Welcome to the August episode of Investor Insights With Brie Schmidt!
Brie Schmidt is one of the most well-respected buy-and-hold investors in Chicago. Each month we’ll be discussing an investment topic brokers should master.
In this episode Brie discusses different lending options available for investors. First she talks about hard money lending, what investors can do to qualify, and what terms are generally included. We also have a conversation about how to find investors, how to structure the deal, and how finding money is usually the easiest part of real estate investing (assuming you have found a great opportunity!).
Please visit MyRehabAcademy as mentioned on the show.
D.J. Paris 0:15
Hello and welcome to another episode of Keeping it real the only podcasts made by by real estate brokers for real estate brokers. My name is DJ Paris today we have our regular series investor insights with Bree Schmidt. Now, if you are new to the show, let me tell you a little bit about my co host. Brie Schmidt acquired her first investment property in 2011 and left the corporate world in 2014. She came because she became a full time real estate investor. She is the managing broker of Second City Real Estate which is a full service brokerage firm, working with new investors and seasoned investors looking to expand their knowledge of the industry and their portfolio. For us a lot. Bri utilizes her extensive knowledge of building and managing a portfolio to teach clients about all aspects of buy and hold investing. She’ll teach you how to analyze potential properties, calculate your ROI, best practices when marketing and leasing your properties, and also how to be a landlord while you’re building a portfolio. Bree is co founder also of the Midwest real estate networking summit, which is a nonprofit educational summit for real estate investors she hosted several times a year. It’s a three day annual event. And it’s awesome. I got to I was lucky enough to be able to attend briefly and the last one. So anyone who’s interested in working with investors or being coming in investor yourself or just getting more knowledge as an investor, check out the Midwest real estate Summit. With all that being said, By the way, you can learn more about the Midwest real estate summit by mid west RV summit.com. We will put a link to that in the notes for this podcast episode. But anyway, without further ado, welcome Bree Schmidt Hello, how are you? Good. Should we tell everybody just how pregnant you are? Can we?
Brie Schmidt 2:01
Yeah, I’m 34 weeks to go.
D.J. Paris 2:04
Four weeks to go. Credible site.
Brie Schmidt 2:07
Awesome. Chicago weather of like 90 degrees has been perfect for me. Let me tell you,
D.J. Paris 2:13
and you just moved. Yeah. And when up to Summit, and you just finished up a summit with hundreds of people. And you had to organize all the speakers, the the event space, everything. It was all the advertisers. I mean, it’s incredible.
Brie Schmidt 2:28
It’s a lot of work. But it’s said like I said you came it’s really worth it. We really focus on no gurus, no pitching, no one’s out there selling their get rich quick scheme. It’s all real investors who not only focus on you know what they do well, but where they’ve messed up and how they’ve, what they’ve learned throughout their their investing career. And that’s really what makes it a little bit different. And people are telling their real stories, not just, Hey, this is the greatest thing in the world, you know, you can retire early, and you know, and it’s not that easy. And everyone makes mistakes. And so that’s part of the focus is talking about those mistakes and how we can learn from them.
D.J. Paris 3:12
Yet everyone should get on her mailing list. So go to Midwest, R e summit.com. And make sure that you’re getting these updates, because you don’t want to miss the next one. What is the next one’s date set yet?
Brie Schmidt 3:26
It will be in May of 2020.
D.J. Paris 3:29
Gotcha. So plenty of time, but you re sends out a lot of good information along the way as well. So get on that mailing list. Okay, so for today’s episode, we actually had a question that we thought was a such a strong question that we thought we’d do a whole episode around it. So I want to read first read the question. This comes from one of our listeners named Daniel, which basically says, and I’ll paraphrase, because he wrote us a really nice note. But he wanted really to ask Bree, uh, her thoughts about hard money lending, he says, hey, I can find deals, but I’m struggling with the funding. He says hard money is something he’s looked into, but not sure if it’s the only option when it comes to now in his case, flipping homes. But so let’s dive into that topic of hard money lending or any types of funding that you think is appropriate.
