EP 10 – Private Lending and Hard Money Loans with a Self-Directed IRA or Solo 401k
Mat, Mark, and special guest Aaron Halderman, SVP Directed IRA and publisher of the Noteworthy Newsletter discuss private lending basics with an IRA or solo(k). They go over secured versus unsecured, documents involved (note, deed of trust or mortgage), common terms/rates, legal considerations, how Dodd-Frank applies, and the basic self-directed rules and process when making lending investments from a self-directed IRA or solo 401(k).
Mark Kohler: Welcome, everybody, to this week’s episode of the directed IRA podcast. My name is Mark Kohler, yours truly and the really miss the color commentary guy today. I got my co-host, Mat Sorensen, who’s the whiz. The child prodigy of Directed IRAs he’s the best selling author around the country on the directed IRA topic, CEO of Directed IRA and author of the second edition SDIRA Handbook, which can be found at SDIRAHandbook.com. We have a special guest today, Aaron Halderman. I’m going to introduce him in a moment. So but we don’t know what I’ll do now. Aaron Halderman, we’re lucky to have him Mat right. I mean, this guy, big deal. It’s a big deal. So this is going to be good. Aaron is the current. He’s currently the senior VP at directed IRA, publisher of the ongoing noteworthy newsletter. I’ll have him explain what that newsletter is all about, and he previously was the managing partner of a private investment company that focused on notes and acquired over 2000 notes around the country, 2000 assets around the country. So we’re going to talk about notes today. Did you figure that out? Mat what would you title the show?
Mat Sorensen: Well, today we’re talking about private loans and sometimes called hard money lending. Which you can do with your IRA. One of the most common assets people buy with a Self-directed IRA is just being the bank. You’re loaning people money. So Aaron’s here and directed IRA. Of course, we work together on a daily basis and he leads a lot of the teams here. But he’s also a fountain of knowledge when it comes to note investing from the conferences he’s held. It’s actually how Aaron and I met. I spoke at one of his conferences, Noteworthy Investor Summit. It was like one of the biggest rooms I’ve ever spoke at at the time. It was a massive conference. And yeah, there were dozens. Dozens? No, I think like three or four hundred people in the back room.
Mark Kohler: Yeah, it was a back is in the back of a Starbucks. I think there’s four or five people or one of them didn’t even know what they were listening to. But it was a big deal at the time.
Mat Sorensen: Yeah, that was a joke, right? Nothing wrong with that. But anyway, so Aaron is kind of the expert. I mean, Mark and I have, of course, you know, work with lots of clients over the years doing private lending. There’s a couple of things for your IRA you want to note, of course, as well as just the normal things for private loans. So we brought in a heavy hitter. You know, we brought in, you know, the big guns today.
Mark Kohler: Yeah. So welcome. Let’s hear your voice. Let’s hear this manly voice that.
Aaron Halderman: Well, thanks for thanks for having me on. Pleasure to be here.
Mark Kohler: Now, as some of you have already maybe noted, if you’re new to this podcast, I’m going to be the color commentary, which means the one that keeps it lighthearted as much as possible today, because these two guys really are the experts when it comes to notes. So I’m going to start out with my first recommendation. If you ever decide to loan to family, you’re never going to get paid back. So just be careful with that. And I think we prohibit prohibited in your IRA.
Mat Sorensen: Yeah, many times prohibited transactions. So, you know, when you’re dumb son in law comes and asks you for a loan, you tell them, hey, you’re a disqualified person. I actually can’t loan you money with my IRA.
Mark Kohler: Yeah, I’m just qualified. Might have various meanings, not only for your IRA. You’re not qualified to participate in my estate, marrying my daughter, whatever the case may be. Yeah. So my only note lending experience is giving money to families. So you don’t want my advice here. So I’m just that way. Yeah.
Mat Sorensen: Ok, yeah. Those are called. There’s another word for those. Those are called gifts.
Mark Kohler: That’s right. That’s right. All right. Mat you got an agenda for us out here.
Mat Sorensen: I kind to work through a little little agenda here. We think we’ll go kind of the flow of how you loan money. Like what do I need to know what kind of go through the process of making the note and everything. So let me get the preliminary point that I turn over to. Aaron, on the note side, the first thing is and for many of you don’t know what a Self-directed IRA is, Mark mentioned my book, The Self-directed IRA Handbook and its second edition. I got a whole chapter on notes. But if you’re like your ideas of fidelity, for example, you’re like, I want to do a private loan with my IRA and you call Fidelity. They’re not going to let you do it. OK, thank you, Vanna White. That’s very nice.
Mark Kohler: Yeah. Oh, yeah. For those of you watching on YouTube, this is also available on YouTube. So you can see our three faces. In fact, if you’re listening on your phone, you could switch over to the YouTube version and it might be a little more interactive. I just held up a copy of this book. If you don’t have a copy of this book with this little yellow circle up in the corner, you’ve got an outdated book. You’re just going to have to buy the new second edition. So get over to SDIRAHandbook.com.
Mat Sorensen: You know, that’s just a little little. Yeah, a little marketing add on there. But I just want to say the first step, of course, is you need a self-directed IRA OK, if you’re IRAs at Fidelity, they’re not going to let you loan money. Like they’ll let you go go buy a bond. It’s kind of a loan, but you’re not going to loan it to your other friend, real estate investor that wants money to rehab a property. So you’re need to get to a Self-directed IRA such as directed IRA. There’s other companies out there, but you only need to know one directed IRA is the best. And so you get your money over to a self-directed IRA. OK, Aaron let’s say I’ve got a Self-direct IRA now. Doesn’t matter the account type.
Mark Kohler: No, and hold up. He posed this question. I want everybody out there to know this could be your HSA health savings account, your simple, your SEP, your 401K, your Roth, your Roth 401K, your Coverdale, which is an educational IRA for yourself or your kids, so when we say IRA, I just if that’s OK Mat I want to tell everbody we’re talking about a SDRP. We’re talking about a SDRP a self-directed retirement plan in any of those forms. And you can roll or money from those accounts to directed IRA or open one of those types of accounts at directed IRA. That’s step one. So I just want to clarify that for all the newbies out there. All right.
Mat Sorensen: You’re trying to use that SDRP term, huh? I don’t know. That little word sounds like something we get like. Now and, you know, some third world country, after you ate something wrong, you said no, we got medication for that. So did you say you’re like, oh, excuse me. Yeah, I just.
Mat Sorensen: All right. Hey, Aaron, I’ve got my self-directed account. Like, when people say I want to do a hard money loan or I want to be a hard money lender or do private lending, like, where are they talking about?
