April 21, 2023

JF3151: 3 Ways to Make a Profit with Hard Money Lending ft. Ryan Wright



Ryan Wright is the CEO of The Investor’s Edge, which walks brand new real estate investors through their first flip and helps experienced real estate pros find the right team to help them expand their ability to flip more properties each year. In this episode, Ryan discusses where investors typically mess up the most when it comes to due diligence, how hard money lenders make a profit, and the most expensive things in lending that cause losses.

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Ryan Wright | Real Estate Background

  • CEO of The Investor’s Edge
  • Portfolio:
    • Commercial properties
    • Multifamily properties
    • Mobile homes
    • Land
    • Hard money loans
    • Single family rentals
  • Based in: Salt Lake City Utah
  • Say hi to him at: 
  • Best Ever Book: Man’s Guide to a Women by John Gottman
  • Greatest Lesson: Cash flow is king. If you don’t have that, it’s going to be hard to get where you want to go.


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Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocum Reed, and I'm here with Ryan Wright. Ryan is joining us from Salt Lake City, Utah. He is the CEO of The Investors Edge, a company that focuses on hard money lending and software in the real estate investor space.

As an investor, he has a limited partner portfolio in commercial land apartments and mobile homes. He also has a large hard money loan portfolio and a single family rental portfolio. Ryan, can you give us a little bit more about your background and what you're currently focused on?

Ryan Wright: Yeah, absolutely. My background was I saw my grandpa and my dad buying rental properties, and I spent the summers fixing those up. And I just knew no matter what I was going to do, that real estate needed to be a part of that. And so I went and got my real estate license, and started buying some rentals, and helping other people buy and sell homes, and then got into fix and flipping, and got into lending, and got into software, and that's kind of been the progression right now for me.

Slocomb Reed: It makes sense that someone who grew up fixing up rental properties with their father and grandfather ended up with a single family rental portfolio. Where did the hard money lending come into play?

Ryan Wright: Now, this was quite a while ago, but one of the things that I noticed is it was really difficult to find capital for deals, because a lot of investors were finicky. It was kind of like the old boys club. It wasn't like it is now.

Slocomb Reed: When was this?

Ryan Wright: Oh, this was 15 years ago, 17 years ago...?

Slocomb Reed: Pre-recession.

Ryan Wright: Yes, yes, yes, before 2008. So the idea was I would go find properties, and then I would call somebody that I knew had money, a private guy, whatever the case is, and I would find a property, I'd get it under contract, and then I'd call a private guy and he'd be like, "Oh, I don't want to do that area." "Well, why not?" "Oh, because on the news last night there was something bad that happened in that area." And I'm like, "I spent months finding this deal, and now you won't do it?" So finally, I got smart and went to the private guys and said, "Hey, what will you do and what won't you do?" and they were a little finicky. And with that, I saw the demand and the need to say, "This is what we do. This is what we don't do. Find a deal that meets this box", which is true hard money lending. Asset-based lending is what hard money lending really means. So when I saw the need for myself in borrowing, then I started saying "This can be done better", and we've built a better way to do that.

Slocomb Reed: Is your hard money lending exclusive to Salt Lake City?

Ryan Wright: No, we're in 30-40 states.

Slocomb Reed: Gotcha. Okay. So how big is your lending portfolio, though?

Ryan Wright: It's a little smaller now than it used to be with some of the changes in the marketplace. But it just depends, we'll average anywhere from 100 deals, could be more, could be less, at a given time.

Slocomb Reed: If I can ask, Ryan, is that good smaller or bad smaller? Is that "Our underwriting criteria got tighter, therefore we're doing fewer loans"? Is it "We've had to foreclose on a few people, take properties back, and therefore smaller"? Is it both? Is it something else?

Ryan Wright: Yeah, great question. I think we've seen the demand side come down a little bit with people that are wanting money for that, and I think a lot of it has to do with the market volatility, and interest rates, and other investments, and stock market... I think we'll start seeing that come back more and more, but I see the demand has gone down a little bit. We haven't really had to take a lot back. We've had a few properties we've had to take back, and get those taken care of. We also have a decent portion that's sitting on the market, that we've got to get more aggressive to get sold, or our customers need to get more aggressive to get sold, instead of chasing the market a little bit. So I would say it's some good, some bad.