Brie Schmidt 4:17
So flipping homes is actually it’s a lot. It’s hard. It’s it’s a lot of work. And it’s really hard to get started. Because when you go to approach a wonder, let’s say a hard money lender, one of the first things they’re going to ask is what’s your track record? You know, if this is your first project, and you don’t have a track record? Well, they’re putting risk into you by giving you the money, you know, can you perform? Can you execute the project? Will your sale price, be on target, you know, will you be able to stay in our budget, these are all risks that they’re taking for a new investor. So typically their rates are a lot higher. So I think one of the biggest misconceptions people have about hard money lending is that they’re they’ll Do 100% financing and that’s not true, they’ll typically for a seasoned investor want at least 20% of the acquisition plus the rehab costs. If you’re a new investor, they may want 30 40% cash to show that you’ve got skin in the game. So one of my actual one of my business partners is a hard money lender, and he lives across the country. So we’ve had many discussions about, you know, how he does his portfolio, and he does about $20 million a month, nationwide, through hard money lending. And that’s how we met was he was funding a flipper here in the Chicago market years ago, and had met me through networking events, and the flipper wanted a million dollar line of credit. So they didn’t want they didn’t want every single deal analyzed, they had been through the process a bunch of times, they just wanted a million dollars cash to do what they want with it. So this guy called me up and was like, you know, I’ve heard of you, we know, kind of know each other, you know, about to give these guys a million dollar line of credit, but I’m not local. So if they don’t, if they start dodging my calls or things get, you know, fishy, I want someone in the local market that could go down there and check up on things for me, I’ll pay you, you know, and that’s how we started our relationship. So there’s a lot of risk involved for the hard money lender. Sure, if you’re a newbie, and this is your first project, you’re gonna expect 30 to 40% down payment on the acquisition plus the rehab. As far as terms, you’re still you’re probably looking at four points. If you don’t know what points are, it’s a flat fee up front, due for the loan amount. So for every $100,000, you finance, four points would be $4,000. So that can get really expensive, really quick, if you’re doing, you know, a 678 $100,000 project, and they’re charging me four point. Yeah. And then for a new set for the new or newer investor, that’s not very experienced, you’re probably going to pay between 12 and 14%. And those terms are typically interest only. And they will, depending on the type of project and the scope of work, they’ll do between six and 18 month loans on that. Sure. So to answer your question is hard money, the right route to go? You and because you don’t have the cash to do the deals, the problem is, you still need the cash, right. So alternatives until you’re building up your book would be private money. So private money is typically friends, family, there are private money lenders in the marketplace as well. But again, they’re going to want to see someone with a track record. We had a great private money lender come speak last year, who’s you know, I’ve he’s done a couple, you know, most of my project for me, actually. But he, you know, they underwrite everything, and they’re very diligent about your, your experience and your track record. So if you haven’t done at least, you know, 510 deals, they won’t even have those conversations. So private money within friends and family and your own personal network, right, then you can negotiate terms, they probably won’t charge you points. But then you’re in a position where, you know, you better make sure you know what you’re doing. Because if you, if you mess up and you lose money, it’s your friends and family money.
So be careful with that. The other option, as well as finding a partner, you know, partnerships, as is a very good thing if it’s done correctly. And so if you can find a partner that has the maybe construction experience or the track record, you know, no one says you have to go do this alone, and has a different skill set than than you, then you can leverage their experience with these hard money lenders and get better terms. Because once you get experienced, you know, you you if you’re let’s say you’ve done five to 15 deals, you’re probably looking more around two points, and more around 10% interest, give or take. And then once you’re becoming, you know, a professional flipper, and this is your job and you know, you’re doing 1015 projects a year, then you start getting into the the private money lenders, who will give you much better terms, because they’ve they’ve had a history with you, you’ve proven yourself essentially.
D.J. Paris 9:28
Yeah, that’ll make sense. I know that for anyone listening who’s interested in putting these kinds of deals together and finding alternatives to hard money lenders, you know, if you know, where you mentioned, friends and family if you have people in your life that are cash heavy. These are the people that are looking for a reasonably you know, modest return a quick modest return. So you know, make sure you have your numbers right but you know, oftentimes People who are cash heavy and there are professions that are cash heavy, you know, people who are traders are oftentimes cash heavy. And we, you know, if you’re here in Chicago, we have a huge trading community here. Sometimes they make good partners, because you know, they’re there have they have the means and are looking for maybe a safer return than dumping it in the market. So there’s lots of ways
Brie Schmidt 10:21
and considering mean, even a high yield savings account as a 2% API, offer friends and family 8% return on their money, you know, then you’re getting a great deal at 8%. And they are also putting their money to better use. Um, so on the topic of God,
D.J. Paris 10:42
no, I was gonna say, this is exactly the kind of topic that is discussed at the Midwest real estate Summit. And again, I know it’s, you know, we have some time until the next one. But this is a constant conversation that happens between investors, right? People are always wondering, Hey, how are you doing it? Who are you working with, so you can get networked in with some of these private money lenders, hard, hard lenders, personal investors sort of thing if you are connected to the investor community. So for those who are listening, if you’re you serious, or wanting to get serious about investing, you should be part of bigger pockets, it’s the place to be as, as most of the listeners will already know. But that’s another place where you can source you know, and get, get put feelers out there and see, you know, what other people are doing.
