Private Lending Deals & Becoming the Bank with Tyrone Shum
Lending deals are especially attractive to investors who are looking into passive alternative real estate strategies.
– the concept of private lending,
– why many investors don’t venture into lending deals,
– my experience with private lending deals,
– the downside of private lending, and
– the benefits of using alternative strategies.
00:00:00 – Intro
00:01:46 – The Concept of Private Lending
00:02:54 – Why Not Many Investors do Private Lending Deals
00:04:43 – Lending with the Bank
00:08:32 – Salena’s Experience with Private Lending Deals
00:13:21 – Primary Lender Vs Secondary Lender
00:16:19 – Salena’s Private Lending Deals from the Past
00:18:41 – The Downside of Private Lending
00:20:03 – The Benefits of Using Alternative Strategies
00:22:54 – Salena’s Experience with Local Lending Deals
00:27:33 – Final Thoughts
00:28:41 – Outro
Q: Can you tell us more about the private lending strategy and your experience with it?
- I love private lending because it’s a strategy that allows you to effectively become the bank.
- Banks are one of the parties in property transactions that just don’t lose because they have the highest level of control, and they put the least amount of time into the deal.
- And if the deal doesn’t go favourably, they still get paid no matter what.
- So, lending deals are one of the most powerful strategies that you can employ – although they’re not as common in Australia as they are overseas.
- It’s pretty cool to be the bank instead of being the person who’s running the deal and trying to make it work.
Q: Why do you think that there aren’t more investors investing in lending deals?
- It probably lends itself to why there are many other strategies that the average investor doesn’t undertake.
- We’ve become very rigid around how we transact with property because we are concerned about people being taken advantage of or title deeds not being transferred properly.
- Our system has evolved in Australia in that there is literally one way to transfer the title of ownership, and it has to be registered. The advantage of that is that it’s less likely that you’re going to have someone take advantage of you.
- But, the downside is that all the associated industries, such as the banks and other lenders, have had to develop their own systems and how they work around that method of transacting.
- If you contrast that to other countries where you can move property ownership around and trade debt as an asset, it’s a much more commonplace for investors to take advantage of lending deals.
- So, it’s a double-edged sword. On the one hand, the way our system is structured offers a lot of protection to the average investor, but on the other hand, it makes the system very rigid – you have to figure out how to navigate the current system to have the strategy be effective over here. So that’s probably why there’s not much of it.
Q: What are your thoughts on lending from banks?
- Working with the banks is challenging even if you have a lot of capital, equity and income – they still make you jump through many hoops before they lend you a cent.
- But the overarching lesson from all of that is that the banks don’t lose.
- So, if you want to become a lender or if you want to act as a lender, you need to think like a bank – you need to dot your I’s and cross all of your T’s. And that’s a difficult transition for a lot of people to make.
- However, there’s a subtle shift happening in the local markets where people like yourself see an opportunity to be the bank and take advantage of the opportunities that the traditional banks aren’t nimble enough to take advantage of.
Q: What has your experience been like with the private lending space?
- I’ve done lots of different kinds of lending deals, but I’ve not been the one out there finding the deals.
- I love this strategy because you have zero obligations to maintain the property and it’s generally a “set and forget” sort of strategy. You do your due diligence up front, you put the paperwork in place, and then you just collect the repayments each month and work on getting your principal back at the end of the deal.
- I tend to lean more into the shorter team deals, but as my confidence in the space has grown, I’ve been open to a lot more longer deals.
- People seek finance outside of traditional lending because they don’t tick all the boxes that a traditional lender is looking for. It doesn’t make them a bad person or a bad deal; it just means that they fall outside traditional lending.
- So, if you can find a way to vet those people and do good due diligence on them, they’re often prepared to pay a premium. And with the right security and support, they can be an incredibly lucrative deal.
- The banks are hamstrung to a degree because the central banking system regulates them, and they can’t raise their rates above a certain level. So, because they can’t be more than a couple of points above the central bank’s rates, they try and make money off their customers through other methods like charging fees and penalties.
- Whereas it’s much more transparent in the private lending space because you want to be making a premium as it’s a riskier proposition.
- The banks can afford to be picky and conservative about who and how they lend because they’re not charging as much. Whereas we’re taking potentially more risk on some of these lending deals, and you want to be compensated for that.
Q: What are your thoughts on filling in the gap that traditional lenders can’t? For example, developers can only get 50% to 60% of the funding they need from the bank, and they’re short 40% to complete the rest of the development.
- The price of real estate in Australia is very so; if you’re looking at a $1 million development of a $2 million property, the lending gap would be around $100,000 to $400,000.