Slocomb Reed: You're referencing demand being down. I want to ask about that, but first, while hard money lending is the topic of conversation, what asset classes are you lending on?

Ryan Wright: That's a great question. We are in the under a half million dollars single family, and we'll go up to a fourplex, but most of the time, our lending is on single family houses. One of the things that's interesting with our model is we have financial investors that actually fund 100% of the deal. So we match up people with money with people that want money, and have underwriting criteria. So most of our deals are taken down by an individual or an LLC or an investment of their own, rather than like a big fund.

Slocomb Reed: So sub half a million single-family. You said demand is down... Is that demand for your product from flippers investors? Is it demand for your product from the note investors? I imagine it's not demand from the retail market for single family homes.

Ryan Wright: Yeah. I would say the demand has gone down for some fix and flippers, primarily. We do a lot with fixing flippers; we do some BRRRs, we do some other things, but I would say the demand's come down a little bit for fix and flippers. And I think more or less it's just been taking a breath and saying "What's next?", regrouping where we're going. I think some of the fix and flippers got caught with some properties they are trying to get rid of right now, so they're a little gun-shy to kind of get back in, or they're slower to get back in, is maybe what I would say. So that's kind of what we've been seeing, is just a little more hesitation.

Slocomb Reed: I have a lot of friends in the hard money lending space, so that's the reference I'm asking from. I have one hard money loan currently that I'm just about refinanced out of...

Ryan Wright: Nice.

Slocomb Reed: What do your terms look like?

Ryan Wright: We're really an asset-based lender. So what we're trying to do is give options for anyone. So it really comes down to - we've done deals as low as one point, and as high as eight or nine. We've done deals as low as 10%, and as high as 15%, or 18%. So it's really based upon the risk assessment with a deal; what we really try and do is match up - the lower the risk, the less expensive it is, and the higher the risk, the more expensive it is. So we're trying to match up risk with reward.

One of the things that we're probably one of the best at is doing deals that lots of other lenders won't do, because we'll look at more of the asset base than the individual base. And hard money lending or private money lending has really gone to more structured lending. We care about your credit scores, we care about those types of things, and less about hard money. So we really do deals that most other lenders may turn their nose up to.

Slocomb Reed: Ryan, I have to say that is a fairly wide spread; if you've got debt for me at 10% at one point, I've got some stuff you could look at right now, but if you're going to be at 15% and eight points, we could just end the interview right now. There's no need to continue the call. I'm just joking.

Last question here about hard money lending... I think. We'll see how the conversation goes. I'd like to give a summary of what I believe your industry is in hard money lending, Ryan, for our listeners. I want you to correct me where I'm wrong. Tell me if I'm spot on, sure, but how what you do is different from my description. I should have started here... I'm very intrigued by your industry as I perceive it, and I have interviewed quite a few hard money lenders, actually, in recent months, on the Best Ever podcast.

So effectively, from my outsider's perspective, what you're looking to do is either broker loans for individual investors, or write loans on behalf of a fund that you've created. And what a - I'm going to say retail investor; what I mean is they're the one acquiring the asset, titling it in their name, executing on a business plan... Because the passive investors that you're working with are investors, too.

The retail investor is getting loan terms that there is a margin on between what you're offering the passive investors either through a fund or more individual notes, and what the retail investor is paying, and that margin is your income as the hard money lender, whether that be all the points, or a spread on the interest. Sometimes the spread varies, depending on the risk, and who's taking the risk. If I'm correct here, that you're effectively brokering loans between retail investors and investors who want to be more passive, or note investors, please correct me where I'm wrong in my description here, Ryan, but also, if I can ask frankly, where is your profitability in your business model?

