Alan Cowgill teaches others how to get private investors as well as become a hard money lender. Alan became a full-time real estate investor in 1995 and has overseen hundreds of real estate transactions. He talks to Jason primarily about hard money lending as well as some tricky states to look out for when trying to get your first private lender. He also talks about SEC filing regulations, a California loophole, and more on today’s episode.
Key Takeaways:
2:00 – Alan teaches people how to become private lenders.
4:18 – In private lending, the terms are very flexible and you can usually find someone to meet your terms.
12:20 – If you want to get private lending from strangers, then there’s 5 areas of control in every state. Alan explains what those are.
16:45 – There are rules to follow that are set by the SEC when it comes to private lending.
23:00 – Make sure you acquire an SEC attorney and not a real estate attorney.
26:00 – Alan talks about California’s loophole when it comes to lending money.
29:10 – Alan’s website, PrivateLendingMadeEasy.com, offers free resources for people who are interested in learning more.
Tweetables:
Mentioned In This Episode:
PrivateLendingMadeEasy.com
Transcript
Jason Hartman:
It’s my pleasure to welcome Alan Cowgill to the show. He is owner of Colby properties and president of Integrity Home Buyers and let’s talk about financing real estate deals. Alan, how are you?
Alan Cowgill:
I’m great and I’m tickled to be on this call.
Jason:
Well, it’s a good to have you. Give our listeners a sense of geography. Tell us where you’re located?
Alan:
Yeah, I’m located in Springfield, Ohio.
Jason:
Okay, fantastic. So, when it comes to real estate deals on the paper side of the equation, Alan, what are some of the best ways to fund real estate purchase?
Alan:
Well, my favorite way is to use private individuals called private lending and that’s what I got started doing many, many years ago and it’s really been tremendous. That’s what I teach people how to do.
Jason:
So, with private lending, the advantages are you can do an asset based loan, maybe there won’t be any credit check or qualification like that. There are a lot of advantages certainty, but one of the disadvantages is the rates are higher and the terms aren’t as long. The US has always had its real estate market, for better or worse, I say ultimately worse, most people say it’s better, subsidized by the governments since the great depression. So, we got Fanny Mae and Freddie Mac, it’s like a governments subsidy on a real estate loan. So, it’s hard to compete with those rates and three decade long mortgages, right?
Alan:
Well, the nice thing about private lending is you get to set the rules, so when I was coming up through my real estate education, I heard this thing about hard money lenders and private lenders and I think they were one and the same at first, actually they are distinctly different. A hard money lender sets all the rules, but what I teach is how to burrow money from private individuals and in doing that I got to set the rules. So, there are very, very flexible on what I can setup with individuals on how to fund a real estate deal.
Jason:
So, did you get into from the side originally of buying and investing in real estate or did you get into it from the side of wanting to be in the paper side of the business?
Alan:
No, originally it was because I’m a real estate investor and I was funding my real estate deals, going to banks, and hard money lenders, and after a while I realized I could burrow money from private individuals and my mom had come into some money when my dad passed away and she did what a lot of people do, she took it down and plunked it on a bank certificate, a deposit. Well, I went to mom and I said, look, you’re getting this little rate of return on a bank CD, I can give you 3-4 times what you’re getting on a bank CD and I can give you a mortgage, a promissory note, has an insurance lender title insurance, I can pay you monthly simple interest only and mom jumped for joy and she became my first private lender. So, the terms that you’re talking about are very, very flexible based on what you want to do and the needs are to your company and with a private lender.
Jason:
So, Alan though, is it fair to say, please, tell me some of these terms that you’re getting? Is it fair to say you shouldn’t expect to be Fanny Mae, Freddie Mac type agency loans?
Alan:
What I do is, what I see the going rate for many of my students across the nature is between 6-8% interest and you can either do simple interest or you can amortize the loan, whatever you desire. On amortizing, you can use the number of years that works for most parties and so that’s basically what I do, so I have some of my students that are paying, 4-4.5-5-6% interest. Some are paying more than 8%. It’s actually whatever fits your needs in the business and you’re working with a private individual and you just work out what terms works for both.
Jason:
Okay, so that’s the side of originating a private money lending loan. There’s the lender or the burrower to do a real estate deal. What about trading paper and so forth and discounted paper?
Alan:
Well, there’s some initial restrictions on that. You can’t sell it. In some state it’s a year and in others you just can’t sell it. That typically doesn’t happen, there aren’t looking to make a marketplace for doing this. So, the original private lender will keep the original promissory note.
