Can you invest like the bank by becoming the lender instead of always the borrower? What investment strategies can we learn from banks to apply to our situations?
My special guest with Carolina Capital, Wendy Sweet, will share how YOU can become the lender and take advantage of higher interest rates.
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How Can You Invest Like The Bank With Wendy Sweet
Hello, my fellow Ripplers. This is Chris Miles, your cashflow expert and anti-financial advisor. This show is for you. Those of you that work so hard for your money. You want your money to start working harder for you right now. You want that freedom today. Not 30 or 40 years from now, but right now, so you can live that life that you love with those that you love. Most importantly, it’s not just about getting rich. It’s about living a rich life because as you are blessed financially, you have a greater capacity to bless the lives of others.
That is why I’m here today. Thank you for allowing me to create a ripple effect through you and for teaching. You have been bingeing faster than I can produce this stuff. Keep going, and thank you for sharing it with other people as well. That’s the ripple effect we’re here to create, to get at least 1,000 of you financially independent by 2030. To help you do that, visit our website, MoneyRipples.com. We’ve got the Passive Income Calculator that you can take to find out how much passive income you could create in your situation in the next twelve months. Check that out on MoneyRipples.com.
I brought on a special friend today. She’s someone that I’ve known for years. Wendy Sweet is a partner with Carolina Capital. We’re going to be talking about what notes are and how you can invest in notes, and essentially become like the bank, and get all the benefits that the bank gets off of you. Without trying to be rude here, it’s a way to say stick it back to the bank. I’ll leave it at that. I’m grateful to have her on because she’s not just a great investor but also an amazing woman as you’ll see here today. Wendy, welcome to our show.
Thank you so much for having me. I appreciate being here.
Give us a little bit more of your backstory. I know you’ve been investing in real estate for over the last twenty years. Tell us a little bit about your journey.
My journey has been a hairy one, as you should say. I started out in this business as a conventional mortgage lender. I wanted to learn about how to loan money to investors on the conventional side because it was hard to get done. All other mortgage brokers were too lazy to figure out how to do it. I learned how to do it. I knew it would be like shooting fish in a barrel because not a whole lot of people did them. I started lending money that way by doing conventional loans. While I was doing that, I realized that this guy would qualify for a loan easily, but he’s not very good at finding houses. This other guy is good at finding houses, but he won’t qualify for the loan.
These people that would qualify for loans had self-directed IRA money or had cash in the bank. I thought, “I’ll take their money and lend it out to this guy who needs it.” Now we’re paying interest to this guy whose money is just sitting in the bank doing nothing. This other guy is able to buy and rehab the house, turn it around and flip it, or refinance it to a long-term hold. I learned later that it was called hard money. I fell into it. I thought, “That’s what it is. It has a name.” That’s how I got into lending and creating notes and learning everything about this business. I always say that the best seat at the table is being the lender. You have the least amount of time put into it and you make the most money for the hours that you’re putting in.
That’s what we’re talking about passive income.
The best part of it is it’s like sitting at a 30,000-foot view. You get to see what everybody does. You see how the contractor works, how they’re finding the houses, what they’re doing to fix them up, how they’re setting them up to sell, the issues that they’re running in with the title and the attorneys, and all the things that go on. I get to see the whole playing field from 30,000 feet. How better to learn about real estate investing than to see what everybody’s job is, and to watch everybody’s mistakes?
I’m the premier mistake-maker. I know other people make them too. The best mistakes to watch are other people so you can learn for free, instead of taking the hit on the chin. Unfortunately, it’s not always that way. I love everything about this business I have. I’m passionate about it. Even if I’m in a foreign country, I’ll look at real estate as if I’m going to buy something there. I’m always wondering, “I wonder how much that would go for,” or “Have they rehabbed that yet? What’s the real estate like in this area?” I’m always looking at it because it’s so much fun to me.
The best mistakes to watch are other people, so you can learn for free instead of taking the hit on the chin. Click To TweetThat’s important too. I’ve noticed that anybody who has that passion, that’s when you know they’re in the right business. It’s when they love it and they’re like, “I can’t stop. It’s so much fun,” versus those people who are like, “I don’t even want to hear about all those headaches and stuff. Take my money and please, I hope it comes back.” That’s what most people say.
