Private Money Wins Deals: How Real Estate Investors Use Private Lending to Close Faster

Zach Richards (00:00)
Yeah, the biggest one is that somebody’s willing to pay twelve percent to a private lender and not six percent from a bank, they must be a risky borrower that has bad credit. And that could not be further from the truth. People that borrow private money understand that they’re running a business and time is money. Like I kind of said earlier, if they’re going to work with a bank that’s 30 or 45 days to close, their offers are not competitive, but if they work with a private lender that can close a deal in a week or two…

Cody Crabb (02:03)
Welcome back to the Real Estate Pros Podcast by Investor Fuel. I’m your host, Cody Crabb, and today I’ve got Zach Richards with me. Zach is one of the owners of REI Capital Guys, a private lending company funding real estate investors across multiple states. Today we’re talking about how private lending really works, what newer investors often get wrong, and how to build better relationships with your lenders. Zach, thanks so much for being here today.

Zach Richards (02:25)
Thanks for having me, Cody. I’m really excited about it.

Cody Crabb (02:27)
So you mentioned before we started that sometimes investors, when they’re starting out, kind of have a relationship with their private lenders that is very nervous. They are nervous to approach them, they don’t know what to do, and they may have some misconceptions. What are some of the biggest misconceptions you see, or the biggest mistakes people make in those initial first conversations?

Zach Richards (02:54)
Yeah, I think the biggest mistake people make by far is treating it as if it’s a transactional relationship. A lot of the time, people act like they’re buying a car, right? Where you negotiate back and forth, you know you’re never going to see the salesman again, so you get the best price you can, and then that’s it. But when you’re working with a private lender, I mean, there’s a lot of trust involved on both sides, right? The lender’s got to know that you, as a borrower, can perform. But the borrower also needs to trust that the lender’s going to be able to close on time, fund the deal, and everything like that. So it always works best—the most successful real estate investors I’ve seen—when they treat it like a real relationship. Yeah, at first there are questions you got to ask to get the feel for each other and how things work. For example, a lot of times people just ask, “What are your rates?” They don’t know what else to ask. They don’t ask, “Well, how long does it take to close? How long does it take to process a rehab draw?” And so all the other things like that are really important. When you work on a loan, you may close that loan in two weeks or so, right? But then you’ve got six or nine months where your loan is outstanding on the flip. So you’ve gotta think of the whole picture when you’re going to work with a lender.

Cody Crabb (04:02)
Yeah, I think you touched on something important there, which is if you’re trying to get in there with someone that really knows what they’re talking about—I mean, if you’ve ever tried to talk to like a car person about car stuff, it becomes very clear that they know more than you, and with just a couple of questions, they can sniff out that you’re maybe not as knowledgeable. Not saying you have to be at the same level of knowledge as them, but I think it goes to show like when you’ve done your homework, that can really make a big difference in the amount of trust that they’re willing to put in you.

Zach Richards (04:38)
Yeah, it definitely does. It definitely does. And I find that it works both ways, too. I’ve had people that have brought deals to me where the numbers just don’t work. And I say, “Guys, the only person that’s gonna make any money on this deal is me. I don’t wanna lend on this deal because I don’t think it’s a good deal for you.” And I’ve had people thank me for talking them out of it.

Cody Crabb (04:58)
Yeah, yeah. And I think it’s the old “trust your”—not to bring it to cars again—but it’s the old “trust your mechanic” problem. If I believe my mechanic is a good dude that’s not gonna scam me, and I really believe in that relationship, and he does the same thing—he doesn’t want to push me or my business away—I’m gonna do everything I can to go to him every time, because he’ll tell me if it’s just, “Nah, there’s just a bolt we had to tighten, it’s fine, don’t worry about it.”

Zach Richards (05:25)
Exactly.

Cody Crabb (05:27)
So for those that may not be familiar with your world, give us the quick version. What does REI Capital Guys do, and how did you end up in private lending in the first place?

