I Cracked the Code for More Cash Flow & Less Risk (Rentals + Private Lending)

0:00Tony, I love when we get to talk to rookies who have jumped into not just one, but multiple strategies early on. Because let's be real, most of us start with one deal and slowly branch out. Yeah, but today's guest went from lending to flips to rentals, all while balancing a W-2 and navigating some tough rookie lessons. And that's what we're diving into today, how to diversify as a rookie and what you learn when things don't go according to plan.

0:30Welcome to the Real Estate Rookie Podcast. I'm Ashley Kerr. And I'm Tony J. Robinson. and let's give a big warm welcome to Shalom. Shalom, thanks for joining us today, brother. Thank you so much for having me. I'm super excited to be here. So Shalom, how did you get first started in real estate and what pulled you towards real estate investing in general? Okay, it's a loaded question. Let's rewind back to COVID. I was in college. I went to Baru College. I had no idea what I wanted to major in, but my friend did this internship in real estate. He's like, hey, if you want to learn more about it and maybe get paid while you're sitting at home doing nothing, try it out, right?

1:07And so I applied, I got in, and it was amazing. I learned so much about institutional real estate, what it means to underwrite a deal, look at gross rent, net rent, what does vacancy mean, what are building expenses, how do you value building with a cap rate and a Y, and I just loved that sphere. I felt that I've never actually applied myself in anything so hard as I did with real estate. And so I love this so much, I changed my major to real estate finance and doubled down on learning as much as I can about real estate. After that, I've interned at many different companies within real estate private equity with Mac Real Estate Group.

1:48I've worked at different public REITs doing retail work and underwriting deals, development deals, and then couldn't find a job at real estate. No matter how good my resume looked like, when I graduated school, I was looking for a job in New York, but I couldn't find one real estate job in New York. And that's when my first real estate deal kind of landed in my lap. The phone rang and it was a deal I couldn't refuse. We'll jump into that in a minute. But that was my first private money lending opportunity. Yeah. So first of all, I want to get into how private money lending was actually your first insight into real estate investing.

2:26But I want to mention the fact that your major was real estate finance. I didn't even know that was a major. And I want to go take a community class now to learn about real estate finance. But I think that's awesome. But that must have set you up for some kind of success. What did that major actually entail? Is that deal analysis? Is that how to structure the financing on a deal that set you up for becoming a lender? Yeah. So this major essentially is getting me ready to work at an investment bank, Think like JP Morgan, Wells Fargo on their real estate underwriting teams or at a private equity firm where I am underwriting either value add deals, development deals or managing a large portfolio of thousands and thousands of units.

3:15So it's a very high level. And once you get into these fields and you intern in these places, you get very kind of like you're a professional in one certain aspect. Like you only do asset management. Like a very niche. Yeah, very niche. Yeah. You're only doing property management or you're only underwriting construction costs or you're only underwriting different value add deals, not development deals. So that's what the major kind of prepared you for. It taught you a lot about how Fannie and Freddie Mac work. What does the national mortgage market look like and different ways that institutional real estate moves?

3:51whenever you want to finance a skyscraper in New York City it's very different than when you go in and get an FHA loan and putting down three and a half percent right your your rate on a skyscraper is probably a floating rate it's probably tied into a bond that several pension funds and then life insurance companies are investors of versus when you're putting down three and a half percent FHA property it's a lot simpler of a deal right but it's also okay this loan gets collateralized with a thousand other loans and then gets sold in a bond to bond investors. So I learned kind of the theory of real estate, but never practicing the real estate.

4:26I also noticed that a lot of people who I network with back in the day that are working at these real estate companies kind of have golden handcuffs where they don't want to do a deal themselves because they always do an analysis paralysis. They analyze a deal to the very T. And oftentimes, you guys know this very well, when you're dealing with single family or two, three, four unit properties, it's really, really tough to get every single expense underwritten to like the cent value. So you know where your NOI is going to be. So that's kind of where I started with my college and then kind of grown into, made the transition into like gross investing myself.