Jason:
What’s the different between a private lender and a hard money lender?
Alan:
Well, with a hard money lender I had hard money lenders in years past before I got private lenders and what mine did was they charged me 15% down and so on a $100,000 loan, that’ll be 15% of the money, that’ll be $15,000 of a wheelbarrow full of money you gotta take into closing and then they charge points, which is 5 points, so same example, $100,000, that’ll be $5,000 coming out of my side at 1. With a private lender, it’s a case deal and I’d have roughly $8,700 dollars coming out of my deal of 1. With a hard money lender, you gotta, they will escrow some money for repairs, which is nice and that’s why a lot of real estate investors go to them, but you got to call up your own case for renovations as a real estate investor.
If you do business with a hard money lender, start now and then once you’re done, you put some money into it and then you done the demolition work and build it up to a certain level, then you call up the hard money lender and they’ll send in an appraiser typically that you’ll pay for and if you did what you said, they’ll start giving you draws, 1-2-3 draws depending on how much money they held back.
With a hard money lender, they’ll put a balloon on it, so I have to pay them back in 12 months, but with a private lender, there is no balloon. So, it’s distinctly different. Now, I prefer to have my students becomes hard money lenders to be honest with ya. Absolutely, I loan out money as, you know, and treat it like a hard money lender to folks that I knew, so there’s a benefit of getting private lenders, because if you get enough money, you can also get licensed and be a hard money lender, so there’s a win-win there.
Jason:
In terms of private lender deals, I mean, like for example, what are the longest term on those over the years?
Alan:
Well, you can go 30 years on – but typically what I do, Jason, is I will set it up to where you have to have terms in promissory note and what I’ll do is setup it up for 5 years or until the house sells or is refinanced. So, that’s typical, but you can actually setup any length of time you want. I have one off here in May that I’ve had out there on 7 years. So, some of my students will amortize the loan, pay a lower interest rate, and they can stretch this out for 20-30 years if they want.
Jason:
Any techniques on getting someone to accept those 20-30 year terms, though?
Alan:
Typically you got someone that, they might be an older person that wants to get that steady income coming in every month and that would be the type of person that you would work with. What you can do with burrowing money from private individuals is you can just establish what terms you want to pay, let folks know, and with some of the rates out there, it’s not going to take very many, asking very many people until somebody says yes.
Jason:
In terms of the rates they’re getting at the bank.
Alan:
Yeah, that’s right. You know, when you take a look at that, if you look at USA Today and look at the money tab there on Thursday or Friday, you get annual or you get national rates of CD rates and the rates are just really low, so you come along and you offer somebody 5-6-7% interest, iot’s very, very appealing compared to the 00.26% that they’re getting on a bank CD.
Jason:
Yeah, no question it is. It’s just the length that I think, you know, people run into getting the objections for. They won’t do these longer term loans and so that’s the thing. What tips do you have, Alan, on finding those private lenders that finances longer term buy and hold deals?
Alan:
A couple of ways to go about it, one is you can have a group meeting. You can preferably invite people that you know to a meeting and what I like to do is put on a PowerPoint slide presentation and tell them about my business, I tell them about the terms, and I show them they get a mortgage, a promissory note, has insurance lender, file insurance on property, and then just flat out ask them to loan me money and it works. The other one is one-on-one, same thing. I do a PowerPoint presentation, put it on your laptop and meet them at your office or a neutral location. I don’t like going to people’s houses to do it, because of the interruptions you can get, people coming to the door and phone running and the dog running through the house, interruptions from kids and things like that, so I prefer a neutral location.
Jason:
Yeah, but you’ve got a find the people to invite to the meeting or are there lists of these people? Do you have any recommendations on finding them?
Alan:
Sure do, Jason. Yeah, there’s a couple of different ways. My start now preferred way is to work with people you know. So, your circle of influence and I call it family, friends, and associates. So, you would ask them to meet you for a luncheon or have a meeting and do your presentation. The other thing, if you want to work with stranger and every single state in the United States there are rules about that.
You can ask people for money from strangers, but you have to fill out some paper work with the SEC. In fact, many years ago what I did was I hired SEC attorney to research every state in the United States and Canada and when he got done, he came back to me and said, hey, I want to thank you. I said, why’s that? And he said, well, I got done with that project and you bought my new house and I’m moving into today. I gotta tell you, Jason, that’s not what you want to hear from your attorney, but to give you, you know, to give an indication of my moral obligation to my students to make sure they were safe and what I found when he did that is there’s 5 areas that are country in every single state and they are all the same.