Brie Schmidt 11:27
Yeah, and even though we have 10 Mountains to the summit, there’s plenty of networking groups locally. And so you can find them on meetup.com. Also, on bigger pockets, there’s a network tab at the top. And underneath, there’s a events link, and most of the events are free, the networking events, you know, I’ve been to and spoken at, you know, 1520 of them. And one of the things that I like most about them is going with the investor community, you know, no one’s no one’s hiding their secrets. A there are no secrets. But be if you ask someone like, hey, you know, who are using for it, hey, can I get a GC referral? Can I get a hard money lender referral? Who are you using? Who have you found to be successful there? Nine times out of 10 very happy to share that information with you. No, I’m so that’s how I said most of my contacts have developed throughout the years is through the meetup that I’ve been running for about six years now. And Norwood Park area, just because you know, investors come and they talk, they’re happy to share their their experiences.
D.J. Paris 12:35
Yeah, that’s been our experience as well. It seems to be the investors I know, say that the lending portions actually not super difficult, because there’s always people with cash. Once you plug into the right communities, you’ll find these people it’s the deals that seem to be the harder of the of the two tasks is find the deals and the investors will find you
Brie Schmidt 12:55
depends on where we are in the market. That’s true. Well, years ago, you know, no one was giving out money. And there were plenty of deals. So there that’s the problem with the real estate cycle here, like in general, is either there’s deals or there’s money. And you there’s never there’s never money when there’s deals I was actually at I spoke at I am and I am on does a middle market forum. They’re doing one this October in Chicago. I spoke at last year’s event too. And that was the biggest takeaway is, you know, these were mid market players in the multifamily world is everyone had money, or everyone had really easy access to money, but nowhere to put it. Right. That was the big conversation. So if you can find the deals, you know, finding money isn’t that hard at this point of the cycle? The problem though, is that make sure that what you’re what you’re looking at isn’t actually a deal. One of the things to watch, I’m not sure if you were I don’t think you were there Saturday morning, we had Sue Hoff, who runs a company called my rehab Academy. I absolutely love what she’s doing. So she’s a GC, I think for about 20 years now. And she’s started my rehab Academy, which is classes for investors. And they will teach you everything from you know how to run electric, sweat, copper, they do like one day workshops, how to build a kitchen, how to tile a bathroom, you know, these are all things that you might not want to know the hands on part of things, but if you’re a flipper and you’re doing a major renovation project, it’s probably a good idea for you to know what proper copper insulation looks like. You know what like the things so if you know how to do it yourself, then you know what to look for when you’re doing rehab projects. But one of the things that she also offers which I find very interesting is she will because I had her come to my house to she will walk through a project when you are during your acquisition period. It’s a flat rate. It’s a couple $100 And she will walk through the project with you talk about your scope of work, and then come I’m gonna check the comps. So I was talking with a mutual friend who was doing a project with her up in the north suburbs and like that, and, you know, Sue came in and gave him, you know, hey, here’s what the comps are. And their original plan was essentially to over develop the property. You know, she was like, You’re based on the comps. And based on the materials, your plan is actually probably too expensive, and you’re going to price yourself out of the market. So if you dial it down a bit, here’s the materials list she provides for you. Here’s the cost of all the materials as well. This is what is in line with the market and will give you the best return on your investment.
D.J. Paris 15:39
Wow, that’s seems like it’s worth a few $100? For sure.
Brie Schmidt 15:42
Um, so yeah, I think what she’s doing is great. So she does the classes, she also does that sort of service for clients. And it’s, I think, very beneficial, especially if you’re a new investor. You know, we all especially as agents, I think, because we know the agent side, we think we know everything. And I’ve seen it, I’m sure you’ve seen it to tons of times where an agent goes to do their own flip project. And, you know, something goes wrong along the way, and then it’s on the market, right. And that’s the last thing you want to do. And we get so excited, because this is our profession, you know, that we want to get, you know, like, oh, I want to do a steam shower, or you know, I’m going to do this grand thing, and it’s going to look great. But that doesn’t always mean that’s in line with what the market wants. Right. And if you’re doing a three, one starter home, you know, in some neighborhood that the average price points 350 If you over build with custom woodwork and steam showers, you know, and now you’re all in is 400. With cost like that you guys sell it for 50. Now you’re priced out of the market, you know, you overdid the project and sometimes the simplest, you know, way is the best. So Sue, that’s what Sue does. And I, I would definitely look into that if you’re a first time flipper.
D.J. Paris 16:58
Yeah, we’ll post a link to her her website on the notes so that people can check her out. And I think one of the big takeaways is you just got to plug in or you don’t have to, but it’s certainly a good idea to plug in to the investor community, the investor community is actually very communal, they they do like Bree said they have meetups, you know, they congregate online, or locally, you know, and if you you know, if you’re a BiggerPockets member, you’ll find out there’s a million things they’re always doing. And members are doing meet up, you know, you just search for real estate investor and you will, you will plug in and get you know, great ongoing support from people who are doing exactly what you’re doing. And I would say it was interesting, and I’d be curious to get your thoughts on this as I almost think the investor community, which a lot of them are brokers are really more communal than even just traditional realtors, I don’t find traditional Realtors community commuting all that much. It’s such a, you know, maybe a solo sport, but, but investment investments might seem like a solo sport, but boy, you can get a lot of help. If you look for it.