Aaron Halderman: Yeah. So typically, you know, those those terms are really, really the same thing. Interchange, you know, sometimes like you have a licensed professional, like a licensed broker that is helping in the transaction, that you’re actually working with that hard money lender to find you a deal. And they’re kind of going to put the transaction and paperwork together. Or you as an individual, like with your IRA, you’re that you’re the one actually doing the private lending with your Self-directed IRA. But there’s some paperwork that’s involved in your IRA can do that. Your IRA can absolutely be the lender. And hold you hold that asset in the IRA. But there’s what’s called a promissory note.
Mark Kohler: Now hold it. Aaron, before you go any further, I just want to as you start to define terms, the first thing that you brought up that’s interesting for people is if I’m going to lend with my IRA, I can employ an agent or a broker. Someone that knows where I could place my money. I may have you to talk about a little bit more about how to use them, but you also said you could do it yourself. Is that prohibited? Well, put the deal together myself.
Aaron Halderman: Well, you can go find the deal like source the deal, right, but your IRA is going to be so you as the IRA account owner, you’re sourcing the deal. You want to find a company or find a note to invest in. You absolutely can do that. But your IRA is going to be the one that’s actually doing the transaction, right?
Mark Kohler: Right. I just it’s not prohibited to kind of find it, manage it, collect the money or at least manage the process. That’s not. I can do that. OK.
Aaron Halderman: And we’ll hit on the management and collection side of it, especially if there’s any deal that goes into that. So we will touch on we’ll touch on that here in a minute. So so when you when you come down to that, though, it’s important that you identify some of these terms. Like what exactly is a note? Oftentimes it’s referred to as a promissory note. And basically what that is, it’s a promise to pay. And it’s an actual agreement that you have now. There’s no security in that, OK, unless there’s some paperwork that accompanies that, which would be a deed of trust or a mortgage. Now, it depends on the state where you reside. Some states or deed of trust states, some states are mortgage states. And just to make it confusing, some states do both, OK? And that mortgage or deed of trust is the actual security instrument that is tied to that note that protects your interest, OK, that gives it the validity that you have a secured asset.
Mat Sorensen: Let me add another way to sell the deed of trust. Our mortgage is the lead on the property. The promissory note is the agreement to repay. Now, when I loan money, right, I’m I’m playing the bank, so I’m getting interest back and I’m getting points probably. And all that income goes to your IRA, you don’t pay UBIT tax or any of these other taxes. You have to worry about sometimes with an IRA, it’s all clean. This is one of the reasons it’s one of the more common assets and things people invest into. But this could be as simple. And this is one of the most common. You’re brand new to Self-directed investing. You start going to some real estate clubs or groups and you kind of walk around like, hey, I have an IRA with two hundred fifty grand on it. I want a loan it on anybody’s deals. Anybody OK? Some guy. I need one hundred grand for a rehab on a property I’m flipping over here. Great. I’ll loan it to you for six months Ten point, ten percent interest two points or whatever terms you can get in your you know, it’s a little competitive. You got to be competitive on rates because there’s other people doing this. But that’s this is that’s very, very common. And eventually, like I have clients with self-directed accounts just doing this, loaning money out of their IRA or other retirement account, getting interest in points at like 10% and two points. And I literally have clients with millions and tens of millions of dollars. This is all they’ve done. This is it. If you get that time, time and time again, it’s it can be a great way to grow an account.
Mark Kohler: Now, if I could ask this to over directed IRA, you see all sorts of notes, I would point out that I think and we should come to this maybe later, there are notes where you may loan money to a new start up business. I was watching Shark Tank the other night and Mark Cuban said, I don’t want any equity in your business. I’ll just loan you the money. But here’s what I want. And so you could create a loan to a business, right? Also, I’ve had some clients in Hollywood. Yeah, I’ve had some clients in the L.A. Hollywood market that have loaned money to productions to buy lighting equipment and cameras. And they take a lean against the equipment, which is called UCC3, and that’s another type of loan. So when we’re talking about this already, I think we’re going to focus on real estate first. But keep in mind, this could be any type of loan. Now, you don’t want to be an idiot out there and do what’s called a signature loan or an unsecured loan will come to maybe some cautionary issues. But it’s not okay to Mat and Aaron to say that there’s different types of loans. You know, it’s not. Yeah, yeah.
Mat Sorensen: Absolutely. And you could be loaning one other common ones we see is people will loan money to a company, a startup that can convert into stock. So rather than getting repaid, the lender can say, no, I don’t want to do it. I don’t want you to pay back the money. I want to convert it to stock at a pre agreed price at the beginning. And so that’s a very, very common in the venture capital world. That is one of the most common ways companies get funded now is what’s called a convertible note where they can convert that debt into stock if the company takes off.
Mark Kohler: Now, Aaron, can I ask you a question? OK, you said you’ve got the promissory note that sets forth the terms and you’re going to want security. We’re going to talk about real estate first, of course. So that means this lean against the real estate, which might be a trustee, but tell people the difference between points of interest in the terms. This was something that was really fascinating to me when I learned this from clients and you. Is that the difference and why you have points of interest?
Aaron Halderman: Yeah, so so basically, it’s kind of like the cherry on top of the ice cream with the points, you know, that that sweetens the deal. Anybody can find like an interest rate. It’s no different than the interest rate you have in a car loan or on your existing home mortgage. Right. Let’s say it’s well, right now it’s at an all time low, but let’s say it’s three percent is what you have on your mortgage loan. And you’re going to pay that over a period of 30 years. 360 months. OK, that’s a and when you refer to notes, when you get when you make that investment, when you’re getting back as your principal and your interest rate, that’s agreed upon in according to the terms in the promissory note. OK, so let’s say you lent out one $100,000 at 3% interest. You’re going and let’s say you did it over 10 months or excuse me, 12 months. You’re going to get that $100,000 plus that 3% over the next 12 month period. And it’s all going to come back to you. OK, now you’re sitting back in cash with your $100,000 plus that 3%. So $3,000. So now it’s one $103,000 that you’ve got back at the end of 12 months. Now, that doesn’t sound very amazing at all, considering how I can go into like an index fund or something, get like five, five, six percent and just completely do nothing. Here’s where it gets interesting. You can go and charge what are called points, OK, which would be a specific dollar amount percentage based on the principle investment you made. So let’s say you charge two to three points on the one hundred thousand dollar loan that you’re issuing out. And you get that right up front typically is where you see that. And let’s say it was three points. So you’re getting three grand that comes back right away into your IRA. Plus, you’re getting those principal and interest payments each month over the next 12 months. And so that’s where you get the points and the ring together. And that’s very that’s a very standard type of deal on what why people love to do notes because they get those those points, which is that cherry on the top, in addition to to the rate that they got. One important thing that I wanted to make sure that we get on discuss is some of the documents that protect and secure your investment as you typically have a lender’s title insurance policy, and the IRA could be listed as the mortgagee for hazard insurance. So in addition to the note and the deed of trust or mortgage that you get, you also have that lender’s title insurance policy. Listed as a mortgagee on the hazard, and here’s why that hazard insurance as it is, is key. What if the property burns down? How would you get paid? How would you get paid? What if the property was blighted? The very next day you made the loan. It’s that hazard insurance policy is the only thing that’s like protecting you at that point.