Zach Richards (06:25)
Okay, yeah, let me answer the second question first. So my original background was in software development. I worked as a software engineer for about 10 years. And then back in 2020, I was honestly—I got bored. I was tired of doing that, working from home, in the middle of the pandemic. I always wanted to be in real estate investing, but I didn’t like the idea of managing properties and tenants and all that. Meanwhile, we lived in a duplex that we owned and we had an absolute nightmare of a tenant that lived above us that we ended up needing to evict. So that was going on, and I was tired of that. Long story short, I found private lending, did a couple of loans with my own money—small loans, like a hundred thousand dollars. One paid off, another one paid off. And then from there, friends and family said, “Hey, I’ve got some money sitting around in a savings account, or I’ve got an old 401(k) that’s in the stock market that I’m not happy with. Can you lend it out for me?” So I figured out how to do all that legally, worked with attorneys and everything. And then that scaled up and led to REI Capital Guys, where we lend our own money, friends and family’s money, and we’ve got an investor community. It’s private money. We’re not brokering loans to Wall Street or selling our loans. The capital that we lend is capital that we control, and we lend it to real estate investors.

Cody Crabb (07:43)
Yeah, I think that’s pretty unique, I would say. I haven’t run into a whole ton of those situations where you kind of keep it close to the vest, much less people that kind of fell into it by accident. It kind of sounds like you started this like, “Huh, this seems like a good idea,” and it just happened to work out. So that’s cool. Yeah, and I think a lot of people can relate to that—the “I don’t want to deal with the tenants” thing, but wanting to get involved in real estate. People can see the power of it, but maybe don’t want to deal with all the headaches that they see.

Zach Richards (08:18)
Yes. That is by far the most common thing that we see happen. People are like, “I want to invest in real estate, but I don’t want the headaches.” Yeah, neither do I.

Cody Crabb (08:27)
Yeah, to the point where you did and were like, “Nope, I don’t want to deal with that.” So when someone comes to you, who are the typical people that come to you from both sides—investors and also people that are trying to borrow?

Zach Richards (08:31)
Yep. “I’m done with this.” So on the borrower side first, it’s a lot of people that flip properties. We’ve got people that flip a couple houses a year and they use us when they’re doing it. We’ve got people that do it at a much higher scale. I mean, one of our borrowers—or a few of them really, but one in particular—owns multiple tens of millions of dollars worth of real estate, and we do loans with him all the time. So we’ve got all scales on the borrower side. And then on the investor side, we’ve got a bunch of different avatars, so to speak, but most commonly it’s somebody that was a W-2 earner or maybe they owned their own small business and they’re getting closer to retirement. Maybe they’re in their late 40s or 50s and they can’t stomach the volatility of the stock market anymore. They know that if it crashes 50% and they’re going to retire in two years, they’re kind of stuck. So a lot of those people have said, “Well, let me do private lending where I can live off my interest and not touch my principal.” That has been a very important aspect for people and why they like to place capital with us.

Cody Crabb (09:52)
So you mentioned you started with your own money and then you slowly kind of let people get into lending theirs, too. At what point did you realize, “This is not just a thing I do on the side—this is actually going somewhere and I’m actually starting to really do this”?

Zach Richards (10:09)
I think it really happened when a former coworker was one of my first investors and he did a loan with me and it worked out well. And then he referred his brother to me, and his brother wanted to place some capital. Once it started growing like that, I said, “All right, I might actually have something here, and let me see if other people are interested.”

Cody Crabb (11:08)
Yeah. So for someone listening who’s never used a private lender, what does that process typically look like from that first conversation until the deal is funded?

Zach Richards (11:17)
Yeah, so all private lenders are different, but I think what we do is relatively typical. A lot of private lenders will say, “I only care about the property. I don’t care about the borrower. I got my loans at sixty-five percent of ARV and that’s it.” We take a different approach where, yeah, we care about the value of the property a lot, but we also care about the person that we lend to because, yeah, we can foreclose and get the property and our money back, but that is always the absolute last resort. So we like to talk to the people that we’re lending to. What is their experience? What types of deals do they do? Have they ever had a deal go bad where they’ve lost money? Anybody that’s been doing flipping for any appreciable amount of time will have a deal that they’ve lost money on, and that’s okay. We just want to hear what they did and how they handled it. So we like to get an idea of what it’s like working with them. Cause like I said earlier, we’re gonna be partners with them on this project for six to nine months. It’s not just a one and done. So I like to get a feel for them, and then we look at the property: what’s the purchase contract, photos, a scope of work, how are they doing the repairs, and work out a draw schedule with them. We try to do it as collaboratively as possible, getting all the details for the deal together, and then from there we can proceed to doing the paperwork and getting the transaction closed.

Cody Crabb (12:37)
Yeah, I think you bring up a great point there. What are some of the things that you’re looking for in these initial conversations that tell you, “This is somebody I’d like to work with or I’d be happy to lend to,” versus, on the other side, maybe some red flags or someone you’d be a little hesitant about?

