Dan has been on the show a couple of times to discuss his real estate investing and share knowledge with us. Today, he’s back to teach us about how he raises money for single family flips. Dan has ways to get creative for finding money for his deals, and shares how anyone could do the same. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
Dan Breslin Real Estate Background:
- Host of the REI Diamonds Podcast
- Founder & President of Diamond Equity Investments
- Listen to his previous episodes:
- Focuses on quick flips with yearly revenues over $3 Million
- Say hi to him at https://diamondequityinvestments.com/
- Based in Philadelphia, PA
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Best Ever Listeners:
Do you need debt, equity, or a loan guarantor for your deals?
Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.
I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com
TRANSCRIPTION
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
First off, I hope you’re having a best ever weekend. Because today is Sunday, we’ve got a special segment for you called Skillset Sunday. Today – oh, you’re gonna like it, especially you single-family home investors who are looking to scale; we are gonna talk to Dan Breslin, who’s been on the show before, about how he’s raising money for single-family home purchases. How are you doing, Dan?
Dan Breslin: I am doing good. How about you, Joe?
Joe Fairless: Same, my friend. A little bit about Dan, in case, Best Ever listeners, you need a refresher – he is the host of the podcast titled REI Diamonds Podcast. One of my favorite names for a podcast, by the way… REI Diamonds Podcast. He’s the founder and president of Diamond Equity investments, and he focuses on quick flips and he has yearly revenues of over three million buckaroos.
He’s been on the show twice. Once in a normal episode, so you can hear his best ever advice in episode 449, titled “Why you should pretend that every deal you set up will be a fix and flip”, and holy cow, I’m looking at the date that aired – November 25th, 2015. It’s been three years almost since that aired. And then the other episode is episode 739, much more recent – September 11th, 2016. This is a fun story, you’ve gotta check this out if you haven’t already, “An upscale land development deal gone WRONG”, and “wrong” is in all caps; that’s a Situation Saturday episode.
Today we’re gonna be on more of a positive note, not talking about things going wrong, although maybe I’ll pepper in some questions about that. We’re gonna be talking about how you’re raising money for single-family homes.
With that being said, Dan, will you give the listeners a little bit more of your background, just as a refresher, and then we’ll roll right into it?
Dan Breslin: Cool. So I do a large volume of deals in the Philadelphia area, Chicago area, Atlanta, Miami and Tampa area. I moved from Philadelphia to Chicago about 3-4 years ago to be a more present father in my daughter’s life at the time, and that led to us expanding into these five markets that we’re in today.
I am a regular listener of your podcast, Joe. I, like many of your listeners, probably can relate; I get lost in the number of episodes; it’s like an outrageous number of guests and episodes, I forget where I’m at… They’re all great, and I get a ton of good content, so thank you for consistently getting that up for more than — what, 1,400 shows now?
Joe Fairless: 1,400 shows and counting.
Dan Breslin: Nice.
Joe Fairless: Well, thank you. I appreciate that. You’ve been a contributor, as well as a consumer of the content… So you’re buying in a lot of different markets; what’s your primary business model right now?
Dan Breslin: We do about 20% fix and flip, where we actually do the construction and then sell it to a retail buyer, and then the other 80% is gonna be split somewhat, where we close on it, just wholesale it out, sell it for either cash or conventional, somebody who’s gonna flip the house or do the [unintelligible [00:06:07].07] thing to their own house and live there, or straight wholesale to other investors for assignment fees.
Joe Fairless: Okay. And you mentioned prior to us recording that you’re raising money for your single-family houses — what single-family homes are you raising money for? Which part of this?
Dan Breslin: For both. Some of the deals I’ll offer to my investor network are gonna be very short-term, like 90 days or less, typically with a three-month prepay… So I might have money for two weeks, I might have money for seven days, I might have money for 45 days. In those instances, we calculate three months’ worth of interest for those lenders, maybe some points depending on how small the loan amount is.
Then the other loans that we raise and use in our business are gonna be fix and flip loans, which are typically gonna be six to nine-month, or even twelve-month term projects, where the investors’ money will be tied up for that length of time.