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6:46So wouldn't it be great if you could actually earn money while you're traveling? Well, you can. Airbnb has something called the Co-Host Network. While you're away, you can hire a vetted local co-host with hosting experience to help take care of things. Communicating with guests, preparing your space, managing reservations. Everything runs smoothly while you're off making memories. Your home might be worth more than you think. find out how much at airbnb.com slash host. Shalom, it's interesting because you started at the most advanced version of real estate investing as it exists, which is like the large institutional type investing, whereas most people slowly kind of graduate up to that level.

7:25So I'm curious, was that experience what led you to think of private lending as your first deal? Because a lot of new real estate investors, I don't even think they understand or comprehend what it means to be a private lender, let alone have the confidence to make that their first deal. So how, if at all, did your experience working in private equity lead you into becoming a lender on your first deal? So yes and no. It kind of gave me the idea of private lending because I saw private credit funds invest hundreds of millions of dollars into the residential space across the nation. And I saw that that was an opportunity, But I didn't think it was an opportunity for me because I don't have$100 million.

8:09I don't know about you, Ashley and Tony, but I don't have$100 million just lying around the bank. And I didn't think it was an opportunity for me. Certain life circumstances came about where I couldn't commit to a rental property. And I was looking for an investment that was very similar to one with the return without the commitment to one. Because whenever you buy property, you have closing costs, you have transaction fees, You have to manage the property. You're kind of getting married in this scenario. And then if you want to exit out of it, it's also a hassle. You've got to put it on the market.

8:42You've got to wait to find a willing buyer. There's going to be concessions and negotiations. It's just too much if you have to get in and get out. With private lending, it's a very short-term investment, but it has a very similar return as to a rental property. If I compare my very first rental to my very first private money deal, I think the returns the private money deal actually more than my first rental but um i was looking for that where i can invest my money into four or five months because i may need that chunk of change in four or five months um and then that's where private lending kind of came about uh my first deal was uh i don't know if you guys want to jump into that yeah yeah please i'm intrigued um i don't know if you guys know this uh she's a bigger pockets author grace gutenkopf um yeah we know great and she called me up uh she's like shalom i'm closing on a property in tucson arizona i need 300 grand tomorrow you in or you out i'm like huh i'm a 22 year old kid i don't have 300 grand lying around i'm like okay send me the details i'll take a look at it and give me like a day to figure something out and i'll get back to you so she sent me the deal and the deal penciled really well she was buying the property at 275 000 she was putting in 60 into it and the arv was in the mid 400s like 420 to at 4.30, around there.

10:01And the deal made sense. She had a clear exit strategy of how she was going to refinance out of the deal. And she was offering me an 11 % interest rate for six months, but there was an option to pay off earlier without a penalty. And the deal really, really made sense. I went out of the first lien position on the property. I wouldn't be giving 100 % financing because she would put 10 % down for the construction costs, and I would only give her the other half the construction costs. And so it was like, well, this deal really makes sense financially. Now let me see how I can figure out the money.

10:37And I was actually at BP Con listening to Matt Faircloth's keynote, and he was telling us how to raise private money in this challenging kind of market. And I copied his method without knowing it was what he taught. Because after he mentioned it, I went into research how many people own their house outright. And over 40 % of people in the USA today don't have a loan on their primary residence, according to US Census. I mean, that is an astonishing amount. So if 40 % of people are like that, Ashley, Tony, we all know somebody probably in our lives, whether we know it now or not, but we probably know somebody in our lives who has a house that's paid off that's has equity there and might be willing to invest it um for example like a lot of people follow the dave ramsey method of paying off debt as soon as possible and throwing everything at your house like that's a great pool of people in our country who could have equity to invest with you um and so my parents kind of fell into that category they came to america in the early 90s and they worked their butts off in order to in order to kind of create financial freedom for themselves, they partially is paying off their mortgage.

11:51My dad paid off our 30-year mortgage in like 15 years. And we had a property that had equity in it. So I approached my mom and I'm like, mom, I don't have the full 300 ,000. I have 50 of it. Do you want to come in as a private money lender and give me the other 250? And she's like, pitch me the deal. And so I had some good experience of in private equity, pitching deals to MDs and directors and associates and whatnot. And so I laid it out in front of her and she's like, this sounds like a no brainer. Let's pull the trigger. And that was our very first private lending opportunity. I love this story.