Ryan Wright: Yeah, great questions. So I would say we are a little bit different than what you've described. And the reason for that is our financial investors aren't just a bunch of people that are off the streets; they actually have agreed to the terms and the underwriting policies that we have... So we only bring deals that fit these criteria. So we don't think of ourselves as a broker, we think of ourselves as a direct funder; technically, are we brokering? Yes, but we have decision-making authority for financial investors to say, "We can do this deal." So technically, it would be brokering, but really, it's "Yes, if you meet these criteria, we can do it", and then we have our investor. And then we also service that. So the paper's typically done in our name, and we're servicing that paper as well.

So for financial investors (it's what we call them) that are putting up money, we want them to have decision-making power on yes and no based upon criteria, and we've already outlined what those criteria are. So then they're basically saying "Which box do I want to be in? I can allocate more money to maybe more risky loans, or loans that aren't as risky", so they can diversify their own portfolio. But our financial investors want decision-making power; they want to be able to say yes or no. We just have said, "What boxes are you willing to play in?"

So that's a little bit different for us, because we're allowing kind of your private investor to come in and bring some money and do those types of things. Do you want to answer the second question, or do you have some follow-ups on this one?

Slocomb Reed: Go for it.

Ryan Wright: Okay. So the profit center for us - we're going to make money in a couple of different ways. So one of the ways that we're going to make money is through an origination fee, which is basically the amount of money we charge to put that loan together and make that loan happen. We have a servicing fee, but we're not going out to people and saying, "I'll buy your money at 5%, or 8%, and then go and sell it at 12%", or something like that. So we let our investors take the upside on the interest rates as they're taking out the upside on some of that risk, and we just take a servicing fee is where we take that. What we have done is we've built a few softwares, and an advanced deal analysis [unintelligible 00:12:05.18] software, some finding property software, tax records, that type of stuff. So then we have people on a membership, where they pay a monthly fee to have access to those tools and resources, and that also is an income generation for our organization as well.

Slocomb Reed: So software platforms aside - I'll ask about that in a second - your origination fee, which I believe would be the points that we were discussing earlier, the percentage of the loan amount that is charged as an upfront fee... The origination fee, and then the servicing fees is where, for lack of a better way to put it, you're making your money. And then your financial investors, your note investors are keeping the entire annual interest. And then the interest rate is a reflection of the level of risk involved in the deal, so your note investors, financial investors have the opportunity to decide the level of risk they're willing to take, which is reflected in the level of return that is possible if the borrower performs on the note. Is that all correct?

Ryan Wright: Absolutely.

Break: [00:13:14.13]

Slocomb Reed: I'm curious about your software platform... You said it was deal finding and due diligence?

Ryan Wright: Correct. I see a lot of investors, and not just new investors, messing up on due diligence, doing things like not looking up buildings department orders, code violations, things like that before they purchase a property, and then realizing -- or accidentally buying a property, planning to flip it as a single family home, and then after they buy it, they learn that it's actually a duplex, or at least their city thinks it's a duplex, and they're gonna have to go through an entire zoning situation in order to get it recertified as a single family to increase that ARV... How does your due diligence platform work? What is it that it's doing for your retail investors?

Ryan Wright: Great question. I see the same thing. I think the two big sins that I see all the time is over-valuing properties, and under-estimating what repairs are going to cost. If you get the right combination of those, that can turn into a pretty big disaster. So what we do, we have what's called an advanced deal analysis; we work with a lot of newer investors, and then as they spend more time with us, they become more experienced. But one thing that's easy to overlook is all the costs associated with doing, say, a fix and flip, or a BRRR, or whatever the case is. When you're talking utilities, and you're talking property taxes for the time that it's there, you're talking the costs on the money, those types of things. And so the software - you plug it in, and it'll basically say, "This looks like a good deal / doesn't look like a good deal. Here's why, or here's what you could do to turn this into a good deal." So people are using it all the time, so they can get more accustomed to what looks like a good deal before they go out there and chase it down and make an offer. And then when they do that, then they bring it back.