Mark Kohler: If some of you don’t know what blighted means. If you’re watching this on YouTube. I’m tan. Those two guys are blighted. That would be kind of an example. And even though they live in Arizona, I don’t know why they’re blighted. I think they work too much indoors, but they run from air conditioner to air conditioner. I do like it outdoors now. No, hold it before we go through all these documents Aaron I want to confirm something on interest. Our Mat, these clients you talked about, are they really charging 3%? Is that all they’re getting in their notes? Is that common, that rate.
Mat Sorensen: No, no the typical private money alone is going to be 8 to 12 percent, you’re going to usually be somewhere in there. It depends on your market and the competitiveness of it. You know, you’ll see private money lenders and I see signs out, you know, like little yellow signs, stuff on street corners, you know, private money loans 8%, you know,
Mark Kohler: Why do these people Mat? Why do these people want to come to you and pay eight, 10 or 12 percent when they could go to the bank and get three?
Mat Sorensen: Because the bank’s not going to loan a money to close on a house next week. Or these are real estate investors. They’re not buying a house to live in. So when you go to a bank to buy investment property, the banks are so dumb they won’t look at the value of the property and loan on it. Typically, they’re like, what’s your credit to income a real estate investor that makes one hundred a couple hundred grand a year? They might have 10 properties going at any given time. They’re not going to get a regular loan. So they have to use the private lenders and the private lenders are going to be all right. What’s the property appraised for? Is there enough equity in it? You know, what’s your background? You know, what you’re doing as a someone rehabbing a property? And do I know the market? You know, you want to educate, of course, on your mark and do your due diligence. And Aaron can touch on some things, but that’s why you get those rates, is just because the banks don’t play in that market unless it’s like really, really big properties.
Aaron Halderman: So I’ll even oversimplify it even further. Banks look at you as an individual, whereas these other hard money lenders that are going to issue points and rates look at you as a business owner and what your business’s track record is. So what they look for is they’ll tell you it will provide me like the last couple of years of settlement statements and what those settlement statements are, shows like the deals that you’ve actually completed from an auction to resell. And that’s how they verify it and they’ll find they. Can you issue those statements that you got from from escrow and title the hard money lenders look at that and they already have their funds set up that they can fund those deals like same week.
Mat Sorensen: So that’s a negative. That’s a good tip for anybody. Getting new to private money lending is how do I do due diligence on a note? Well, you can get an appraisal of the property or a BPO, right? You can look at the background of the person you’re lending to. You can run a credit check and have some resources on some of these things. But look at their background. Have they flip properties before? If it’s a if you’re lending to a flipper and you could lend other people on real estate in particular, it’s not because someone flipping, but that’s really common. And looking at their settlement statements on the last three deals, they did what the buy one and the sell one. You can see what they buy for what they sell it for. And did the hard money lender that loaned on it last time get paid?
Mark Kohler: Yeah. Let’s talk about due diligence for a minute if that OK Aaron, and we’ll come back that some of these technical documents that everybody should have in their package and things. I liked Mat’s example at the beginning of if you want to start lending your IRA, if you’re not going to use a broker, you got to immerse yourself in the real estate industry in the area you’re familiar with. And it’s typically going to be your local area. So let’s say you’re in Denver, Colorado, and so you want to join some real estate clubs, maybe start getting involved with some brokers or some builders and just say, hey, if anybody’s up the creek, I got money to lend and I can move quick. I know people want that phone number in their back pocket just in case. But here’s something important. Do not do not be lazy on the due diligence, I’ll share one of my personal tragedies being a lender 20 years ago and I learned a hard lesson and it’s just so important that you do that term called due diligence. So, Aaron, when you would go through that process, give us what you would say. The top five due diligences are three year. What are what are the things you would normally do?
Aaron Halderman: So I’ll start with, like the top three, that when I first started out in the industry that one of my mentors talked to me about, the three biggies are tax title and the blighted property, not the color of our skin. So so specifically, let’s break each down taxes. Are there any outstanding taxes due on that particular property? OK, you can just you can just go to the county assessor’s and public recorder’s office to get get that information. It’s all public record. OK, so you go to the county site where that property resides in and you go pull the tax records.
Mark Kohler: Can you pull that from a title company? Can you? Is it called a PR or premonitory title report from a title pay one hundred bucks or so and just say, hey, pull that, pull that title for me and let me guess what’s.
Aaron Halderman: So title title can can do that for you, but you can also do the search for free for the taxes specifically. But yeah, you can pay for a title report or what I like to do is develop a relationship with somebody at your local real estate club. There’s plenty of title people. They’ll just do it for free because they want your business to help and close the transaction with you. It’s a lot like if you got American First or Chicago title, you’re all most of them have representatives that go to the local real estate club develop a relationship with one. Send them, they’ll turn it around the same day to you. Now, it’s a little different if you’re assessing large portfolios of loans, but we’re dialed in on just onesies, twosies at a time, OK, because that’s a that’s different. You’re actually doing the business multiple. And then the next thing is with the title report, you’re looking for all the various liens that might be there. Are there any mechanics lien’s or is there a secondary lien? Is there a third lien is is there any steam piling filing against that? Did did a solar company file a lien is there an HOA lien really? You know, you’re looking for all those types of liens on the title and then and then you’re looking at the condition of the property to make sure it’s not completely blighted unless you already know that because you’re lending to a flipper that’s going to just rehab it and resell it. OK, but if you’re looking for somebody to come in and occupy that day one as is, you need to make sure it’s not blighted. So those those are the big three.
Mark Kohler: I thought you were going to bring up and I’m sure it’s on your list. Is that appraisal that BPO because because most lenders and correct me if I’m wrong, if someone says I need a hundred grand, you’re like, OK, you pull the title, you find out there’s no liens against it or maybe something small that you’re like, OK, I can deal with that. And then you go, all right, you need one hundred grand and you go drive by. You’re verifying I love the word verify, whatever do you do you verify. So no one swindling you and you drive by and blighted of course means the lawn is burned. It’s the windows are broken. You know, no one could really live there without a lot of work. Now, if the person asking for money says, well, I’m going to rehab it, I need your hundred grand to rehab it, like, OK, what’s the appraisal now and what will it be worth when they’re done? But I don’t really care about when it’s done. I care about what it’s worth now. Is that right? And what’s the ratio? I don’t even know what ratio you would look at.