Number one advertising. There’s times you can advertise to find strangers to loan you money and there’s times you can’t. You can do it if you just comply with the laws within the state and fill out some paper and pay a fee and then you can go ahead and advertise to find private lenders. The other rules are commissions, you can not pay commissions to private lenders.
The third rule is pooling, this is just like advertising, you can’t – pooling would be putting more than one private lender on a promissory note and so you can’t do that unless you fill out the paper work just like advertising and pay the small fee and then you can do it. The other two are thresholds. One is the number of lenders you can have in a state and the other is how much money you can raise within that state. You can go unlimited amount of money, but again, you gotta fill out the paperwork and compel with the rules. See, the SEC controls this piece of it.
Jason:
Have the laws in terms of private lending, how is the Jobs Act impacted that if it has in anyway? I mean, certainty the crowdfunding people are looking for gold at the end of the rainbow, there’s no question about that, but what about just doing straight regular private lending?
Alan:
Well, with the Jobs Act is what it does is it talks about owner financing. So, this is not what private lending is all about. Private lending is all about borrowing the money from a private lender to buy, fix, and sell a home. Someone can come along and get a bank loan or a hard money loan to buy the home or whatever they want to do and so, yeah, the Jobs Act and with the Dodd-Frank of it, yeah, that’s control on owner financing, but that’s not what this is about. This is about funding.
Jason:
Would it be better to just restrict oneself to lending to investors only? You know, is it just a lot less fraught with problems around Dodd-Frank and so forth?
Alan:
I think so. Yeah. I love it. My students are extremely successful doing that. You talked about crowdfunding, you know, everybody’s interested in that and I’ve done a lot of studying on that. The thing about crowdfunding is there’s a lot of positive things. Number one is if you really hit it off you can get a lot of money. The thing I heard though was about 70% of the folks setting up crowdfunding don’t get them funded. I don’t know if that’s an accurate percentage or not, but that’s what I heard. The other thing..
Jason:
You mean, the deals or the businesses, the websites?
Alan:
Yeah, the websites. Yeah, it takes a little bit of time to setup the website and you’re part of it and to do your video and to attract people to that. My students, they can raise money in 24 hours. In fact, we’ve done that at my live events and been incredibly successful.
Jason:
What else should people know, you know? Just anything I haven’t asked you so far.
Alan:
The biggest thing is to get the techniques down on how to do it right. You don’t want to go out and stumble and bumble and ask somebody for money. Let’s say they got money loaned, but you can’t answer your questions and if they say no, you know, you could be dismissed as a fly-by-night. You need to have, to know the right answers to answer their questions or you’re not going to be successful. So, you need some training on that. The other part of it is on how to manage the money. It’s very, very easy, but it’s kind of like a bicycle.
When you first get your very first private lender, you might not know how to handle the paperwork and do things like that, so it’s important that folks get an education on that and then the other piece of it, what I talked about earlier, is the laws. It’s kind of like a sporting event, Jason, you know, at the sporting event, I was an offensive and defensive guard in football and the coach would teach me the fundamentals of the game, how to block, how to tackle, how to play the position also. He also handed me a rule book, which said if you’re carrying the ball under 10 yards, your first down. If you’re carrying the ball and you step out of bounds, player stops carrying the ball, and goes across the goal like you get a touch down.
It’s the same with private lending. There are the fundamentals of how to acquire private money, how to manage it, and then there’s also the rulebook, which is set by the SEC. It’s the wild west, even though people would like it to be that way, and a lot of real estate investors don’t understand that there are some rules and they go out and burrow private money and they make mistakes.
Jason:
Why is it the SEC that we’re talking about when we’re not doing multiple investors or actualizing a deal or doing a private placement memorandum. These are just two parties, the lender and the burrow. Wouldn’t that be the Department of Real Estate or the, I don’t know, the Federal Trade Commission or something? It’s SEC, huh?
Alan:
Yeah, SEC. They were created by in 1933 and..
Jason:
Yeah, the Scoundrels Encouragement Commission. Well, look at Wall Street, the modern version of organized crime. How are they doing there?
Alan:
Yeah, I’ve never heard it called that before. That’s pretty good. Yeah, what had happened was when it was created this was put underneath their domain, so there’s the federal SEC and each state has a division of the SEC. So, I live in Ohio, so I’ve got the Ohio division of the SEC and they control the commence within the state and the federal SEC covers when you go across state lines. Now, you talked about the reg d, the ppms, Private Placement Memorandums, that’s part of it. My students use those. I give out 40% of my student base is commercial folks, balance, and residential.