Joe Fairless: So the first one you are describing is where you are gonna turn it around quickly, so a wholesale or a wholetail, right? For the investor, if you’re wholesaling a deal, you just need equity for the down payment and any fees associated to getting it to contract, right? Or you’re buying all-cash, or what?
Dan Breslin: Yeah, we’re gonna typically buy all-cash; that’s part of how we get the discount. We will sometimes sell to mortgage buyers, but in my experience, Joe — and if anybody’s listening right now and you’re interested in raising money, you’ve raised a little bit of money and you wanna raise more, you haven’t raised any money yet and you think this is gonna open the door to your business, and partially it will, but number one, you’ve gotta have deals before you can raise money… But there’s four things that I’ve found, Joe, that investors are gonna be interested in, and that’s how much money does it take to participate in a deal, how long will my money be with you until it’s returned to me, how much return will I receive in addition to the money that I give you, and how am I secured in the deal? Those are the four basics that most people — they have to know at least that much. Of course, we have to know who the team is, how the money is gonna be working in the deal and a lot of other details, but those are the four main chunks that we have.
I’ll talk just about how my deals fit in there, in the conversations with investors, and how much category — compared to some other investment vehicles out there, or even with other fix and flip investors… We have 40-50 deals per month cooking in any of the five markets, so sometimes our benefit to our investors is that we can offer smaller loan amounts for people to get started.
I’ve met with a guy today, and he was kind of wanting to tiptoe in, and he has a lot more money than he’d be willing to offer on deal number one, but for everyone looking to raise money, if you have an opportunity with a smaller amount of capital to raise upfront… I’ll have deals where $25,000 is the purchase price, with the title, insurance, closing etc. An investor can give me $25,000 and feel like that’s a relatively small amount of money to place with me, to test me out, see if the deal goes as I said it would, see if I actually return their money, see how long it goes, see if they can sleep at night while I have their money… So any investors just getting started, if you can, I think you’ll have an easier time cutting your teeth and getting a track record if you can offer a smaller loan amount to get started.
A lot of the same people who started with 25k, 35k, 55k deals, they have no problem putting in 200k or 250k on a single deal with me today… But your investors have to know how much money they’re gonna put on the table in order to participate in your deal. A side note for me, and I think for a lot of single-family investors who are not set up with a fund structure – you typically wanna have one investor per deal; I’m not collecting 25k from this guy, 25k from that lady, 25k from this person and adding it all together to do a 200k, Joe. If the deal is 200k, there’s gotta be one investor that’s participating, or if somebody only has 125k, I may let that person participate, but I’m gonna foot the other 75k of my own cash.
A couple reasons I do that is 1) I just think it’s the right thing to do if I’m not set up in the fund structure; I think you can get into a little bit of hot water by combining and pooling money without setting it up the correct way; you know more about that than me. 2) If I get hit by a bus, or if me and one of my operating partners – we both die in the same crash, or for some reason the deal goes wrong, it’s going to be an unfair, immoral position that you place several people if you’ve combined money on that deal, instead of just keeping it at one person per deal.
So on the how long piece, like I had mentioned earlier, the shorter-term investments are attractive to some investors, especially as they tiptoe in and get used to Diamond Equity Investments, they get used to Dan Breslin or they get used to you, who are listening to this show, and doing your first couple deals with that investor. The faster you can get in and out, that’s the less time that that investor might be losing sleep, wondering how their deal is doing.
Updates would be important throughout that period – e-mails, photos of the project if in fact you’re doing renovations. For us, a lot of our investors love to get in on the wholesale deals, where we’re gonna close on a deal for that 25k, we’re gonna resell that thing for 45k within 60 days we’re closed, contract to contract, and they’re paid back. They get a taste of that, and they wanna put that money right back to work and kind of keep it in play once they’ve seen how that works.
On how much return to offer investors, I typically do a 10% annualized interest rate. That’s much stronger than a lot of investors are gonna see, at least the people are in my audience, my circle of influence, if they were to put that same money in the bank at 1% or 2%. So a lot of the people, that’s where I’m gonna compete with.