Aaron Halderman: Yeah. So I’ll I’ll break it down. Real simple for those that are listening and watching. So there’s a couple of different scenarios. But let’s talk about best practices because there’s not like there’s not a one size fits all. But the first step would be you can do it yourself easily. Just looking at Redfin or Zillow, OK? They’re pulling from public record information to get those values. And also there are massive index of properties that have been resold not just through their own listing service, but that’s what all brokers and agents are using as well. So so that that’s step one. Step two, before you’re actually going to give the money, lend the money would be you probably want to pay for a professional to go do that. I like a resource called BPO boto flow there nationwide. It’s really cheap. They’ll go buy, take the pictures, give the condition of it and and they’ll do it for less than one hundred bucks to get at least that the condition of it. Now, again, let me go back to developing relationships, because this is a relationship business, because you’re a lender and you want to know the people that you’re doing business with and lending the money to develop a relationship with the local broker or agent in town. And they can help get you an appraisal done and pull some. Do a comparative market analysis, a C.M.A report, comparative market analysis, and go through the most recent cells that are specific in that neighborhood to where you’re looking to lend money to. And those are the key steps. Now, if depended upon the you might need a the you might require a licensed professional to do an appraisal and have like a complete walkthrough that’s totally up to you, but not necessary as a private, private lender individual. But you can you can do that. So those are some like best practices that you want to know what you’re dealing with. What you talked about, Mark, was two scenarios. What’s the value of the property right now and what could it be if it’s fixed and resold? What it could be, if it’s fixed and resold is you’re looking now for properties that are in pristine condition that have recently been resold. And that’s what you’re recognizing as ARV or after repair value, which is different than what the current condition of the property might be. And so those are those are two completely different values. And typically what we see from deals that cross our desk here at Directed, you know, we’re not look, we’re not we’re not concerned on our end any type of loan to value ratio. We’re just looking at the paperwork. But from the investor side, you typically aren’t lending any more than anywhere from 60 to 80 percent of the loan to value. And the reason I give such a big spread is it it just depends on what you’re comfortable with, know what their track record is and what that market is and it can tolerate. So that’s typically you want anywhere from like a 20 to 40 percent coverage area to help protect your investment. So that’s a lot of information. There’s other things to look for on the due diligence, like bankruptcy. You can do skip tracing. There’s lots of resources for that. But we’re trying to keep it real simple here. As far as, like the tax and title and the value of the property, those are the biggies.
Mat Sorensen: Ok, and of course, many private lenders are funding rehab, too. So you might be a private money lender funding the purchase. You might also be one funding the rehab expense. Now, that’s more risky. You want to know that rehabers track record. You have a lot of confidence in him because you have a lot of equity. You might still get to lien on it. But we see many people coming in funding the rehab. There’s already another private money lender, hard money lender in first, now you’re coming in second, you’d better be charging more points and more interest. So when you’re funding the rehab, there’s generally a higher interest rate and points I think you can get right. And you could be funding the purchase and the rehab all in one. But just know there’s more risk, of course, when you’re funding the rehab. The same that a bank is going to do when you go and ask for a construction loan. Right. They’re going to loan that on a little higher rate than they would buying a house that’s already done.
Mark Kohler: Now, tell me about my analysis here would be too conservative or incorrect. So let’s say we’re back to the one hundred thousand dollar loan and this guy comes along, Gal comes along, says, I need a hundred grand, I’m going to fix it up, and I’ve already bought it, but I need a little bit more to just get it over the hump. My concern would be, OK, what’s the ARV? You said current the current value. If this place is only worth one hundred grand right now and they want a hundred grand from me to fix it up, I think there’s more risk involved too, because I’ve seen clients over the years. They pay a contractor to go fix it up and three months later they stop by to look at the progress and they were scammed. Nothing happened. Now they go to sell the place and they can’t get their hundred grand out of it because the margin was too thin. So with that in mind, I mean, really, I don’t again, is it appropriate to say I don’t care what the future value is going to be unless I’m writing them like on top of it? I probably want to worry more if I have to sell tomorrow, what am I going to get out of this place? Is that a fair assumption?
Aaron Halderman: Well, well, yes, yes and no. Yes, it depends. Like what? Like, that’s why I talked about lending, making sure there’s like 20 to 40 percent of coverage in there. So that’s one hundred thousand dollars is all it’s worth. I’m only lending like 60, 70 grand. That’s what you’re that’s what you’re going to get out of me. So I’m protected and it’s a safe and secure investment. If you’re saying, OK, you know, I need additional money for the rehab and to resell it because I feel this property is worth one hundred and fifty, it’s going to take me another 30, 40 grand to rehab it, which now I’m a loan like Mat was saying, I’m a loan on the purchase plus loan on the rehab. So let’s say the loan on the purchase for 60 day, it needed 40K in rehab. So now I’m up to one hundred K, but the after repair value on a resell is one hundred and fifty. I’m golden, you know. So where I’m not we’re in let’s say they didn’t do any work. Let’s say they didn’t do any work. They took my money and ran. You know, I’m going to foreclose. You know, I’ve got to hire an attorney. I got to foreclose on the property. Now I’m going to take the property and now I got to fix it or resell it as if I’m protected because I have a good enough loan to value coverage ratio. OK, and that’s what happened for. Mat hit on something we’re talking about a senior lien, if I if somebody else would say, bought the property or leant on the property to to do the rehab, and then I’m coming in to provide the rehab money, which is a very common thing to do. I want to make someone.
Mat Sorensen: Someone loaned at first to buy it to do the acquisition or loan to purchase. And now you’re coming in for the rehab.
Aaron Halderman: I want to make sure I’m the rehab money as the as the lender with that that I know who that senior lien is. I want to know how much the senior lien is with that current unpaid balance is, what’s owed and who who they are. And so that that would be a key due diligence thing that I’m looking at is how much is out on that senior line and what’s the status of it? Is it paid?
Mat Sorensen: You can have other terms in your note. So and we’re sticking to a lot of real estate terms here, but our deals is the common example. But you can have profit sharing, too, so you could loan money and say, all right, I want points, I want interest, you know, and I want to share of the profits when you sell. And so you have this kind of equity kicker or whatever you want to call it, clause in the note, that’s essentially a form of additional interest. Can be a little bit profit sharing, too. But your IRA can do that. You can certainly have that in the note. And we see clients that do that, especially when they’re funding the rehab. They’re like, man, I’m taking a little more risk here. You’ve got to sweeten the deal for me. I’m just not playing banker now. I’m kind of partnering with you because there’s not a lot of equity left here as I’m funding the rehab, too. So that can get a little more money on the table. And the deal is you can get an equity stake in the are sometimes called equity kicker clause.
