral one.

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Lee Arnold Real Estate Background:

– Private money lender
– Funds private money loans and some of the rehab
– Based in Coeur d’Alene, Idaho
– Reach him at cogocapital.com

Listen to all episodes and get a FREE crash course on real estate investing at: http://www.joefairless.com

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors.

We make funding your projects easy so you can focus on what you do best…rehabilitating homes. Learn more at http://www.fundthatflip.com/bestever.

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JF653: How This Private Money Lender Beats ANY Competitor Lending Terms Nationwide

He is a seasoned private money lender willing to beat any competitor terms. He flexes and flips around 50 homes a year and sees over 200 loan applications a day. Be sure to hear this episode has a good benefit you and your next fix and flip!

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Lee Arnold Real Estate Background:

    – Private money lender
– Funds private money loans and some of the rehab
– Based in Coeur d’Alene, Idaho
– Reach him at cogocapital.com

Listen to all episodes and get a FREE crash course on real estate investing at: http://www.joefairless.com

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors.

We make funding your projects easy so you can focus on what you do best…rehabilitating homes. Learn more at http://www.fundthatflip.com/bestever.

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JF624: How He Invested in Zillow to BUMP His Business

Today’s guest is a very savvy real estate agent and investor. He has invested in spec homes, vacant lots, and now back in himself. He invests in his own personal brand by investing in Zillow and other online marketing platforms, hear how he does it and adopt these methods of branding.

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Greg Boss real estate background:

  • Real estate agent who Top Producing Realtor for Resale Homes out of 4500 agents
  • Top 50 agent out of 10k+ agents according to Homes and Gardens Real Estate
  • Been an agent for seven years
  • Also a real estate investor who invested in spec homes, vacant lots and did fix and flips
  • Based in Eagle, Idaho
  • Say hi to him at Findmyhomeeagle.com

Listen to all episodes and get a FREE crash course on real estate investing at: http://www.joefairless.com

Do you need more leads for your real estate business and a platform to grab more leads?

Danny Johnson has a solution for you, go to leadpropeller.com set up your website for success and get more leads!

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JF296: How to Manage Everything From a Single-Family Home to Hundreds of Apartment Units

Today’s Best Ever guest shares with us everything you need to know about property management. Whether a property manager or not, here are the things YOU need to know about it and what you need to look for in a potential property manager.

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Clint Collins’ real estate background:

–          Began managing apartments while in grad school for free rent 10 years ago

–          Been investing and managing properties ever since

–          His team now runs over 1,800 units and Clint directs an accredited property management training program for http://www.RentLikeAPro.com and HUDU University

–          He is currently consulting for a multifamily project in Micronesia

–          Based in Guam and Idaho and Utah

–         Here is the sample doc we discussed during the show: SAMPLEApplicationScoring

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Wela – Get clarity and insight on your money by using Wela. See all your accounts in one place, and get all the answers to your questions from a real financial advisor ANYTIME.  Go to yourwela.com to learn more.

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JF30: Mo Problems. Mo Income. What?! Yep. Turning Problems Into Income.

Every property has at least one problem. What if you could turn that problem into actual income? Jacob shares with you a story where his team turned two poorly functioning laundry rooms into cash money.

Jacob Durtschi’s real estate background:

–        Investing in real estate for over 11 years

–        Founded Jacob Grant Property Management (http://jacobgrant.com/)

–        Manages over 400 properties in Idaho while continuing to rapidly expand

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