The second part of the due diligence that we do is we actually have project managers that do a virtual walkthrough with the customer and their general contractor to establish a scope of work. And with that scope of work, then we see additional inspections that are needed. We're obviously looking at zoning, and making sure we don't want to be buying in what we think is a house and it ends up being a fourplex... Because no matter what you do, whatever the city says it is, it is what it is right now. It doesn't matter what it looks like, the city's king. So we look at those things, you get full title report, and hazard insurance, and those types of things.

So we're more of a hold you by the hand, and then as you do more, then you become more of a repeat customer, and then we're not as hand-holding in that type of stuff... But that's really the value we provide to somebody that's looking to fix and flip, or somebody that's looking to do BRRRs, or are needing hard money, is helping them through the process so they don't make some of those decisions.

There's hard money lenders out there that do loan to own. Put a bunch of money down, I'll fund it and do that, but that's not what we're about. We're trying to take on and help you assess the risks, and do asset-based lending, and then return, hoping to help our financial investors also get a higher return. The financial investors that are coming to us, they're looking for a better return than they're gonna get if they put it in a fund, right? If you put it in a fund, you get five or eight percent, but man, I want to get closer to 10%, or maybe I want to get 12%, or maybe even 15%, but I realize I'm taking a little more risk on with that. And so that's what the financial investors are looking for as well.

Slocomb Reed: Your bio references your hard money loan portfolio. Are you one of the financial investors personally?

Ryan Wright: Absolutely.

Slocomb Reed: We're wrapping up the first quarter of 2023, Ryan... Thinking like a financial investor and a hard money lender, tell us about the loans that you are looking to do right now.

Ryan Wright: One of the things that I really like to always be in - and this is one of my investment strategies - is below the FHA loan limit, no matter where you're investing. FHA is going to have a loan limit based upon the counties. So if your FHA loan limit, let's say, is half a million dollars for that county, we're typically going to want to be about 75%, or 80%, is what we're going to want to be into that.

However, if you're getting a good enough deal, we'll fund the entire purchase, and sometimes even fund part or all of the repairs as well, which makes us unique... But we're also going to want to make sure values are good, and everything else, so we're going to be more hands-on.

So that's more what we're looking for, is opportunity-based based upon the value there, and the better the value, the more we're able to provide an in terms of funding. So I'd say single families is probably our bread and butter. We do some of the duplex, triplex, fourplex, but single-family houses under the sub-FHA, under a half a million dollars... And also good neighborhoods; they don't have to be amazing neighborhoods. My rule of thumb is I want my wife to be able to walk down the street at night alone. And if that's the case, I'm good in that neighborhood. And if it's not, then I don't want to be in that type of neighborhood. So that's one of the things.
And also just rural areas. If you can't find comps, and there hasn't been a house that sold there in the last six months, you need to be in areas that there's [unintelligible 00:19:13.04] so there's enough commerce and enough business where you know transactions are actually happening. I like to see about 100 transactions in the last year, as a minimum. So those are some of the things that we're looking for.

Slocomb Reed: Ryan, as a financial investor, do you find now that your appetite for risk is growing or shrinking?

Ryan Wright: That's a great question. I would say when the interest rates started going up with the Federal Reserve, my appetite started to shrink. But I would say that now that we see that, I would say they've more stabilized, and I think we're gonna see that come down over this next year. My appetite is increasing. So just wanting to make sure that it's a good deal, solid deal. So making sure that it's a deal that everybody's going to win on is one of the big things for us.

Slocomb Reed: Ryan, are you ready for the Best Ever lightning round?

Ryan Wright: Maybe... [laughs] I hope so.

Slocomb Reed: Great. What is the Best Ever book that you've recently read?

Ryan Wright: Okay, so the best book I've recently read - you can ask my wife about this, and she will say it, but it's not real estate, it's not investing, it's actually about marriage, and it's called "The Man's Guide to a Woman." And it's by John Gottman. I've really liked that; some things I don't like in it, so I'm not fully endorsing everything, so don't get mad at me if you don't like a part of it... But it's been awesome. I'm reading it for the second time right now.

Slocomb Reed: What is your best way to give back?