Mark Kohler: Now, if I I’m going to ask this Mat, because you and I have debated this before, when I start getting a piece of equity in the promissory note, I love the word you used. You’re kind of a partner. I my feeling is that if this there’s a someone gets hurt, there’s a problem, there’s a lawsuit. A lawyer worth their salt is going to sue everybody involved if they have a piece of the equity in a note or not. And so I think if you’re going to start playing with those types of notes where you’re getting a piece of the action or profit on the back end, I think you need to consider using an LLC for your notes and your IRA because you don’t want a litigator to get past that particular deal. You might have a million dollars in your IRA and you’re doing three or four notes. Once you start participating in a note, the entire IRA is a suspect or potentially liable for one deal gone bad. So I think you need to isolate your exposure and really understand you’re a partner. Would you agree with that, Mat?
Mat Sorensen: Yeah, yeah. When you’re just lending, your risk is pretty low. So we have a lot of clients who just private lend out of their IRA directly. It’s pretty easy. You get the note, the deed of trust or mortgage done, you get it gone through title, you get the lender’s insurance like Aaron mentioned. You get listed on the mortgage insurance. You you’ve done the due diligence on the deal. You’re good, you’re getting your interest and points back if they don’t pay, you know, we’re going to talk about that you foreclose on the IRA has got to pay for that. But once you start trying a little more creative past just being a banker, it’s possible. And I like I want to start participating the profits here do a little more. The LLC is very valuable because it does give that layer of asset protection.
Mark Kohler: And I know now can I share my crappy experience? So this is a good interlude for a little color commentary on an example. And I think this opens the door of how to work with brokers to. So Aaron and I think that’s I think the comment we’re going to want from you on this if you want to think from that perspective, because I was stupid. So anyway, this is over 20 years ago. I was literally a brand new lawyer. I was new to note lending. I was excited. I had some family money. So my brother and dad were in on this and we had a financial adviser. That said to this rehabber out in Chicago is doing a project and he needs some more money for the rehab. And we said, OK, that sounds great. And we assumed that our financial adviser knew what the heck they were doing and they had done the due diligence for us and they were advising us on this project. And he said, let me introduce you. Let’s get this rolling, thought about it and I said, OK, and what position are we in? And he goes, you’re in second position and this place is going to be worth two million dollars. It’s in this great neighborhood. The first position is only a million. They only need 300 grand. It was like two or three hundred grand. And that was a big deal. But my brother and dad and I were like, OK, OK. And so we put the money together and did the paperwork. We got a promissory note and a trust deed. So we thought we did it all right. Well, come to find out. Yeah, yeah, the six months note was due, we got our points? We got our up front, but at six months we needed our interests and our principal back. No one would return my call. I’m like, hmm, so I wait a few weeks, I call my adviser, I’m like, Dude, what’s going on? Where’s this guy? Where are we at? Because I don’t know, I thought he sent you the money. And I’m like, OK, so the story begins, right. Long story short, come to find out when I actually got involved and did the due diligence, I should of the first time I pulled title, we were in fourth position and the current fair market value of this place was nowhere near two million. It would be worth that when they were all done. But the contractor did a crappy job, didn’t use our money for this project, used it on another project. Long story short. We never got our money back. It was really, really tragic. It was really sad. It was an important learning lesson for everybody involved. Could we have sued our financial adviser? Maybe I we licked our wounds, chalked it up to learning experience, and it was a write off, but. Aaron, tell me what you would have done differently, maybe in just some thoughts on that experience. I had.
Aaron Halderman: Yeah, so the pretty much of this title report. Title report would have shown me all the liens I would know, like before you fund a deal where other lenders or people are involved, just get a title report and look at any outstanding and look at taxes like do those two things. If you don’t do anything else, you don’t do anything else. Just do those two things that’ll solve that’ll solve 99% of anything else that might be worrying you about potentially wanting to fund that deal we hand.
Mat Sorensen: I would say. And then fund the loan through title or escrow that’s going to record the mortgage or deed of trust and get it on title that you know, you could pull a title and you don’t fund it until two weeks later. And who even recorded the mortgage or deed of trust didn’t get recorded, you know? And so you want to go through title now? I know a lot of real estate investors are like, oh, I got to pay closing fees and buy title insurance policy because it’s the cost of it and the borrower should pay for it. You charge it to a borrower like the bank does when you get a loan from them, you have to pay all those costs. They don’t they don’t pay them. It’s all coming out of there.
Aaron Halderman: They’re Pass through fees. The borrower should pay for it. Here’s the other thing. I don’t there’s nothing wrong with being in a second or third position as long as, you know, the overall landscape of how you’re protected and covered in what’s recorded and that loan to value coverage ratio, it’s OK. And even if you’re in second position, you don’t get wiped out unless you want to get wiped out. Like the only thing that’s wiping out is a bankruptcy. Now, if you aren’t in a second position to do take that, you better make sure that you have enough funds to potentially step in and take care of that first mortgage or First lien that’s ahead of you to protect your secondary lien. OK, if you are going to go that route, that’s a but that’s a different risk category. We don’t need to go into that now. Those are things that you need to look at. So, OK, let’s.
Mark Kohler: Well, let me ask. So using a broker, OK, I assumed that my agent knew what he was doing. Is there something I should look for if I’m going to use a broker out there to help me.
Mat Sorensen: No, I think that’s like saying I think my accountants figure it out every deduction. You know, like it’s something that I think investors and this is one thing even what if you’re using an IRA custodian? No one’s doing this for you. Like, you can hire these people, but you’ve got to verify that it’s getting done. I like that very. And at the end of the day, you’re the responsible person and you’re the one whose accounts going to get paid back or not. And so, like at directed, we’re not looking at your deals for, you know, like I’m just we’re just going to process the paperwork you authorize us to. And so seek out the professionals, of course, as needed, especially when you’re new to something if you’ve never done a private money loan. Get the professionals, get educated, verify what you’re thinking is occurring, is occurring. Don’t skip steps. Don’t skip using the lawyer and do a document. You get off online, don’t skip the escrow title company because you don’t want to pay the title insurance fee. You know, don’t skip an appraisal or a PPO because you don’t want to pay that fee and again, push all these damn costs on the borrower.
Mark Kohler: It’s costing me. Yeah, and I like how you said verified because whoever is helping you or helping you find this deal, if there’s someone like that involved, my word for that was a broker. But no matter what, it’s just like having a property manager on your property. You’ve got to make sure they’re really doing what they say they’re doing. A contractor remodeling your kitchen. You’ve got to stop in and look at it. You’ve got to. So this is some I hate the word turnkey because people go, oh, you just give him the money, you turn the key and you’re done. No, notes are not that way either. You’ve got to verify what people are doing. And I learned a hard lesson in a big way. But twenty years ago. And so thanks for letting me bring that up because I think it’s just a classic.