There’s going to be better opportunities for a lot of people’s money, with higher rates of return, and maybe not the same amount of predicted return that I’m gonna offer. So when I’m gonna say 10%, I’m gonna have the money for 6, 7 or 8 months. They may find something else with a longer lock-up period – 2, 3, 5 years – that potentially is projected to pay out at a much higher rate, of 10%, 12%, 15%, 18%.
I know in some of the deals that you talk about, Joe, you have very strong returns for investors that come with that additional lock-up period, and it’s a great reward for having the money working for that length of time. And that works for a lot of investors who don’t wanna have to – like in our instance – run down to the bank or call in a wire every 3, or 4, or 6 months to keep that money working. A lot of people would rather set that and forget that. That’s not necessarily what we as real estate investors who are fixing and flipping properties on a one-off, or a two-off, or a five-off basis, where we’re putting the money to work in one deal and then paying it back – that’s not gonna come with that same level of convenience in our deals.
And then how are investors protected? You definitely have to get into this and understand it if you’re gonna raise money for your own personal projects. At least I give my investors the first position mortgage and the only mortgage. I did mention that we don’t put several people and have a first, second, third and a fourth mortgage on a property. If two people, a husband and wife, or a brother and sister, or cousins, or business partners wish to invest together their capital in one of my deals, I ask them “Look, it’s gotta go in one person’s name, or you’re gonna have to set an LLC up, and the LLC can loan me the money… But there’s gonna be one mortgage on this property.”
The last thing I wanna be in is in a partnership dispute or divorce proceeding as a result of the loan being made against my property and my project. Investors are typically protected. Anyone buying and selling houses needs to be at 70% of the ARV minus three pairs, so that in the event something goes wrong, there’s plenty of equity here; even if the market takes a hit, there’s plenty of equity for me to pay off my investor, even if I have to firesale the property and make no profit or break even.
I’ve had cases – because I personally guarantee to my investors, Joe – where I’ve had to cut a check. I got the repair, construction budget went over, the length of time on the market was 15 months instead of nine months, the investors got the additional interest for that time that we were late on paying them back, and it cost us a few thousand dollars to get out of that project.
And then a final piece for protecting people when it comes to these types of deals on single-family is make sure that you have your property insurance in place; if you’re gonna have a vacant property and you’re gonna do a renovation, you’re gonna need a special vacant policy, that are underwritten by a select number of insurance companies, one being Lloyd’s of London; they do all the crazy — rockstars ensuring their right hand that plays the guitar, and things of that nature… So there you are, you’re gonna need a specialized property insurance… But you’re gonna wanna name your investor, whether they’re the investor who is funding your deals in an LLC, or a personal name – you’re gonna wanna name them as the mortgagee, as if they were Wells Fargo, when you’re setting up on a standard 30-year mortgage for a house. They need to be in that position. That’s additional protection, so that if there is a loss, they’re being notified that a potentially substantial check is going to be issues, and they need to be aware of that because it’s gonna have to go to them as the mortgagee who put up whatever percentage of the money to get this deal done.
And the final piece of protection that I’m gonna mention here in this piece is gonna be an additional title policy, a lender’s title policy to protect the lender for that amount in the event that anything crazy pops up on the title from previous ownership.
Joe Fairless: The special vacant policy for the insurance – if the place burns down, you said there might be a pretty large check relative to what they’ve put into it for them… What is the amount that that policy should be insured for, relative to the house value?
Dan Breslin: That’s a great question. The real answer to that is at a minimum the amount that the investor is putting into the property, plus their interest. So if it’s $100,000 for the loan that this investor is making – let’s just say the numbers are $70,000 acquisition, $25,000 renovation – this person’s getting 100% of all the money, including the carrying costs or utility bills or things of that nature. So $100,000 is the project costs, including construction. At 10% interest, for one year – we’re gonna keep it simple – is $10,000, so the payoff is $110,000. At a minimum, it should be $110,000, although the insurance broker who’s handling that can suggest, depending on the construction style, the values in the area – you may be able to ensure for even higher than that amount in the event that you decide to rebuild there; it may cost more than the $110,000 that you’d be looking for.