- But, the sorts of deals that I’ve done in the lending space have been much smaller than that – starting from as little as $20,000 up to, on average, $80,000 to $100,000.
- So, the lending deals are much smaller. But, the mechanics and principles are similar.
- It’s important to mention to people that there are two ways to address a lending deal.
- One is that you’re the prime lender. In other words, you hold the title of the property, and you’re in the first lien position. So, if something goes wrong, you can swoop in and take that property.
- The other type of lending is where you are in the second position. So, there might be a bank or another lender ahead of you, and you’re second in line if something goes wrong.
- One of the crucial things to consider if you’re thinking about being a lender is the equity cushion in the deal – are you going to get paid if things go south?
- So beyond doing your due diligence, you need to make sure you’re comfortable with where you sit in the pecking order.
Q: What kind of lending deals have you invested in?
- If something goes wrong on an Australian deal, you have to go through the court system, and it’s expensive. Whereas the deals that I invest in in the United States, it’s a more commonly understood arena – so you don’t need to go to court – you just take the property.
- The paperwork is pretty black and white, and it’s basically comparable to evicting a tenant. So, it’s not expensive, and it’s not time consuming.
- If I have small amounts of capital, I’ll happily go into a lending deal for $20,000 where I’m in the second position. And overall, the loan to value ratio might be 60%.
- It’s important to recognise that the 60% is not on completion; it exists today. One of the things that I’ve seen some people do is bring me deals where they’re showing me what the equity cushion will be when the deal is finished – but there’s no equity cushion now – you want to be careful of that.
- The other lending deals that I like are under five years, but I call that a longer-term lending deal. The shorter-term deals are anything under two years, and that’s where you’re in the first position.
- With the short term deals where I’m in the first position, I’m getting well over the legislative rate. If the typical rate is 3% or 4%, I’m getting around 8% to 15% per annum. And if something goes wrong, I can just walk in and take the property.
- Lending deals are powerful because they give you a level of leverage and control that is hard to match.
- But a downside that is worth mentioning is that if you’re going into a long-term lending deal, where you have a 30-year mortgage structure at 8% and then you run into an environment with high inflation, your repayments don’t change – you’re still only going to get that 8%.
- So, lending deals are great and can be lucrative, but you shouldn’t necessarily put all your eggs in that basket because it’s not really a hedge against inflation.
- If inflation kicks in, you still get paid the negotiated amount. Whereas, on the other side of the table, when you hold real property, if inflation goes up, then rents should theoretically go up too.
- It’s probably a minor pitfall, but it’s something you need to understand.
Q: So, this kind of strategy is good for generating an extra 10% or 15% to use and pay down your portfolio?
- Yeah. My thinking around the alternative investment strategies is that it’s not intended to replace traditional investing – it’s a bolt-on.
- If investors want to build meaningful wealth where they have the freedom to choose what they do with their lives, then alternative investing helps speed things up.
- Most of the people I work with, who are high net-worth business owners, are still 25 to 30 years away from hitting their goals – even though they’re playing by the property investing playbook.
- The alternative sphere allows them to access a more liquid, lucrative sector of the market and just speeds things up.
- It allows you to increase the velocity of your money, get it back and reuse it – whether it’s for lifestyle or paying down debt.
Q: You’ve mentioned that you’ve invested in the US. Have you also done any local lending deals within Australia?
- Well, I’ve certainly been looking at some of your deals, Tyrone, because I find those super interesting.
- My experience with lending deals and where I learnt the fundamentals was in another market. But, I’ve always been aware that it does exist here in Australia.
- I’ve watched how friends of mine, who are professional mezzanine fund lenders, have done it, and you definitely have to be a certain kind of person to run it as a full-time business.
- I think what I appreciate about what you’re trying to do, Tyrone is that you are trying to facilitate the deals in a new sector of the market for Australians.
- You definitely can find some diamonds out there, but the challenge for most Australians and New Zealanders is that they have to work super hard to find those kinds of deals.
- The advantage of sitting on the lending side of the fence is you’re not scrambling and fighting amongst other people to get those deals – you can sit back and wait for the diamonds to come to you.
If you’re interested in understanding how to create wealth through alternative strategies, please check out my programs, where I help you catapult your investment income and blend strategies to shave decades off your timeline to financial freedom.
Or, you’re welcome to get in touch today, book a call with me, and I would be happy to talk you through it – no obligation!
Tyrone and I are back at unpacking...
In this week’s episode, I unpack...
Tyrone Shum of Property Investory...
In this week’s episode, I unpack the...