Aaron Halderman: You know, Mark, let me close the loop on that, because it’s it’s important that, you know, everyone understands the mechanics of it. Brokers are great for deal flow to, like, find deals for you. But like Mat said, the onus is on you to do your own due diligence. So brokers are great, like let them bring you deals, let them. But you got to evaluate the deals. You can’t just rely on them and say, oh, I got a great deal for you. Is it great? You know, and I’m just taking your word for it. I don’t know. Do your own due diligence. You hit on something else about property management and Mat you want to go into kind of collecting servicing flow of things.
Mat Sorensen: Let’s one last topic, then let’s get to that will kind of jump through some other important topics here. Quick, guys. But let’s talk about Dodd-Frank. Think this is the law of the financial crisis that came out is here on. Dodd-frank, Dodd-Frank didn’t just last week, I thought, you know, Frank and Dodd.
Mark Kohler: Ok. All right. Couple senators here.
Aaron Halderman: Senators.
Mark Kohler: Oh, OK. You’re talking about a law. Dodd-Frank, OK. Yeah, this is good.
Mat Sorensen: Ok, so this has been around for 10, 12 years now. 2010. OK, so what do I need to know about this from a private lender? What do I need to comply with it? This is for banks. What should I know?
Aaron Halderman: Yeah, so so let me just give a brief background history, and I pulled a few things I’ll just read off here. So Dodd-Frank was signed into law in 2010 under President Obama. The primary reason Congress passed it was to monitor and regulate the financial markets so we don’t have another real estate mortgage crisis or crash. And it’s specifically what came after signing into Dodd-Frank was the Consumer Financial Protection Bureau, the CFPB beat, OK, and what that was, is to protect consumers and have an oversight and investigative body that would protect consumers against predatory or fraudulent lending practices. OK, and so that’s the whole crux of Dodd-Frank is really targeted towards the bigger banks. But then it also affects us as smaller private lenders at the same time because of some of the the requirements in there. Here’s the good news, though. If you are doing one, there’s there’s two exemptions. One is a one property exemption, and the second is a three property exemption. And what that means is if you’ve done three or less deals in a 12 month period, you’re not subject to 99% of all the Dodd-Frank now restrictions.
Mat Sorensen: And that you’re you’re talking about lending to a consumer. You’re a homeowner, not an investor. We’ve got to come back to that as part probably the bigger exemption, I think. But it is the first exemption you’re saying is you could be lending to Bob Homebuyer who’s buying a house to live in and you’re giving a private loan. I could do up to three times and most of Dodd-Frank I don’t have to comply with. There’s a couple of things I got to. But, you know, when we go buy a house, you know, you right. You have a set of mortgage documents. It’s like, you know, six inches high. Six, six or seven pages of that is the note deed of trust that really matters. The rest is all disclosures so that the Dodd-Frank stuff is not the truth in lending. And then all that now and.
Mark Kohler: Mat can I ask on this? So if it’s if if these are private ONE-OFF loans for people that are going to actually live in the home in some we have clients that do that. They want to be first trust deeds. They want a 30 year or 15 year note. They’re easy, schmeezy. They like that. So that’s it, that there are people that want to do that. You say you can a that’s common, but if you do three in a year. If you do less than three in a year, you’re OK, three or less is that.
Mat Sorensen: Now, let’s stop there actually.
Mark Kohler: That’s what I was going to ask, is that per IRA, is that what you were going to say?
Mat Sorensen: I think that falls down to per individual that owns an IRA.
Aaron Halderman: IRA account owner.
Mat Sorensen: That’s going to float the percent beneficiary of the IRA, that rule is going to apply to you on an individual basis, even if you want set up hundreds of LLCs and stuff, you know, Dodd-Frank is not dumb enough. They’re like, we’re going to that’s all you. So but let’s let’s hit this before we go to the investment, because I think that’s what more people are using the investment exemption to get out of Dodd-Frank. But let’s say I’m loaning to, you know, Bob, homebuyer buying a house he’s going to live in. It’s not investment property for him. It’s his home. What are the things I need that I can’t have in my loan or that I need to comply with for Dodd-Frank.
Aaron Halderman: Ok, so here they are. You have to verify that that homeowner that’s borrowing the money has what’s called the ability to repay ATR ability to repay. Let me read.
Mark Kohler: Who cares about that?
Aaron Halderman: That’s exactly why the Dodd-Frank reform came out, is because the lenders were not verifying the borrower’s ability to repay. And what they, what they do is they, they’re looking at their current income and assets, they’re looking at their employment status, any monthly payments associated with ownership on the property. They’re looking at their credit history, their debt to income ratio, and all those things have to be verified using reliable third party resources and records. OK, so first and foremost is the ability to repay. The second item is there cannot be a negative amortization schedule on what that amortization schedule means is the entire term over which the loan is being paid on typically 10, 15, 20, 30 year loans. Right. It can’t go it can’t be a negative amortization loan like those subprime mortgages and all that that we read about. It can’t be anything like that. There can be no balloon payment is a third criteria and the financing has to be a fixed rate or a rate that’s adjustable after five or more years only. And if it’s a variable rate, it has to be tied to an index. And those are the main things. Now, if you go over three, all those things still apply. But add in you have to have the file underwritten by a licensed professional mortgage loan originator and you’re going to pay them three five hundred bucks to to do that. And they’re going to be the ones that looks at the ability to repay and the entire loan. And you can go over three properties. That’s it. OK. Again, that is the Bob, the home buyer and me and lending to people.
Mat Sorensen: Now, the good news is most people lending with their IRA in particular are loaning to other investors. They’re loaning to X, Y, Z, Inc or ABC LLC or, you know, Ivan the investor. You know that on a property. Right. Or or Rheba, the rental property owner, you know, well,
Mark Kohler: I thought you missed one because one of the key provisions in Dodd-Frank was that you cannot have a guy on payroll named Guido to go collect with a baseball bat. If there’s a problem. You can’t.
Mat Sorensen: That text wasn’t in there. That was actually not in there. Oh, we can still have that then. Yeah. So so let’s here’s the good news, though. Dodd-Frank, even those things that Aaron mentioned, you know, no balloon payment, no negative, and you got to do some ability to repay. This requires some additional disclosures and stuff, pasture, your note and deed of trust or mortgage. But the good news for the property is for investment purposes, for commercial purposes. It’s not a consumer transaction. Right. So if I’m if I’m lending on someone’s rental or I’m lending on someone’s flip, that’s not a consumer transaction. It’s outside of Dodd-Frank. Right.
Mark Kohler: Yeah, oh, yeah, yeah, and what I’d like to hear, I’m going to sort this out and you guys correct me if I’m wrong as we turn the corner to a new topic is I think if some of you are feeling a little overwhelmed, like, OK, this is too much, I thought I was going to do notes and it sounded really good. And I like the two points and 10%, and I can do it in less than 12 months and even get a better annual rate in the big scheme of things. And OK, I’m not going to do consumers. I’ll get away from Dodd-Frank. The first two or three times you do this, especially, you need to engage a lawyer. Don’t forget that piece of the equation because you want to make sure you have good documents, the trust deed, the promissory note, all these little things that protect you. You don’t want to be downloading these off. Google hoping you nailed a, you know, hit a home run.