So they can really answer the question with more detail, but never just the purchase price of the property. If you’re buying it for 70k and you’re putting 30k into it, you absolutely without a doubt must protect that additional investment capital that’s coming into play to participate on your project, with the property insurance policy.
Joe Fairless: What paperwork is involved in receiving a loan from a private lender? Can you just name the documents?
Dan Breslin: We have a couple. On the front-end, when the deal is being funded, I send out an e-mail to my list of lenders who already raised their hand — this is something that I wish I would have started earlier; I’m sure you have something similar, Joe… If you’re listening and you don’t have one yet, get a money list – a short list of e-mails, of people who you at least had the conversation, the intention with… Maybe you had coffee with them, maybe a phone conversation, maybe they just sent you an e-mail on LinkedIn and said they were interested in maybe participating and funding some deals… But get a money list going.
So I send that out to my money list. Somebody will call me back, e-mail me, text me, and then when they commit verbally, I’m gonna send to them a mortgage for the property, written out to their name, and also a note spelling out whatever details – if there’s points, if there’s interest, the note is gonna spell out how much money…
Joe Fairless: A promissory note?
Dan Breslin: A promissory note. So those two documents go out for review. Before settlement, before funding, we send off the insurance binding documentation showing them as the additionally ensured, a day or two before settlement.
Some investors like to see the title policy. If I’m investing personally in another person’s deals – which I do sometimes too, Joe – I’m also gonna look to see the title. I just wanna take a look at it, have my attorney review everything and make sure we’re totally protected.
The deal funds, the money is wired; a week or two later, I believe the mortgage and the note are recorded, and then they’re actually mailed to the investor who put the money up. They hang on to those documents, in their file, until we go to settlement on the retail side, and then at that point we have like a standard form, payoff statement that we do some calculations; we send it to them via e-mail, they verify our interest calculations, they send it back to the title company, and then right around that same time there’s going to be a mortgage satisfaction document that the investor is gonna need to get notarized and then sent back to the title company to release that mortgage, once the money is actually wired back to them and paid off.
Joe Fairless: How much of a passive investment is it for an investor who invests with you all?
Dan Breslin: Well, there is that running to the notary and getting that satisfaction document, and there is organizing the wire. So on the front-end, and investor probably has to invest maybe a half hour to an hour if they’re pretty familiar with us (give or take), and sort of be on stand-by for when the settlement is gonna take place. I typically will have the money wired in maybe a day in advance, but usually the day of, especially with a new investor… “Hey, we’re gonna settle at 1 o’clock. I just want you to kind of hang tight, make sure that we have everybody at closing before we send the wire. I don’t wanna just have to send it back, I wanna do it all at once.”
So they’re a little bit on call. We’ve literally had surgeons in the operating room calling in our wires on our deals; that’s happened more than once. I think he was actually a brain surgeon too, that investor, believe it or not. And then there’s also — once we’re getting ready to go to settlement, you have to pay attention and be somewhat available to go to the notary. People who are traveling out of the country – it can be a challenge sometimes, and we’ll have to appoint attorneys with power of attorney, or pre-complete the satisfaction document, and then place that in escrow with their attorney if they’re gonna be traveling around the world and not quite in contact potentially when we need to pay them off.
Joe Fairless: Did I hear you earlier say that you personally guarantee each of the loans?
Dan Breslin: Absolutely. If I’m borrowing money and it’s on my name, this is personally guaranteed. If that deal loses money, this is not “Oh… Well, sorry.” It’s not a guaranteed investment, because we’re not allowed to use the word “guarantee” but the thing about it – there’s some certainty here, whereas there’s a lot of other deals with potentially greater upsides, Joe… The upside here is gonna be spelled out, you know what you’re gonna get. The only other variable is the length of time that we have the money for, but you know that your money is earning 10% interest the same way that it would be earning that money in the bank, it’s just not FDIC-ensured. Does that make sense?
Joe Fairless: It does make sense, yup. And you’re doing (I heard) 40-50 deals at a time. Is that what you’re considering, or is that what you’re working on, you’re actively in a deal, 40-50 at a time?