Zach Richards (12:56)
Yeah, I think the biggest red flag is if somebody’s not truthful. If somebody tells us they did all these flips, all right, give me the addresses and I’m gonna check. I’m gonna look in the county records. If I see that you just grabbed properties from Zillow and sent them off to me, there’s no way we’re working together. So that’s one red flag. And then another red flag is a lot of times people say if a property didn’t go well or a project didn’t go well, that none of it was their fault—they had all these things happen and none of it was their fault. You like to see people take some ownership for what happened when a project didn’t go well. That’s fine and expected.

Cody Crabb (13:40)
And so what else are you trying to learn about the borrower in that first meeting? Obviously, there’s stuff like credit, but what other threads are you pulling when you’re meeting them?

Zach Richards (13:50)
Yeah, credit is one thing, but it’s about experience. What other projects have they done? If they’ve only flipped 500-square-foot condos before, and now the next flip they want to do is a ground-up hundred-unit multifamily project, okay, that’s not really a project that is in line with your experience. So it’s really trying to get a sense of where they are, but then also—a lot of our borrowers we’ve worked with for years—what are their real estate goals? Where are they trying to take their business? Are they just content doing a few flips a year, or do they want to do twenty or thirty? It depends.

Cody Crabb (14:24)
So give me—obviously this is not a real number—but give me just a percentage split: what percentage comes down to the numbers versus the actual person sitting across from you? What percentage is the actual person, if the numbers all add up, that would be enough to knock it out of consideration?

Zach Richards (14:45)
Yeah, I’m trying to think. It’s probably fifty-fifty that we focus on the person and the property. Yeah, I would say. I’ve never actually been asked that question, but I think that’s what I would say.

Cody Crabb (14:50)
Really? Well, it’s hard to quantify that, but you know what I mean. I think that number is higher than I would have expected. It sounds like you can’t really—the first thing you said when we started talking was that relationships are the most important thing, and that certainly reflects that. If there’s a slightly riskier deal, but you just really get a good feeling from somebody and they really impress you with what they’ve done, that can carry a lot of weight, it sounds like.

Zach Richards (16:12)
Definitely. Definitely.

Cody Crabb (16:14)
So you mentioned that you care about the borrower and not just the property. What kinds of things do you bring up in one of those meetings because you’re trying to give someone a heads-up?

Zach Richards (16:34)
Yeah, I run all the numbers from our side to make sure that we’re protected, but I also try to do some basic math on how much profit they’re probably gonna make on it. A lot of people just say, “Okay, take the ARV minus the repairs minus the purchase price, and that’s my profit.” Well, all right, you’ve got closing costs, holding costs, and any overages in the budget. So I like to show them, “Hey, here’s my math. Here’s what I think you’re gonna make. If I’m wrong, or if you disagree, let me hear it. Tell me what you think.” And then also I like to ask the borrowers to give me their own comps on the flip, because, yeah, I’m gonna run my own, but I also wanna see where their head is at. If their comps are wildly different, it tells me one, it could be that they’re trying to inflate their comps, which definitely can happen, but it also might tell me, “Okay, they may not really understand what the property is worth.” But at the same time, maybe they’ve got tons of construction experience and not much on the real estate side. So I try to work with them together on a full understanding of their project.

Cody Crabb (17:51)
Yeah, so this has been really informative. Thank you so much for giving us some insight on this. You’ve obviously been doing this for a while now. How has private lending changed over the last little while, and what continues to change in the landscape?

Zach Richards (18:08)
Yeah, I think what’s interesting, what’s probably changed the most, is the relationship between the hard money lenders and the private lenders. Back in 2020 and 2021, everybody remembers when rates were really low, right? Hard money lenders were able to get really cheap money from Wall Street and then offer funding for flips in the six or seven percent range. That made it worth it for a lot of people to jump through all the hoops that the hard money lenders put people through, because they’ve got their capital requirements. But then over the last few years, the difference in rates between hard money lenders and private lenders has really tightened. So the hoops are not as worth it to jump through, if that makes sense. We’ve had a lot of people want to start working with us saying, “Yeah, you guys are a little bit more expensive, but you’re not going to ask me for tax returns. You’re not going to want a formal appraisal on the property, and it’s just worth it. If we can close in two weeks, we’re gonna make this much more money than if we had to wait thirty days.” It just comes down to being a business decision. So I think the relationship between hard money lenders and private lenders in terms of costs and process has really gotten tighter.

