What does “Net Zero” mean? In most everyday applications of this term, it is within a discussion about greenhouse gasses, and the push towards achieving a perfectly even balance between emissions produced and emissions taken out of the atmosphere. Some would say achieving Net Zero is the goal towards achieving a healthy atmosphere and stable planet.
So, what does Net Zero have to do with interest rates, and more specifically private money interest rates?
First, let us define “Private Money” for those who are unfamiliar.
Real estate investor communities refer to Private Money as a source of financing. This source of financing comes from private individuals, private companies, and even individual retirement accounts in many cases. This differs from obtaining financing from a traditional bank or lending institution such as Wells Fargo or Chase, for example.
The difference between private money and traditional institutional money, is that private money often allows for looser underwriting guidelines, limited credit checks, faster funding, less money out of pocket, and greater access to non-conventional financing options for borrowers looking to purchase investment properties. In short, private money financing has less red tape.
Some people consider the downside to be that private money financing is more expensive than traditional bank financing. On the surface it may appear so if one is only looking at interest rates. But if we dig deeper, one can make the argument that private money is far cheaper than institutional banks.
Let us circle back to the concept of Net-Zero, in a real-life example:
Derreck Long of Houston, Texas works in the financial services industry and invests part time in real estate. In August 2020, he sought out private financing to buy a rehab property. In this case, private financing was his only option because the deal was hot.
“I didn’t have time to deal with a traditional bank. By the time my traditional bank could get me a preapproval letter, this deal would have been gone,” he said. Traditional banks often require hard credit checks, proof of funds, and an underwriting process that can take as long as 30-45 days to close on an investment like this. On top of that they would likely require 30% as a down payment. Mr. Long had the funds in a retirement account, but was hesitant to distribute those funds because of the taxation and penalties he would have to pay. Instead, he used what I refer to as the “Net-Zero Approach.”
Mr. Long contacted Blink Lending, a local private moneylender in Houston, Texas. He received an instant preapproval letter and far less paperwork to provide. This allowed him to immediately get the property under contract with the help of his realtor. Once the property was under contract, Blink Lending was able to fund his investment in a matter of days, not to mention with very little out of pocket from Mr. Long (approximately 10% of the purchase price instead of 30%).
The interest rate and term of this loan was 10.99% for 1 year. Mr. Long’s plan with the property was to do a minor rehab and flip the property for a quick profit. (One thing to note is that the interest and fees paid on a home loan are fully tax deductible over the term of the loan. Assuming Mr. Long keeps the property for one year, all the interest and fees will be a tax-deductible item for him.)
Blink Lending also helps clients facilitate the opportunity to invest in other private money notes, secured in first lien position to 3rd party borrowers throughout the state of Texas. Investors seek out companies like Blink, to facilitate investments of their own private funds, and often retirement funds (though use of self-directed IRAs and self-directed 401ks). This is exactly what Mr. Long looked to do with his current IRAs. Instead of taking the tax hit on a distribution just to obtain financing through a traditional bank, he used the tax laws and available investment options in his favor. Using his self-directed IRA to purchase a first lien position on a note opportunity through Blink Lending would put Mr. Long’s retirement in a position to earn 9% interest over the course of a year. By using his self-directed Roth IRA and Health Savings account, the opportunity looks even better, considering profit made to those accounts become completely TAX FREE.
So, when we look back at this scenario from the airplane view, a borrower of private money at 10.99% (fully tax deductible to them as an individual over the term of the loan), who then invests with their self-directed retirement accounts to earn 9% interest (fully tax free if using a Roth, Roth 401k, HSA, or ESA), essentially reaches a net-zero interest on the money borrowed. Even though Mr. Long and his retirement account are legally considered different “entities,” Mr. Long will receive tax-free benefits through the IRAs distributions. And the balance between borrowed and earned interest rates for Mr. Long when all is said and done, and tax benefits factored in, is close to zero.
When using a creative strategy like this, private money becomes highly attractive. No traditional credit checks, less money out of pocket, less red tape, increased tax benefits, and the ability to buy more real estate than traditional banks allow for. These are exactly the things every real estate investor looks for. One might say, this is “thinking outside the box.” In contrast I would say, “This is simply realizing the box is bigger than you thought.” Happy investing!
Be sure to all the knowledgeable Blink Lending team for all your real estate investing needs in Houston.