12:28I have to go back to the beginning as how did you get connected with Grace where you were in a position that she gave you the phone call to say you in or you out? how does someone do that type of networking to get connected with investors who are looking for lending? Yeah, social media is very, very big. I mean, you guys know it best, and something I'm working on right now in order to get out there more and more on social media, but I followed Grace for a long time. I don't know how I found her, but I was into real estate and she was posting a lot about real estate. And I was stalking her page 24-7, looking at her lips, I'm like, I already know how many units she owns and what she does in Cedar Rapids and different kind of flips she does and whatever.

13:15And one day she was like, hey, I'm looking for partners on this deal. She was going to do like a 20 unit in Cedar Rapids. And I'm like, hey, I don't have the money, but maybe if the opportunity is good, I could find the money. So I was like, okay, let's get on the call and just talk about it. So I built up a story and I never say no to an opportunity. Ended up she never did the deal. It wasn't for my appetite. But we got in contact. And that is what – now she was able to reach out to me if she needed something, right? And so we kind of kept in touch. And when she needed money, she knew who to call.

13:48Shalom, I think it's an interesting story. And I love how it all came together. But I think maybe one more nuanced part of this is that you partnered with family on this first deal as well. And we've had a lot of conversations. Ashlyn even wrote a book on real estate partnerships about partnering to buy real estate. but I don't know if we've ever had a discussion on partnering to lend for someone else to buy real estate with that money. So how did you and your parents structure this partnership with, you know, them bringing two 50, you bringing the other 50, what did that structure look like? So we were on the mortgage and on the promissory note.

14:25Um, and we owned a portion of that note proportion to the portion of the money we had in the deal. So my parents owned, what would that be? Like a sixth of the deal and I owned one sixth of the deal. And we were on the note together, which meant we kind of had risk together. And there wasn't like, I wasn't guaranteeing them some kind of return. I showed them the deal and I said, these are the risks that could happen. Worst comes to worst, we foreclose in a property that's worth more than we have into it because they'll be doing construction and the ARV is there. Or we go and we finish the business plan and then sell the property.

15:11Right. There is a few exit strategies here. But on that first one, it was it was a true partnership. It's like we eat together or we starve together. But in one way, we're getting in and out of it. Are you interested in effortlessly growing your Bitcoin portfolio? I am, but I don't really know where to start. So the Bitcoin credit card by Gemini earns you Bitcoin back on every purchase. Use it like any credit card. Buy lunch, gas, or your weekly groceries, and you'll earn up to 4 % back instantly in Bitcoin. Or one of over 50 other cryptos straight to your account. All that with no annual fee.

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19:07Stop letting outdated lending practices hold you back. That's hostfinancial.com, where your property's potential meets unlimited financing. I want to know how you've structured this deal with Grace as far as the private money lending. So we have a rookie listener that maybe wants to go out and do private money lending as their first deal. How did you structure the actual payback of that loan? Was it monthly payments of principal and interest? What did this look like? And would you do it again? For sure. I mean, the way we did the deal was, it was my very first deal. So Grace dictated a lot of the terms.

19:45And in hindsight, I could have charged more if I wanted to, but I didn't know what the market was. So it was an 11 % interest annualized, and she would be making monthly interest-only payments throughout the period until she refinanced the property and then paid me back the lump sum. I gave her the money for the purchase of the property and an additional$30 ,000 in construction costs, and then she would bring in the other$30 ,000 in construction costs to get the project finished to where it has to be. She agreed to send me monthly emails or bi-weekly emails on updates that are happening. So I knew when the new roof came on, when landscaping was done, when the bathroom and the kitchens were in, and what kind of trouble she was having.

20:29Additionally, I knew when she was starting to refinance. It was before all the construction was done. And she kept me updated along the way. This allowed me to know when my money is coming back. So our deal was for six months, but she really paid me off in four. So I knew my money was coming back earlier and I could probably plan to do something with that money when it comes back, whether invest into an added loan or buy a property or go buy a Lamborghini. I don't know, but. We don't recommend that. No, but what one follow up I have to that is, was there any kind of extension? Like, did you know what would happen if six months came and maybe she couldn't refinance or if it was somebody doing a flip the house in itself, was there any kind of like contingency or anything put into your contract or your agreement, the promissory note that stated what would happen if the six months came due and she couldn't pay?