Cody Crabb (19:21)
Do you think that the industry is trending a little more towards private lending in any way? Because I feel like this is a topic I hear brought up more than it used to be.

Zach Richards (19:32)
I don’t know, that’s a great question. I think that maybe more people are wising up to the fact that they can become private lenders and lend their own money. Not everybody has to do it as a business. You can just—I know people that have a million or so in a 401(k) that they just lend out. I think people are figuring out that they can do it, and that’s become more prevalent. I just hope that people really understand what they need to do to protect themselves and everything.

Cody Crabb (20:01)
So for someone that thinks this sounds interesting—someone that doesn’t necessarily want to do a full business out of it, but is interested in learning about how this could possibly work for them—what would you recommend as far as the first steps to get started?

Zach Richards (20:18)
Yeah, and honestly, and I know I’m not just saying this to try to scare people off, but you could do what I did. I spent about six months trying to understand how this all worked. I went into my local market and I talked to other real estate investors, other lenders, attorneys that do documents for private lenders, and also title companies that work with private lenders. I just wanted to get a full picture of, “Okay, you hand somebody a bunch of money, how do you protect yourself?” So that’s something that I did, and like I said, talking to other lenders is very helpful. If somebody’s on the fence about it, I’d be happy to talk to them and let them know my experience and kind of what we did to make sure that we actually had something here where we’d get our money back at the end of the day when we did a loan.

Cody Crabb (21:07)
Yeah, I suppose that’s the entire point, right? If that part doesn’t work out, then it’s not exactly worth it in that sense. As far as the misconceptions in private money, I’d love to hear if you have a couple of things that you hear all the time or things that come up often as misconceptions about private money that you’d love to clear up. If you just wished everybody could understand this before coming into your office, what would that be?

Zach Richards (21:41)
Yeah, the biggest one is that if somebody’s willing to pay twelve percent to a private lender and not six percent from a bank, they must be a risky borrower that has bad credit. That could not be further from the truth. People that borrow private money understand that they’re running a business and time is money. Like I kind of said earlier, if they’re going to work with a bank that takes 30 or 45 days to close, their offers are not competitive. But if they work with a private lender that can close a deal in a week or two, they can make an offer—essentially a cash offer—to the seller of the property, and then they know that they can close, they’ll be done quicker, and then they’ll make their money quicker. So the misconception that these must be risky people is just flat-out wrong. And then oftentimes, too, banks can’t even do these kinds of loans on a property that needs a lot of work and is uninhabitable. You cannot get a mortgage from Bank of America to buy a property like that. That’s why private lenders exist in the first place.

Cody Crabb (22:44)
Yeah, I actually just talked to a lender yesterday who said, “I’m probably gonna get kicked off the internet for this, but I don’t think interest rates matter at all. You can refinance—it’s just another business expense, right?” So taking that into account, that makes perfect sense why you’d say that. Because you could pay a little more interest now, refinance later, and you’ve got the loan processed at the speed that you need it to.

Zach Richards (23:10)
Exactly. Think about a twelve percent loan. Okay, that’s twelve percent in a whole year, but if you do your flip in six months, that’s six percent, right? It’s a line item in your budget. It’s the same as replacing the cabinets or tiling the bathroom.

Cody Crabb (23:23)
Yeah, exactly. And it may make the difference between you being able to close it or not, because some of these move so quickly that every second counts. So yeah, I think this has helped me understand a little better why people would lean toward this as an option. From an outside perspective, I could see why people would be nervous about it or think it’s riskier somehow, but when you really dig into it, it’s certainly not less secure than going with one of these big institutions because you’re trying to protect yourself as well. So it’s a mutually beneficial transaction for it to all go well. Before I let you go, if someone wants to learn more about REI Capital Guys or connect with you directly, what’s the best place that they can do that?

Zach Richards (24:07)
Yep, that’s exactly right. Sure, so there’s really two. You can go to our website, reicapitalguys.com. There’s information there, and if you want to reach out to us, there’s a contact form right on there. Also, you can find me on Facebook—I’m very active on social media—and it’s under Zachary Richards. If we can link to that in the show notes or whatever, that would be perfect. But those are the best ways for people to reach out.

Cody Crabb (24:40)
Fantastic. Well, thanks again for all this info. I think our audience is gonna walk away understanding private money a little better—I certainly did. So thank you for that. And audience, thank you for giving us some of your time as well. We’ll see you on the next episode. Zach, take care. Have a good one.

Zach Richards (24:55)
Hey, thanks for having me on.