Mat Sorensen: Yeah, I’ll say a lot of title and escrow companies are providing those documents, too. So if you got a good title and escrow company, you know, they’re doing this every day and they got a good note, a good mortgage or deed of trust that they’re using in that state for these investor type deals. So they’re a good resource too.
Mark Kohler: And if you call our law firm, we’re going to say that you don’t we don’t want to play around with legal docs in Massachusetts on one day in Miami, Florida. The next day, we’re going to say go to that area that even that county could have specific rules. So I think using a local title company to bring your deal together after you do due diligence and verify, would you agree? I mean, this is not a promo to have you call us lawyers. We really want you to get specific help. Yeah.
Mat Sorensen: So let’s go into it. Made the loan now. All right. My IRA loan that sent the money out. Right. You’re going to submit an authorization called the direction of that investment to directed IRA, we’re going to send the money out. You have these documents done by your title, escrow, or attorney or whoever’s involved doing, you know, and now how do I collect the money and what are my options in terms of getting payments back and everything.
Mark Kohler: Now Guido comes into play.
Aaron Halderman: Now we’re cooking with gas. Now we’re cooking with gas.
Mark Kohler: We’re talking Greedo and his friend Easten Easten bat, OK?
Mat Sorensen: It’s like a mobster movie or what. What is this.
Mark Kohler: I, you know, I, I watched Netflix once in a while. You’re watching Goodfellas, The Sopranos, Sopranos. You guys know how to collect.
Aaron Halderman: You know they do. Oh OK. Well Mat not, we’re just talking about you know, that’ll parlay into debt collection but it’s what’s called a licensed loan servicing company, OK, a licensed loan servicer. And there’s lots of them, all hard money funds. OK, there’s these hard money funds in these notes funds and I’m going to hit on that here in a minute because that’s an easy way to get involved. Investing promissory notes with your self-directed IRA, but a licensed loan servicing company that has their debt collectors license and you basically pay them a monthly fee and the borrower sends the money to the online portal just like you would, you know, your bank and doing bill pay and stuff. You set up an account. You require the borrower that you lent the money to that to set up their account with the loan servicer that you’ve hired. And you pay that loan servicer $25, $30 a month and they do the collecting and taking up the payment and they automatically deposit that payment once received from the borrower into your IRA each month. And that is where the whole word turnkey notes or turn key lending goes into play is you got to insert that license servicer that helps take care of the money flow and transaction of it. And there’s lots of good, good ones. They also play a key role of, well, what happens, Mark, if the you lent the money to the borrower and the borrower stops paying me three months from now, what happens then? What are your options? Who’s going to help you do the work? Well, guess who? The servicer, because they’re a licensed debt collector. OK, and you can think of them as a property manager, you have property managers that manage property for real estate. The loan servicer is managing your loan for the note investment you made.
Mark Kohler: And what’s nice about that is they send you an alert. By the way, your tenants are not your tenant. Your borrower’s three days late this month or 10 days late, oh, they were 15 days late. We had to charge a late fee or whatever. And you can get reports. It’s clean. And I know some of you that are very, very. Tight with your money. Engineers don’t try to do this yourself. We love our engineer clients, but I swear they should have gone to law school as well as become an engineer because they love to do it all themselves, delegate it. I mean, you’re talking about sometimes less than 50 bucks a month and many times to just ten to twenty twenty five.
Aaron Halderman: Thirty bucks max for that. But that’s fourth practice. You could absolutely do it yourself. But the problem you run up against is now you’re like actively managing that investment. Why not? And you’re not licensed and regulated to then collect. Now, you could send out a letter, right Mat to to the borrower saying, hey, I was notified by my servicer that you’re late, like, what’s going on? Can I help like that? But you can’t be like showing up there, doing work on the property or anything like that. Remember, you’re just the lender, so you’re just sending an inquiry seeing what’s going on and how I can help. But you’re going to let the servicer and attorneys do the collecting or possible foreclosure, you are not, because you’re the IRA owner.
Mat Sorensen: Ok, so we can use a note servicer let me hit a couple of other points here and we’ll kind of wrap up on maybe ever a concern, additional thought or so. Let’s talk one type of thing that some people will buy are what are called nonperforming notes. So sometimes people go buy notes that are defaulted and they’ll go buy them from a bank or other investor. That’s like, I don’t want these anymore. And you go buy them for 20 cents on the dollar. Right. There’s one hundred grand, but you pay 20 grand and you buy that note. Because it’s in default now you’re going to buy it thinking there’s equity in the property and I can get them to perform. So if you’re going to do that, I highly recommend using an IRA LLC, these nonperforming notes where you’re buying these at a discount, the IRA/LLC, you can do some basic collection work because we’ve talked about here you may use a loan servicer, but you could call the borrowers, you could send them some letters, engage a servicer if you want to try and get them back on repayment, because then when you can get them performing again, a lot of investors will sell that note for a profit. So now I’m not just being a lender, loaning money and getting interest in point. I’m buying low notes, getting them performing and selling about a higher value. I got some interest along the way and I bought a note for 20 grand and maybe I can sell it now for 80, you know, because it’s now performing and I know there’s equity in the property and such. So that’s another investment to make. You may want to use an IRA/LLC if you’re going to do that. Aaron what other items did you have that you wanted to hit that you think are important for note investors to know about?
Aaron Halderman: So here’s what I get, like we get this on a lot of inbound calls to at directed and we also I get it all the time and I publish a newsletter each month specific to the note space. And one of the things I’m always talking about is where to find the deals, you know, because you’ve got to have deal flow in order to have your IRA do an investment. So and if it’s your first investment starting out in notes, what’s a good first step or first deal that you could do? There are a lot of note funds and hard money funds that are licensed, regulated. They have they they may have had their own PTM or subscription agreement and had a securities attorney do that. And you can lend into that fund, which is just a private company, and they’re lending money to big some flippers or rehabbers or they’re lending money to buy these non-performing or paying notes that are already paying performing notes is what that would be called. And that’s a great, easy way to get involved, because here’s what you’ll see. The flow of all the mechanics of how they operate their business before you go do it yourself. So I like that there’s a lot of hard money for this note in this crowd, crowd funding, that is, you know, these private lending, crowdfunding portals. And you get kind of like behind the scenes access to see how they’re doing, the paperwork and what’s all required. And you can request that from them as well. And the way they’re doing it is, you know, they’re they either secure it with your investment is secured across the portfolio of loans or notes. And so that’s what I always say. There’s lots of different online exchanges, too, and that you can go and do research as well. Maybe we’ll provide that in the future. But I’m not going to list any of the companies because we really don’t give out a ton of recommendations on that because you need to do your due diligence. There’s a lot of great loan exchanges out there that you can, you know, research and find deals as well.