To me, it’s like a puzzle. I love the challenge of a puzzle and figuring out how to make it work. That’s the fun part to me, the architect of the deal. Just being able to think of new ways of getting something done, and get around whatever loophole, brick wall, or whatever it is that’s coming up in front of you to stop it. I love figuring out a way around it. It’s so much fun to help other people build wealth. I’d like to have it for myself, but I’m not going to get there if I don’t help other people get there first. That’s the key. You’ve mentioned that in the opening. It is all about making this a better world and making other people’s lives better. You can’t outgive God. It’s the way I look at it. It’s all about what you can do to help somebody else get to where they want to be. Jim Rohn says that good stuff.
We talk about a lot of different types of investing. Most people hear from someone who goes and buys apartments. Maybe they buy self-storage or something like that. When it comes to notes, what is that exactly?
A note is something that’s so simple. Anybody who’s ever had a mortgage has signed a note. If you’ve ever bought a car, you’ve signed a note. It’s a promise to pay. It’s simple. What’s so interesting about a note is that the terms inside the note can change. They can change to meet the needs of the person lending and the needs of the person borrowing. They can take care of both people. That’s what it’s supposed to do, to meet the needs of both sides.
Another thing I love about creating notes is finding out who the borrower or the lender is and figuring out where’s their pain point and what needs to be met in that pain point, and you put that in the note. Does it need to be a 3-year note? Does it need to be a 30-year note? What do your payments need to be? If your payments need to be this, let’s figure out what the interest would be over 5 or 10 years or whatever that term needs to be. That’s a note. It’s the terms of paying someone back with what you’ve agreed upon to do that.
It’s basically saying, “We don’t need the bank. We’re going to do a private deal with ourselves.” Essentially, you become the bank when you’re the lender versus the one borrowing the money.
The thing that scares people the most when they talk about buying, selling, or creating notes. They think, “How legal can this be?” It’s extremely legal. If you’re smart, you get an attorney to draw up the terms that you want. That’s what you want to do. Get an attorney or a title company to draw up those terms. Notes are not necessarily recorded but the collateral, the deeds, or the mortgage that’s there can be. If it’s a car, then it’s the collateral for the car. Whatever the note is on, that’s what’s recorded. It’s the lien against it, but the note is not necessarily recorded.
Essentially you become the bank, in this case. A lot of people, especially if they come from that perspective, they’ve been taught traditional financial advice, which is crap. This might sound risky to them because it’s different. I’ve told people that the definition of risk is chance of loss, which is true. It’s funny that they go and put their money in the stock market, which is gambling because the chances of success are very little.
What’s your collateral on that?
There’s no collateral.
Double zeros, nothing.
There’s one thing too that you brought to mind, and I’ll let you respond to this too. I guess I’m answering you the question partly. When people say, “This sounds risky,” it could be, but there’s collateral there. You got to ask yourself, what do banks invest in? Banks will never give you money to put in the stock market. That’s illegal and they’ll never do it because they think that’s stupid. Why would they put their money there or put it at risk? They’ll never lend you money to put it in the stock market. They will lend you for a business. They will definitely lend for real estate because there’s some collateral there.
I love that you said the word risk because there’s risk in every single thing that you do. There is always a chance you’re going to lose money. If somebody comes up to you and says, “I’m going to pay you interest on this, and it’s guaranteed,” run from that word guaranteed because nothing is guaranteed. “It’s safe.” Run from that word because nothing is safe. It’s all a mitigated risk. What is it that can help you sleep at night when you know you’ve either borrowed or loaned money based on this? What’s that mitigated risk? What’s your tolerance? What can you live with? It’s different for everybody.
I can take the risk. I do as much homework as I can before I make a loan, and I’ll lend money on anything. I know that homework. I’ve been thorough about it. I know what I’m doing when I’m underwriting any type of deal. I understand my risk going in. On the other hand, my husband wants no risk at all ever. He wants everything paid for. When I start talking about business, he doesn’t want to hear a word about it because he doesn’t like risk. Everybody falls in that space somewhere as to what that risk is that you’re willing to take. That’s where the asset of the note and the sponsor of the note are important. When I say asset, is it a house? Is it a car? If it’s a house, where is it? Is it a 3-bedroom, 5-bedroom, or 1-bedroom? It’s all the things that go along with underwriting that asset.
The other part of a note is who the borrower is. Who is going to pay you back? What kind of ability do they have to pay you back? Do they have a regular income? Are they going to pay you back based on the income that’s coming off the property? What is their borrowing strength and their credit score? How much money do they have in the bank? How solid is their job? What kind of experience do they have in doing what you’re lending on? All of those things come into the risk that you’re taking as a lender in creating a note.