Jason:
That’s when they’re raising money to have multiple people create a loan on maybe a bigger deal, right?
Alan:
Exactly and they just changed those rules here in September of 2013 before with a private placement memorandum, you couldn’t advertise. The words private placement, so you couldn’t advertise, but what happened was congress passed some laws of the first quarter of 2012 and in September of 2013, the SEC had bust to the new rules and there’s now a 506 rule b, which you can not advertise. It’s handled like the old way where you just had to ask people to loan you money, but not strangers, but now there’s also a rule c and with rule c you have to have a 100% accredited investors and you can advertise. So, with the rule b you can have 35 non-accredited in the balance, have to be accredited investors. So, a lot of my students use those. What we do is we find private lenders to fund those deal, private individuals to fund them.
Jason:
At this stage of your career, you probably got a lot of cash, probably able to do deals, I assume you doing lending as well as burrow, but is it still wise to use a private lender even when you’re in the more advance stages of wealth creation and you’ve got money?
Alan:
Oh, I’d use it forever, yeah. I find it the cheapest, easiest, safest way to go find your real estate deals and it’s fast. I can get an offer accepted on a Monday, I can go to the property owner Friday. Commercial deal it’s different, but on single family homes it’s that fast. You call up somebody, you know, frankly Jason, it’s like ordering pizza. You order private money like you order pizza, obviously there’s some rules to follow, but you can order money that quick. People are glad to do it. In fact, when you pay somebody back, they’ll call you up and say, hey, I got my money back, I didn’t want my money back, how do I get this money back…
Jason:
Right, I want to keep it out, so I get the interest on it.
Alan:
Exactly, exactly, but you don’t want to keep the money in what I call the gap, which is when you sell the property and you’re ready for the next property, because you promised the private lender that the money is secured by real estate and therefore you gotta keep your word and so if it’s not secured, the money needs to go back to the lender and the job is to crack up your buying machine and get it working again.
Jason:
One of the things I say to our private lenders is that, you know, you should get the money back at the end of every deal and try to re-loan it again as soon as you can, because that’s one way to insure that you’re not in a Ponzi scheme. If they keep giving you your money back, then it’ll be pretty hard to operate if you had a Ponzi, you know, a Bernie Madoff type of situation going on, which is probably very rare in this world, but it could happen. You know you really have your money if you’ve got it back even if it’s just for three days before you do the next deal, I think that’s just a prudent idea to get your money back each time.
Alan:
I agree with you. I agree with you 1000% and that’s exactly what I do and exactly what I teach my students to do is to give the money back and then their job is to crack up the buying machine and get the money working again.
Jason:
Yeah, absolutely. Are there any states you would really avoid that are, I mean, you know, New York, California, they’re always a hassle. It seems like everything I do when I deal with California is this whole set of special laws. Are there any states that you would just kind of shy away from?
Alan:
Well, there’s 13 states that you have to fill out a piece of paper before you get your first private lender. For example, in my state I can go out and get a private lender tonight. I don’t have to fill out any paper work and I can get up to 10 lenders in 16 months. Most states are 12. The lowest state on the number of lenders in a 12 month period is New Hampshire, which is 4 and the highest is New York, which is 40. All the rest of us are somewhere between most states are around 15-25 lenders, but like I said earlier, Jason, if you want to go unlimited, you can do that. Now, on the 13 states, just because I have to fill out a piece of paper and send them a small fee. I’m talking about 100 bucks or 200 bucks fee, then you can go get private lenders just like the rest of the states.
There’s some stuff that the SEC is more aggressive than other ones. I wouldn’t – I got a lot of students in those sates, so obviously just be very, very aware in any state to follow the rules and you want to make sure in those states you got an SEC attorney to help you out. Not a real estate attorney, because this is different. You’re following SEC rules, so you want an SEC attorney. Just like doctors have different skills, so do the attorneys.
Jason:
Any tips on find an SEC attorney and then I want to ask you, you know, which are some of those states you would avoid that are harder.
Alan:
That are a little tougher? On finding an SEC attorney, the best would the kind that actually worked within the division of that state. They’ve been in there. You find, what I hear, is – I’m not an attorney and I don’t give out legal advice, but I hired that attorney so I know the laws and can teach it, but he told me that someone would come out of school and get into the division of the SEC, stay there a few years, and then spin out into private practice. Those are the best, because they’ve been the inside, they know the rules and that would be the best. They’re probably also the most expensive.