21:25This was two years ago, so I can't tell you exactly. I'm pretty sure we had something in there. Like if we go past six months, there's like a 1 % extension fee or half a percent extension fee. I mean, all these things are negotiable. And for those out there that want to lend private money, I really recommend it. and I stand by it because I'm still doing it today. So it kind of goes to the question, would I do it again? Absolutely. I still do it today. And all these things are negotiable. So the interest rate is negotiable. Your origination fee, if you want to charge one, is negotiable. Extension and prepayment penalties are negotiable.

21:59Everything that, it's your deal, it's your money, right? So you should be comfortable with the terms that you're putting out there for borrowers to use and work with. Now, Shalom, this first private money lending deal sounds like it went pretty well. But have you ever had a situation where you lent money to someone and it didn't go according to plan? I think the worst case scenario is that you've got to take a property back. But I guess, did they all go smoothly? Or have you had any situations where maybe the operator didn't execute the way that you would hope they would? For sure. I mean, this one went really well because of the quality of the borrower, I want want to say, right?

22:38Grace is amazing what she does. She has a lot of experience and there's a lot on the line for her to lose. I don't think she would just run away with my money if she had the opportunity to. But there was one time when I got a little bit naive and kind of went on a deal and it did kind of go wrong. So someone came to me, they were an experienced investor as well, but their credit wasn't as good. That's why they couldn't go to a typical hard money lender. They came to me, hey, Shalom, we want financing on these two properties that they're buying in South New Jersey. It's my backyard, so I kind of know it pretty well.

23:13And I said, hey, listen, I'll finance these properties for you. Here are the points I want to charge. Here's interest rate. And here are my terms. They agreed to it. We signed off on it. For the first three months, everything was great. They were doing renovations. They're making payments. And then payments just stopped. I called them up and I'm like, hey, what's going on? He's like, I'm going through this, this happened. And I'm a little bit of a softie. So I'm like, okay, like, I'll give you like a little bit of slack. I won't do anything. But two months went by no payments, three months went by no payments.

23:45I'm like, okay, now we have to act and do something. And so me and him agreed that, hey, you don't want two foreclosures on your properties, because it was two separate loans on two deals. And I don't want to pay 3040 grand to a lawyer to get these properties from you. So if you want to just hand me back the properties and I canceled the mortgages, then we can kind of do like a cash for keys, but there was no key. Just give me the properties and walk away. And I'll figure out what to do with these properties afterwards. What saved me was I didn't give him all the money. So I had some equity in these properties and they were in good rental markets.

24:23So I didn't have enough equity to go on the foreclosure auction, sell them and walk away with either my principal or some profit. But they were almost done, right? So I finished the construction. I put them up as rentals. And now they're in my rental portfolio. And they cash flow pretty well. They cash flow anything like 200, 300 bucks a unit. And there was some other stuff in there with some stop work orders and construction delays. That's a story for a different day. I think that's a really interesting exit strategy. you know as a money lender you usually think like okay I'm gonna have to take you know back the property and then I'm gonna have to sell it put it up for auction do whatever through the whole foreclosure process but you actually finished the deals and rented them and you made it work for you so I think anyone that's maybe scared of that happening here's like a another aspect you could look at when you're underwriting a deal to lend on is okay worst case scenario could I use this as a rental too.

25:25And on the piece that you said you didn't give them all the money, were you doing like draws with them for the rehab? That's right. Yeah. So for the rehab, they would need a complete, like we did it in separate phases. So I guess phase one was demo, phase two was flooring, phase three was like some plumbing and electrical, phase four was kitchen. As these things were done, we would release the money for those things. So five grand labor cost me three grand. Okay. So give us an invoice for that. We were to see, release$8 ,000 in a wire. And we also have to confirm these, these things were done.

26:01So whenever we have larger things that require a permit, say electrical and plumbing, an inspector will come out there in order to view that these things are actually done and to code. And if it's something cosmetic doesn't really require a permit, a simple picture or a few detailed pictures, send them over to me and then okay I see there's new vinyl there I'll release the draw. Shalom based on what you learned from this deal going sideways what are you doing differently now as you're looking at borrowers and projects to lend for? Fair question yeah I'm looking at the borrowers as a whole and the deal as a whole in order to say okay worse comes to worse do I want to own this property or what's my exit strategy out of it if I have to foreclose on it, right?