Ryan Wright: I like to teach kids as much as possible entrepreneurial principles and finance principles. So my number one way - and maybe this is a little self-serving - is to make sure my boys know and understand that. But we're also helping other kids in neighborhoods or in other places that are coming together to teach financial literacy... Because I think financial literacy is one of the most valuable skills, that's the most under-taught in schools.

Slocomb Reed: Ryan, I like to adapt one of my lightning round questions whenever we have a lender on. I usually ask about the biggest mistakes that was made in their investing. I want to ask, what is the Best Ever loss you've had on a loan? And the Best Ever lesson that resulted from it, for our listeners.

Ryan Wright: I'd like to answer both of them, if that's okay.

Slocomb Reed: Absolutely.

Ryan Wright: Okay. So the mistake I made on a personal investment is I bought a property that I was planning on moving into at some point, so I was emotionally tied to it. It was in a specific area, my wife and I were really excited about it, and we ended up losing about $100,000 on that property. The reason is, we bought it right before the 2008. We put tenants in there, which was all part of our plan; values came down, we were feeding it monthly, and we said "Do we want a death of a thousand strikes, or do we want to just get it over with at once?" And so we did that.

And the lesson from that was don't ever get emotional in investing. You cannot get emotional [unintelligible 00:22:10.16] We thought it was a good idea to buy, because prices were going -- so that's that one.

The next one - and let me start with the lessons when it comes to the lending. The most expensive things in lending that cause losses have to do with attorneys fees and costs from foreclosure, or fights, or whatever the case is; it has to do with the property not being maintained or taken care of, where the property is sitting for a period of time where we can't even do anything other than just board it up. So we're having those costs. And the other really, really big one is property taxes. If a property sits and there's some fight or we're foreclosing or whatever the case is, especially in some areas more than others, those property taxes get really, really expensive.

So I would probably say the biggest loss ever is probably something around $75,000. I'd say most of the time we get to a breakeven. But if we're losing money, it has to do with legal costs, it has to do with foreclosure costs, it has to do with property taxes... It has to do with the things that you aren't really planning on spending money on, and maybe you budget a little bit, but when all of it hits you at once, that becomes a problem.

Slocomb Reed: I get where you're coming from there. On that note, Ryan, what is your Best Ever advice?

Ryan Wright: My Best Ever advice is to not wait to get started. It's kind of like the "I'll be happy when this happens, or I'll be happy when this happens, or I'll be happy--" And it's like, "Well, just be happy now." And I see the same thing with investing. "I'll get around to investing once we do X, Y, Z. Then I'm going to start investing." So I say if you're not starting now, you're not going to start later. So regardless if that is looking to get into a fund, regardless if that is becoming a hard money lender, regardless if that's doing a fix and flip, or a rental property, you've got to get started now. And you won't know everything when you get started. You learn as you go. So I think a lot of people believe that it wasn't scary for us to do our first deal, or our second deal. It was frightening. It was terrifying. But I've gotten more used to that, so it's less terrifying than it was back then. But as I go and do different deals, or a new deal that maybe was terrifying when I did my first mobile home deal - that was a little terrifying. It's less terrifying now, because I've done a bunch of those. So I would say get started.

The second thing - I've got to say this, I'm sorry - is cash flow is king. So it doesn't really matter what you're doing, you can make a great income, but if you don't have a way of producing cash flow for the rest of your life, you're still working. Now, you might be getting paid a high wage, but cash flow is king. And I see a lot of people make a lot of money in real estate investing, but they never convert that to cash-flowing instruments, whether that be my favorite, hard money lending, or whether that be real estate that they're buying... But if you don't have cash flow, it's going to be difficult to get where you want be.

Slocomb Reed: That is an excellent answer. Ryan, last question - where can people get in touch with you?

Ryan Wright: Just check us out at theinvestorsedge.com. You can check us out and see some of the things that we're doing, and we'd love to help you out if it'd be a good thing for you.

Slocomb Reed: Those links are in the show notes. Ryan, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show. Leave us a five star review and share this episode with a friend who we can add value to through our conversation today. Thank you, and have a Best Ever day.

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