Dan Breslin: Well, right now I have 83 properties on the board. A portion of those – if I look up, I guess 30% are sold, under contract, with buyers. Some are renovated already, waiting to be sold… We own, actually have deed to about another 20% of those, and then the remaining 50%-60% or so are properties we have under contract, which we potentially would fund, or we would potentially just assign and wholesale to somebody else. Of all of the 83 deals, it’s about 40-50/month.
Joe Fairless: That’s mind-boggling. I couldn’t imagine that. I could not imagine that.
Dan Breslin: Thank god for my team. I have a great team around the country. It’s about 15 of us now, spread out in each of those markets. It’s a loose organization of me as a center partner, with partnerships in each of those markets, in a sense… So it’s not like one big conglomerate. Everybody’s getting paid for what they bring to the table, for what efforts and what results that they create.
Joe Fairless: I love it. Is there anything else as it relates to raising money for single-family homes that you wanna mention that we haven’t discussed?
Dan Breslin: There is. The question burning on everybody’s mind is “Dan, where do I find lenders? Where do I find the first person to lend me money?” and the answer is 1) your network. Obviously, if you know somebody who’s got some money, that’s gonna be a good place to start. But for me, the place where I’ve found my first private investor was at a real estate investor association. I paid five points and 15% interest. This was in 2008. It was a lot more expensive to get hard money. He was in a sense doing a hard money loan, but he was doing that out of his IRA, and to this day, that same gentleman is still a partner of mine and we’re doing a lot of business together.
But as a side note, try to add value to people first. That same investor — I met him at a real estate investor association; I did a deal, I made 6k. That was my first deal.
The second deal I did – we’re at that association a month later and I’m bragging about my 6k, and he says “Well, what other deals do you have cooking?” I say, “Oh man, this guy has a burned down house in Chester he’s trying to sell.” That’s what I said. He says, “Oh, I have a buyer.” So $13,000 later on another deal – we sold this burned down house in Chester, which is like a crime-infested, drug-dealing block type of neighborhood.
By the time we got to the third and fourth deal – the third deal I brought him in was a 50/50 joint venture partner on a deal that he funded, and then my fourth deal was the first one that he actually lent me money. So add value first.
Some businesses are loaning money, but a lot of the lenders I work with, especially in real estate investor associations, there’s occasions even to this day where we’ll do some joint venture 50/50 stuff, and then we’ll do some 10% interest stuff… We try to allow them to participate and keep the money working as much as possible, and try to provide opportunities for everybody that we work with.
Joe Fairless: So many tips, and I love how specific the tips are, and how you walked us through the entire process of borrowing money from private lenders, and investing them into our deals if we’re doing single-family homes… And the paperwork involved, the process, things to look for… How can the Best Ever listeners get in touch with you?
Dan Breslin: I have two ways, Joe. First, I drive a supercharged Range Rover. I’m into fast cars. I wish I could get the Ferrari…
Joe Fairless: That is no surprise to me. Absolutely not surprised at all. I would pick that on a multiple-choice test that your podcast is called REI Diamonds, so… I saw that coming.
Dan Breslin: Where I’m going with that is I have a site set up if anybody was interested in just checking out what we send out as far as these investments we talked about today. That’s superchargedreturns.com. Then you can check out the podcast. I talk a lot of cool stuff there. You’ve been a guest, and a returning guest – your episode is coming up here shortly. That is reidiamonds.com. Real estate investment jewels of wisdom.
Joe Fairless: Awesome. Dan, this has been such a helpful conversation for real estate investors who are looking to bring in private money. You offered some tips if we’re just getting started – start with some smaller loans, maybe shorter-terms, then send them e-mail updates with photos, maybe some video of the project, have one investor per deal (for multiple reasons), and from a paperwork standpoint you talked us through the entire process. So go back, rewind, listen to that, and you’ll hear the entire process… Or just look at the show notes, too; they’re at bestevershow.com, and you go to this episode.
Thanks so much for being on the show. I hope you have a best ever weekend, and we’ll talk to you soon.
Dan Breslin: Thanks, Joe.