You sound just like a banker. Are you saying that the questions they ask us that are so annoying are actually useful as an investor?
That is so true. I have to laugh. Many times people will call, “I’d like to borrow money. I want to buy this house and fix it up.” I say, “I wanted to see a copy of your tax returns. I’m going to pull your credit score. We’re going to do a background check. I’d like to see your bank statements.” “Why do you need all that? I might as well go to a bank.” Will a bank qualify you? You’re Mr. self-employed who doesn’t have a regular income. Are you buying a house that’s completely not livable, and you need the money not only to buy the house but also to fix it up? A bank is not going to lend it to you on there.
For separate individual notes or companies like mine, hard money and private money, you have to step up and show your ability to pay. We’re going to think outside the box. A private lender is going to think outside the box where a bank is not going to. Bank has this box that you better fit in. If you don’t fit in it, hit the road, Jack. I can’t get a bank loan. I have a fund that I manage that I’ve been managing since 2014. I have self-storage facilities. I have several short-term rental properties. I have a good income, but I won’t qualify for a bank loan because I’m self-employed. The way my taxes are, I’m going to certainly take advantage of every tax opportunity that I can take. My tax returns aren’t going to make a bank happy.
You’re going to make yourself look as poor as possible, and pay as little as possible.
That’s exactly right. My credit is great, but they don’t lend on credit. They lend based on everything in this box. When you’re able to go to a private lender or a hard money lender, or create a note and lend your own money, you are setting the standards for what you can do.
I love it. I can already hear people saying, “This sounds complicated. How would I even do this? How would I even find the deals or know it’s even going to be a good deal?” It’s almost like someone would say, “Is there a way to get spoonfed these deals instead that have already been vetted?”
It depends on what side of the deal you want to be on. Are you looking to be a borrower? Are you looking to be a lender? If you’re looking to be a borrower, then I always tell people to join your local real estate investor association. Don’t buy all the products that they’re trying to sell. Just go and learn as much as you can. Get involved in the smaller subgroups that meet for breakfast, lunch, and dinner. You’re going to meet people and break bread across the table. You get to know what they do. They get to know what you do.
That’s the way you can find private money as well if you’re looking to be a borrower. If you’re looking to be a lender, you can do that same thing, but then you have to understand how the deal works and what it is you need to underwrite. You could buy pre-made notes that have already been created by people like me. There are other people that do that as well. When we close a loan, we lend the money out of our fund, and then we have these notes sitting in our fund. We actually sell those notes to anybody who wants to buy them. It’s like a $50,000 minimum. When you buy a note, it is sold to you with what’s called an allonge and an assignment. It’s a note with an allonge and an assignment.
The allonge and the assignment are two pieces of paper. One is recorded, and one is not. The one that’s recorded goes along with that lien. Remember, I said liens are recorded. That’s something that’s recorded. The other document is one that describes the note, and this is the portion that you’re buying. People say, “I don’t have $300,000 to lend.” Of course, you don’t, but if you have $50,000 that you want to lend, I can sell you $50,000 of that note. We’re still collecting the payments for you and sending them to you. We’re still doing all the servicing on it. We’re retaining the bigger portion of the note.
It’s a done-for-you option.
That’s exactly right. You get paid monthly. When it’s time to get paid off, you get your money paid off with the interest that’s owed to you, and then you can do it again. Rinse and repeat as they say. Not only do we do that, but there are other companies out there that do that as well.
You guys had a long track record of doing that very thing.
At Carolina Capital Management, we’ve been doing that since 2014 when we first started the fund. We immediately sell the notes. People say, “Why would you do that?” That’s how we get money back into our fund to be able to re-lend it again. The money is constantly turning over. Just like you would be buying that one little note, that’s exactly who we are. We’re buying a lot of notes and we create them too. We’re just doing it on a much bigger scale. We’re doing all the heavy lifting. Underwriting is truly the hardest part. You’re doing two sides. You’re doing the borrower and you’re also doing the asset. You need to know your market.
As a lender, you’re lending money. People can definitely do this on their own. If they want to take their self-directed IRA money, you can absolutely lend out your own money. Make sure you understand the market you’re lending in. Is it going up? Is it coming down? Is it a growing market? Are people moving away from where you want to invest in? You also need to understand who you’re lending to. Even the size that we are now, we lend to people that we know, like, and trust. It’s still just as important. I don’t care how big you are. You need to know who your borrower is. You need to be able to trust them.