Brie Schmidt 18:03
It’s very different, um, you know, even just this weekend was my housewarming party and 75% of our guests and investors that were, you know, became friends over the years. The ID that the investor community is, is all really about paying it forward. You know, no one, there’s really no competition like or as with agents. You know, even even I get with clients, you know, we have if one property comes up sometimes, like we’ve had times where we had eight showings with one house. You know, we had a situation two summers ago, where we had six offers on one house with our clients, which is very, very rare. But usually I always tell them like, listen, even though you’re you all have the same endgame. You all actually have different strategies and different preferences. So people recognize that. And again, usually within the investor community, someone helped them out along the way, and they want to pay that forward. So when I said when it comes to any sort of like lending, referrals, construction referrals, those sorts of things, I I’ve never run into a situation where I’ve asked for a referral and not and someone said, No, this is my guy, I’m not going to share that information with you. Super uncommon.
D.J. Paris 19:24
Well, Daniel, who is the listener that wrote this? And hopefully this answered your question about about hard money lending. And Bree also provided some alternative ideas about you know, getting plugged into the community, and we’ll post a couple links to some of the talking points in the episode. But that also brings us to another point, which is as we’re wrapping up as you’re listening if additional questions came up in any capacity with respect to real estate investing, Reshma is absolutely the person to answer them, which is why we’re so honored that she does the show at eight months pregnant And so please send us your questions, you can do that through Facebook, which you can find us by typing and facebook.com forward slash keeping it real pod or just search for keeping it real podcasts, you’ll find us that way. Also go to our website, which is keeping it real pod.com, which you can also submit questions that way as well, or, you know, just send them to me or Bri directly if you have our personal information. But, you know, this podcast, of course, is to help all the listeners learn more about real estate investing. So I will let bring it back to her final stages of pregnancy, and all the other things you’re doing, which is incredible running a business and doing investments. And gosh, you do it all. So in planning next. Yeah, but
Brie Schmidt 20:44
thank you. Yeah, planning. That’s not for a while we needed a break from that. We usually take the summer off, and then we’ll start back up October, November,
D.J. Paris 20:55
good. How many properties are you do you own? What’s How big is your portfolio?
Brie Schmidt 21:00
Actually, I just sold some properties. Oh, I just sold a few properties this spring. And I’ll kind of go into this, but I actually hired an economist. So through through networking with investors, I attended and spoke at an event in Philly last year. And one of the speakers was an economist. And so I ended up hiring him to explain things to me, because I understand the real estate market, what I don’t understand is the stock market, you know, the other what economic indicators, what a yield curve is all these things that are kind of outside of my realm, but affect my realm. So I hired him to, you know, explain things to me. And part of that was him reviewing my portfolio. And I’d went back through, you know, five years of data and gave it all to him. And he pointed out to me that for some of my properties, while they were performing, and doing well, my equity position in them was so great, that if I sold my property today, I would get at least 10 years plus cashflow up front. So yeah, so I ended up I sold five properties, the spring, because they were they were above that 10 year trigger for me. Um, and then I’m looking to reinvest that capital in more passive options. But so now I think I’m down to like, 84 unit. It’s a lot of work.
D.J. Paris 22:25
Yeah. Plus, you also run a real estate company. And on top of that, so incredible. And so, you know, and by the way, I just a quick pitch for one of our other regular episodes, which is with Ryan Day, April, where we’ve actually done this where we’ve worked macro to micro or we’ll call it, you know, more national to hyperlocal, where Ryan actually shows some of the trend data, which isn’t always necessarily specific to real estate investing. But just for our broker listeners who are brokers who work with their clients, you need to be able to explain what’s going on in the market. We’ve done some episodes around understanding some of the trends that are happening, you know, from a larger, higher altitude perspective and then going hyperlocal. So definitely check out our Ryan coaching monthly episode too. But on behalf of Bree and myself, we want to say thank you, for everyone listening, we’re over 100 episodes now. So we’re super grateful for that, and that people are still listening and passing this over. So please tell a friend if you know anyone else that is either a real estate investor or someone who is a broker who is interested in learning more about real estate investment or not or not somebody is not a broker who’s interested, you know, pass this podcast over to them. And we’ll keep doing this and send us your questions. And Bree, thank you so much, and we wish you the very best with your final final days of pregnancy.
Brie Schmidt 23:48