The other kind are the ones that go into the SEC division and stay there, so they end up staying there the rest of their life. So, the ones that spin out into private practices is the best. The other thing that..
Jason:
But how do you find those people just out of curiosity?
Alan:
Well, you gotta do some research, because the fees are all over the map. For example, you talked about PPM a little bit ago. Well, those fees can be, if you’re at some big corporate company, SEC company, and they’re dealing with some big corporation, you know, they’re charging $50,000 for a PPM and that just puts my students out of realm of doing that. There are all over the map on pricing on PPMs. You can get them for $15,000 or $10,000. I know attorneys you can get it for $5000, $500. So, that puts it in play for my students. So, to answer your question, you gotta shop around. Get on the phone and shop and get some pricing on the attorneys and make sure you got the best state that you can.
Now, back on the states, the tough ones, well, you mentioned one, New York is tough, Pennsylvania is tough.
Jason:
California is tough on the hard money side, right? Well, the thing I find in California is even if you’re going to say it’s not, which would be amazing from a regulatory standpoint, because California, I mean, every year they got 800-900 new laws as if we’re suppose to know those laws, right? You know, the rates are not competitive, they’re for the lender, for the burrow they may be, but you just don’t have – there’s too much competition, there’s too many hard money lenders in California, you know? They pushed down the rates.
Alan:
Jason, it’s interesting you bring up California, because when I was paying that attorney to do the research in the United States, he uncovered the fact in California they have a unique opportunity on their books to where the folks in California can pay $600, fill out a 2 page form, tern in their advertising, their disclosure statement, and they are able to raise $5 million dollars and advertise to do it in California.
Jason:
What’s that called, that program?
Alan:
The name is really long, so I had to make up my own name. I call it the California loophole, so not that it’s illegal, it’s just different from what the other states are doing that we did the research on. So, you can raise $5 million the first year and on second year, you can raise an additional $5, so then you got $10 million dollars. You think about someone who is doing a multi-unit apartment complex. I mean, they can cookie cutter those and burrow $5 million a year and each year get a new complex, but it’s a very, very simple way to borrow money from and advertising and pool money and you can cross state lines.
So, I have heard, I’ve got students in Canada that they’re using it. So, you can usually use it in other countries too. You have to take the first step though, if you live in Ohio like I do, you have to take a step to where you file as a foreign corporation, like you’re in an different country, foreign, but you only have to pay $100 to do that. Once you get that paperwork processed and then you can go ahead and use the program to go ahead and raise $5 million dollars, fill out the two page form, $600 bucks, and you’re good to go.
Jason:
Okay, so, in other words what you’re saying is California is actually pretty beneficial from that perspective.
Alan:
I like that one. I’ll tell you that. Yeah, yeah. Most states are capped at a million unless you fill out the paperwork and then you can go, you talked about the PPM, you can go unlimited what that.
Jason:
But, when you talk about that, I mean, there’s a different between raising the private money for debt versus equity, right? Which one are you talking about there or are you talking about either one?
Alan:
Well, I’m talking about debt. I’m talking about debt, but some of my students they team up with a private lender and it’s equity. So, you can go either way.
Jason:
Okay good, what else did you want to say about that?
Alan:
Well, the different states. Those are the ones that come to mind that we just talked about. Pennsylvania has got a real aggressive division, the SEC, New York also, and those are two of the states you gotta fill out a piece of paper before you get your first private lender and there’s 13 total.
Jason:
What else should people know and give out your website, tell people where they can find you, okay.
Alan:
My website is PrivateLendingMadeEasy.com and just spell the words all the way out and Jason, if they go out there on the top right hand corner, I’ve got some free stuff for everybody. I’ve got 35 e-coaching lessons. I brought up a foreign country, you know, burrow money from a foreign country and vice verse. There’s a top box there will get a free report, white paper on that, and some videos. Just got a tremendous amount of information out there for folks on private lending. The biggest thing that I teach is not only attracting private lenders like a bee to honey, but also how to be safe and do it and following the SEC guidelines. So, I think that’s the biggest thing.
Jason:
Yeah, I think you’re right. Alan Cowgill, thank you so much for these insights today, we really appreciate having you on the show.
Alan:
Well thanks Jason, I appreciate you having me. Take care.
Announcer:
This show is produced by the Hartman Media Company, all rights reserved. For distribution or publication rights and media interviews, please visit www.hartmanmedia.com or email media@hartmanmedia.com. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate or business professional for individualized advice. Opinions of guests are their own and the host is acting on behalf of Platinum Properties Investor Network Inc. exclusively.