I agree. I think in a lot of ways, although it’s important to know what you’re investing in, it’s almost more important to know who you’re investing with.
This is a great example. You and I are in a lot of masterminds together. We only lend in the Southeast. That’s our backyard, North and South Carolina, and pretty much anybody that touches our state, plus Florida. We lend in the areas that we know what’s going on there. We have people in our mastermind groups that might be in Wisconsin, Indiana, or Texas, and we know them. We break bread together. We’ve seen them operate their business for years.
We’ll lend to those people. If the deal works, we’ll lend to those people as well. That’s the only time we’ll ever go outside of our box or outside of our regular place where we like to do business. It is when we’re lending to somebody that we know. We do the asset due diligence as well. We’ll be very thorough on that. As long as we know who that borrower is, that makes a huge difference.
Before I ask you a few other questions, if someone wants to know more about what you guys do in your company, whether it’s through the fund or even through getting on these individual notes where you guys spoonfeed them to us, do they reach out to you or do they reach out to somebody else on your team?
They can email me Wendy@CarolinaHardMoney.com. They can go to our website, CarolinaHardMoney.com.
Many people will ask about the lending, “What if it’s too much? What if things go down?” That whole loan-to-value is a big thing you look at as well. You don’t loan up to 100% of a deal of the value of the home, for example. What’s the typical barrier or boundaries you have there?
We talked earlier about risk tolerance. Our risk tolerance is 70% of what that after-repair value would be. After-repair value means what it is going to sell for once you have it fixed up. In today’s market, if we were pulling comps on a property, what we think a property would sell for once it’s fixed up, we’re not going to pull a comp from six months ago. We’re going to pull a comp that’s going to be about 30 days old or less. That’s what we’re looking for.
You know why that is because the market tends to drop or stagnate. It certainly depends on what area you’re in. We’re definitely going to use numbers that are as close to where we are in real life as possible. That’s another important reason to understand and know your market. It’s another reason to understand and know who your borrower is because I can tell you, in the last three years, anybody who could fog a mirror could make money in real estate.
You’ve got these young guns running around, “We’re rocking and rolling. We’re buying all these new houses. We’re fixing them up and selling them.” How long have you been doing that? If it has been in the past three years or less, then they don’t have experience. They haven’t been through 2008. I have to laugh at everybody freaking out about the interest rates the way they are now in the 7% and 8%. I remember when they were 18%, and people were still investing and making money. It’s all relative.
I was actually going to ask you that question. Interest rates going up, does that help the lenders? Is it allowing you to be able to make more money on the lending side?
We could increase our rates right now if we’re lending. We charge 3.5% points and 10.99% on our interest rates for a 12-month term or 6-month term. They’re very short-term. We like it short-term because, as short-term lenders, when the market changes around us, we can quick-term too because our loans are so short. We can make the changes that we need to make. We like that flexibility to be able to do that.
That’s another way to lessen your risk.
We could raise our rates right now, but we’re already able to produce the returns for our investors that we want them to have. The last thing we want to do is kick a man when he is down and try and raise the rates at this point. We’re at a time right now where nobody knows where we’re going or what’s happening in the real estate market. It’s a wait-and-see for a lot of people. Our returns are good and we certainly don’t want to throw money down the tubes. That’s not what we’re doing.
We're at a time where nobody knows where we're going or what's happening in the real estate market. It's a wait-and-see for a lot of people. Click To TweetWe’re also trying to be cautious with every move that we make. I certainly hate to raise my rates next week, and then have the Feds drop the rates, and then watch things start to affect mortgage rates too, and have those all drop around us. You don’t know what’s going to happen. We’ve never been in this particular economy before. We’ve never been here for the reasons why we’re here. Does that make sense?
It totally makes sense. It’s a new situation.
Every time we hit a recession, it’s always for different reasons. This one is out of the box and nobody knows. I’m telling you, my crystal ball broke back in 2008. It’s crushed. It’s never going to work again. I want to be cautious in everything that I do, and everyone else should be too. When we look at any given deal or borrower, we always ask ourselves, what’s the worst thing that could happen here? If you can live with that, then do it. If you can’t live with that, then don’t do it. It’s pretty simple.