Mat Sorensen: Yeah, and I found the funds. The one note I’d make on that is, you know, I mean, those they may have like a reg d offering or something with the. But that’s that he’s not approving it or licensing it or regulating it. Right. They’ve just done some paperwork and paid some fees and got it up there. And so those are common, of course. And do your due diligence even more on a fund than you do an individual loan. Make sure you know who’s involved with it. That’s been they’ve been around the block. They know what they’re doing and have their expertise, of course. Yeah.
Mark Kohler: And I’ll add two points to that. And I do have a final comment. But I think first is we’re not financial advisers here, but we see so much deal flow and we see what successful clients do and what unsuccessful clients do. And we don’t we can’t just stop you and say, don’t do that. That’s not our job. We are here to we want to guide you and warn you. And but we’re here as your as it is in the law firm as a fiduciary to help point in the right direction. But once you end up a directed IRA, it’s directed by you. And that’s by definition you’re telling us what to do. But I still want to say this. If you’ve got a couple hundred grand in your retirement account, don’t put your entire 200 grand in the first note you ever do. It dipped your toe in the water. Be careful, don’t invest your entire retirement savings on your first note because it sounded like a great deal. Hit a few base hits. You don’t have to hit a home run. First time up to the plate, but be really careful. The next thing is when you’re doing your own deals, you’re going to get a better rate return when you go into these funds, that can be really hard to get out of and say, I want out now. Well, who’s going to buy your interest into that fund? You’ve got to find someone to take your place a lot of times and that’s no fun. And your rate of return, you’ve got to share that with everybody. So these fund managers are getting a piece of the action where if you do one off loans and I like what Mat said, you just have to do your due diligence on that person and that property and you can get a lot more control and a better rate of return. Believe it or not, rather than doing a fund. But. OK, Mat, I want to suggest this to and Aaron both you guys, we ought to do a few more shows, I think, because today was obviously about the real estate note story. But I think doing bank I’m sorry, equipment loans. I’ve seen clients now boat loans, boat rehab is a big deal on the east and west coast and marinas. You could do auto loans. You can do factoring. Factoring is a deal where you loan money on accounts receivable, auto loans. Yeah, there’s a lot of ways to use your IRA when it comes to lending, and so we ought to do some specific shows on some of those, I think they’d be fun. But my final comment is I just don’t like the word promissory note. I don’t know if you’ve ever noticed this. I think it should be called promise note. Because you’re promising to pay me. I think this promissory came into it because people said, sorry, I can’t pay. So I it’s not. So they’re saying I promised to pay, but I’m sorry if I can’t. And that’s I don’t that I think it’s a much more positive word to say promise note. OK, observation. Yeah, OK for you to say notes. Yeah, I don’t a promise of sorry. Yeah, don’t tell me sorry. Right out of the gate. I just want a promise notes. No, so I’m just.
Aaron Halderman: Mark I will say this on the the private funds that are that are lending or investing in notes. If you’re going to do that, look and see if there’s a paragraph in there that states you can buy or lend to anybody in that portfolio as an option to get out of that fund. And a lot of people don’t know that. And I’ve seen I’ve written some up myself to take on investors in years past, but we gave our investors the option where you can pick you have first crack at the portfolio to get a loan or, you know, a note or one way with a note to say, I’m going to take that note get out. Yeah, you know how much easier that is versus like, let me go get get some liquidity and pay you off. And that’s why that’s what freaks people out and ties up their money. So look for that provision if you are going to go down that path and see if that’s an option.
Mat Sorensen: Yeah, the last thing I was going to say sorry, I think I said my last one, but the unsecured note, OK, you can loan on the unsecured. All right. I don’t think you should, but you can now go back to the family note. We call those gifts. Yeah. Yeah. And so we see them with clients, IRAs and our direction of investment form for unsecured notes. You’re signing off on something that says the only way they’re going to pay you back is if they there’s no security, like it’s 100 percent dependent on them to pay you back. So just be careful. It is an option. But I just want to note that we want to secure it with assets, whether it’s real property equipment like Mark talked about, or maybe it’s a convertible note into equity in something where there’s some upside. Those are the more successful notes we’ve seen over the long haul.
Mark Kohler: And if anybody comes to you and says, hey, will you loan me money? So maybe I’ll do this in my IRA. A lot of people don’t think that, you know, someone does come to you in your church or neighborhood or business circle or family and says, hey, can I borrow some money? And you can loan to a lot of people. You can’t loan to your kids, your parents or yourself. But there still are family members that could fit that. You may want to set up a table in the back of the family reunion and start handing out loan applications that could work really well. But if someone does come to you and say, I want some money, if you think IRA, that’s great, but get a lien against anything you can say. I want to lien against your home. I want a lien against your auto. I want to UC3 against your equipment in your business or whatever. If if someone says, oh, I can’t believe you’re going to do that. Oh, my gosh, you know, will say, dude, you’re the one asking me for money. Why is the bank not giving you money? Because they don’t trust you. So be tough. Blame Mat me and Aaron say I do it, but Mat, Mark and Aaron my lawyer said my lawyer.
Mat Sorensen: Mark does that all the time. Mat made you do it. So.
Aaron Halderman: Get a lien. Don’t just accept a personal guarantee like come on. Get a lien be smart.
Mark Kohler: You don’t know how many times Mat how many times in our history of our law firm. I remember one in particular where a client said I’d loan someone $40,000 and I need to collect, I’m like, all right, send me over the note. It was a paragraph on a piece of paper. And I go, You gave him the money already? Did you get a lien against anything? What’s that? And it broke my heart. And so, people, this is a very profitable thing to do. But you got to do it right. Just do it right. All right. Mat take us out baby.
Mat Sorensen: Ok, well, thanks, everybody, of course, for hanging in here on the directed IRA podcast. I hope you learn something about private lending and notes. Aaron’s got his noteworthy newsletter. You can find that. Is it noteworthy.Com where all your stuff for noteworthynewsletter.com, noteworthynewsletter.com. Go check it out there. You can sign up for it and also get over to directed IRA, wherever you’re listening to this Like it subscribe, give us five stars. Provide a comment about how handsome and good looking Mark Kohler is. Really. Yeah. I’m working on I’m really wanted to make sure that you got recognized for that.
Mark Kohler: I think so now and there. When you’re directedira.com/podcast, you can type in a question for our next open forum, which could be next week or the week after. But feel free to always type in a question and we respond when we answer. So that way, you know which episode to go listen to. Yep.
Mat Sorensen: All right. Thanks, everybody. Appreciate it.