According to the hype, Crowdfunding will make everything different…. It’s like Star Trek.
The Promise of Crowdfunding vs. Hard Money
After attending the first REIFACON in Los Angeles in 2015 I was enticed by the idea of crowdfunding. When it came to crowdfunding vs. hard money, crowdfunding was going to make everything different and give me easier access to investment dollars.
I mean, Crowdfunding! How cool is that? A school teacher in Iowa investing in my 3 bed 2 bath flip in Union, NJ. If crowdfunding could do all I heard at REIFACON, then transporter technology must be just around the corner.
So, I took meetings with crowdfunding companies in Los Angeles and reached out to others across the country.
The Reality of Crowdfunding vs. Hard Money
I soon found out was there was little difference to the end user like me between crowdfunding vs. hard money (using a Hard Money Lender or HML). In fact, the HML in some cases had better deals, both in interest rate and terms. Most importantly, the HMLs could fund with the speed I need to secure the best real estate deals for my partners and me; this was something the crowdfunding platforms could not promise.
Alas, my research showed the Internet Crowdfunding revolution was not for me and I would just have to hope for Amazon drones and business class instead of my transporter pad.
I went back to meeting Hard Money Lenders at diners for lunch. Again and again I heard the classic “we have rates as low as 9%”, which of course would not be available to me until my 10th deal with that HML.
After working with a few HML in NJ I found the best deal was funding for 80% of purchase price and 100% construction costs. It would be high interest and flexible terms.
When I say high interest, I mean 15% interest, 4 points (but no personal guarantee), half the normal loan fees and all the expenses loaded into the back of the deal (in other words, fees paid at the end).
Yet that was the best deal in NJ simply because the entry cost was very low. If the house cost $150,000 then all we needed was $30,000 to get into a $300,000 ARV Deal.
Not bad, but nothing like what I had been led to believe crowdfunding would provide based on my attendance a variety of real estate events.
After a year of doing flips, we got the HML to 14% and 3 Points interest and were okay with it.
On one occasion the lender did not have enough funds available to do a great deal we had found, so we had to use another lender. More fees, same high interest rate and all fees up front. We had to bring almost twice as much cash to the deal as we would have needed with our original HML.
At this point I got the idea of a better way—transporter technology—back in my head. I went back to my mentor Kent Clothier and his partner Jason Medley and started looking at private money.
I had already purchased Kent and Jason’s product for finding private lenders, which lays out the basics of how to find and work with them. However, as I began to dig in and ask questions of Kent and his team, I learned that private money was not necessarily the best solution either…more on that next time.