You were talking about how we sell notes to people out of our fund. We talked a little bit about that. One of the things that I won’t do is have somebody tell me, “I’ve got $50,000 in my self-directed IRA, and that’s all I have. That’s the only savings I have, and I want to buy a note.” I will do my best to talk them out of it because I don’t want anybody to put their last bit of savings into one basket, and into one thing. They need to be cautious about what they do.
Even though you have a great track record, you just never know.
You can lose money in everything that you do. No matter what you do to mitigate it, there’s always the chance. Can you live with this decision that you’re making if the worst thing happens or not? When you’re measuring lending money against a note on a note on an asset or putting money in the stock market, the house isn’t going to disappear and go away. The house is sitting on land that’s worth something too. That’s never going to go to zero.
The stock can easily go to zero and below. I don’t even question what my money is going to. Any investing that I’m going to do is going to have something to do with real estate. It’s not going to have anything to do with the stock market. I’m anti-stock market. It’s scary to me. It’s very frightening to me. I know a lot of people are comfortable with it, but it’s like I have no net. I feel like I have no net to fall to.
That’s good to hear. One last question, and changing topics here a little bit. For you personally, you’ve got self-storage units. You’ve got short-term rentals. You’re doing your own investing. You don’t have to keep doing this. You can totally get shut this business down not to deal with all the headaches of this. Why do you keep doing it?
I love it. I have a passion for real estate and all that it entails. What I like the most about it is I love teaching other people about it. I love guiding other people down the path that I’ve been on and helping them to avoid the mistakes that I made. I’ve made a ton of mistakes. I know that I probably have a ton in front of me that I’ll make again. Hopefully, they’ll be different.
Hopefully, you’ll learn.
I didn’t get to where I am by just stumbling. I had people all around me, helping me, encouraging me, lifting me up, giving me direction, and showing me the ropes. I want to give that back. I want other people to have that as well. I do this thing called Wednesdays with Wendy. I used to get everybody, and I’m sure you get this too, “Can I take you out for a cup of coffee? Let’s do lunch. I want to pick your brain on this.” I want to help people. It’s hard for me to say, “I don’t have time. I can’t do that.” What I did is set aside what’s the hardest thing for me to set aside, and that’s time. I can give money, but setting aside my time is the hard thing to do.
I look at it as tithing my time. On Wednesday, from 9:30 in the morning to 12:30 in the afternoon, every Wednesday, I have my calendar set up. People can book a 30-minute free mentoring. It’s on Zoom and all we talk about is real estate, whatever it might be. Remember, I’m sitting in a lender position, so I get to see all the different positions that people play and all the roles that they have. I get to see the mistakes. I get to see the good things they’ve done.
I have a pretty good view of what I’m able to see. If I can’t help them, I’m also involved in a bunch of masterminds with people that have the same values that want to help other people. I can hook them up with other people that are willing to share, direct, and guide them in what they’re doing. I love doing that Wednesdays with Wendy. What’s funny is I thought that I was doing it to help other people. What I get out of it is so far beyond what I give. I learn something from every person I talk to. No matter what their experience is and no matter what the topic is, I learn something from every single person I talk to. It fills me up. It’s awesome.
You’re definitely a giver, Wendy. There’s no doubt.
Thanks. I’ve been given, so I must give back.
As you’ve been given much, you got to give as well.
That’s exactly right.
I appreciate this. You’ve given us a lot today. It’s been very educational. I appreciate your time and your generosity.
Thank you so much for having me. If anybody wants to sign up for that Wednesday with Wendy, email me, Wendy@CarolinaHardMoney.com. I’ll send out a link, and they can schedule a time to meet with me. I’d love to do it.
That’s huge. Thank you so much, Wendy. That’s great.
Thank you.
Hopefully, this has given you something to munch on a little bit more and see that there is this whole other world out there, especially in the investing world. There are a lot of ways you can take control of your own money, and do it in a way that allows you to be in the driver’s seat versus you always feeling like you’ve been driven around by markets. It’s one thing to learn about this education. It’s another thing to figure out how to apply it. Go and apply it in your life. Make it work for you so you can be prosperous today. Make it a wonderful and prosperous week. We’ll see you later.
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About Wendy Sweet
Wendy Sweet and Bill Fairman (brother and sister) started Carolina Hard Money LLC in 2012. Having both worked in the mortgage business for a long time but never together. Wendy, with her residential rehab experience, and Bill, with his commercial mortgage experience, thought that the timing couldn’t be better to fill that void in the Carolinas where they both hail from and have worked for many years. They have a combined 45 years of experience in the mortgage lending industry.