Why Some Hard Money Lenders Profit When Real Estate Investors Default

Dan McCarthy (00:00)
the one problem with that is that if things are delayed, we don’t want to take a house. I mean, there are plenty of investors out there that are hard money lenders that hope and pray and cross their fingers that they default and they can just get a house. Like, let’s be honest, there are plenty of investors that do that. And that’s not something that we want to do at all. Like again, we’re trying to grow with these borrowers. We’re trying to give them a good experience and not have to tell people that, hey, we gotta take the house. So it really is just about coming up with solutions

Joseph Crooms (02:03)
Hey everybody. Welcome to Investor Fuel Real Estate Pros Podcast. I got a— tremendous guest on today. I’m your host, Joseph Crooms. And today I’m joined by someone I’ve been looking forward to chatting with. His name is Dan. He’s going to explain who he is, what he does— who’s been making some serious moves in the industry. We spoke about something that he’s really concerned about, how to tie AI into his— personal business as at versus the loan. So he’s gonna talk about that. Dan, glad to have you here. I think our listeners are going to really take something away from you, your approach, especially when you talk about your challenges, your real-life experiences, and also your success. So— so let’s dive in. So first of all, for people who may not be familiar with your world, give us the short version. What’s your main focus these days, and what mark— and what market are you exactly into?

Dan McCarthy (03:11)
Absolutely. So I’m in Cleveland, Ohio. I’m in Northeast Ohio. So we have Cleveland, Akron, Canton, and then some obviously other other— Toledo, Youngstown. But we’re Northeast Ohio. I own a— a hard money lending company, private money lending company. And we’re really just specialized in a lot of fix and flips for borrowers as well as just buy and holds, especially in our market. We’re getting a lot of out-of-state— out-of-state investors coming in and buying up Section 8 housing. And, you know, we’re not focused on just Section 8 housing, but obviously if it underwrites or it’s a good deal, of course, whatever the client’s, you know, end goal is, you know, we’ll help them out with that. But yeah, I’m coming from a seventeen plus year background in— in the loan officer role for conventional mortgages. And I didn’t transition ’cause I still do that full-time, but I obviously built off of that about three and a half years ago into the private money space.

Joseph Crooms (04:16)
I love it. What caught my attention about what— about you was the way you— you’ve been able to contemplate about your business, but also come to an exact point where you say, “You know, I need to use AI as a loan officer.” So can you share something— what would be the advantage of doing something like that that you see?

Dan McCarthy (04:42)
Yeah, I mean, I— I think just— you know, I’m— I’ll age myself, but I’m forty-two, so I’m— I’m not that young kid, but I’m also not that— that old. I’m— I’m like that thirteen— that awkward thirteen-year-old again. But it’s almost out of curiosity for a lot of people, including myself, like how can it— I need to— I’d like to say that I can use it, but I need to know about it first. And like there’s so much stuff out there. I feel like I haven’t really, you know, dove into that like headfirst or, you know, jumped in two feet just yet. But from the hard money standpoint, I think AI would allow us to reach out to more investors. We don’t really need too many more borrowers. Of course, I think borrowers would come just from like on the DSCR side, of course— you know, because we’re asked about DSCR all the time about refinancing out or even purchasing using DSCRs. But I think AI is more of like a reaching tool for us. That would be something that I would like to know more about in terms of marketing our— our product on the hard money side and kind of going direct-to— direct-to-consumer that way. But also for investors. I mean, I do think I’m wanting to use AI more as a marketing tool to get funds as well as borrowers. And it is a numbers game, in my opinion. I’d love to hear, you know, any opinions from maybe some of the listeners that want to reach out— honestly, because I think we’re one community in the investing space and I need to learn more about it and how I can reach more borrowers and investors alike using AI because somebody’s way more smarter than me. Probably AI is more smarter than me, and I’m just staying in my lane. But I do need maybe like an accoutrement, an accent, you know, to— to my business. And I think AI would definitely help that.

Joseph Crooms (07:23)
Thank you for sharing that. DSCR— can you share what that is for me, a layperson, don’t know a DSCR? Tell us how that works in your job and real-life experience.

Dan McCarthy (07:37)
Yeah, I mean DS— DSCR’s Debt Service Coverage Ratio. It’s not a new product, but I do think it’s been talked about over the last two years more than it ever has. And it really allows investors to qualify for a property or refinance a property using— the, you know, not their income. It’s the income that’s coming from the actual asset itself, right? So, you know, if rent is $2,000 but your mortgage payment’s only $1,000, obviously that ratio is going to be used to underwrite the loan. And it’s just been a really big— it’s been a really big tool if somebody is not, say, self-employed or employed or they don’t want to use their personal credit or personal income to qualify for a loan.

Joseph Crooms (08:25)
So it sounds like it’s— it’s really an important ingredient. Tell me about your customers that come to you. How much education do you have to do? Or do you have a mixture of those that are educated, want to invest, have a problem investing? Talk to— about that. Talk to us about—

Dan McCarthy (08:42)
Yeah, as an investor or somebody that uses our— borrows our money. Okay. you know, somebody that borrows our money, it’s— it’s actually funny. Our biggest borrower knows nothing about lending and we’ve kinda educated him about it. but he is so— you know, he’s— he’s doing hundreds of wholesales a month. he’s doing probably two flips a month as well on top of that. And he doesn’t know a single thing about the lending side, so we have educated him a little bit, but I think it’s just more— they come to us, they trust us, they know that our product’s great. Like the one thing that our product does for the hard money is we don’t have any draws, right? So like it— it completely eliminates the draw process. but we also don’t have any monthly payments. So it’s all paid on the back end. So no draws, no monthly payments. Investors really like that just because it’s simple. There’s not a whole lot of hoops, they don’t have a whole lot of things to worry about until they just gotta worry about fixing up the house— or purchasing the house and then six months later just refinancing or selling. But that’s our biggest borrower. He doesn’t worry about any of that. But then our smallest borrowers, they’re more about the rates. They’re more about origination costs. You know, these are— there’s— my point is the biggest borrowers sometimes don’t really care about the— the small little details, but even the people that are the— the smallest, they care about that stuff and we just obviously have to tell and educate. But I’ve got everyone from somebody doing one flip at a time, maybe two, three flips a year, to somebody doing 36 flips a year. And the flips are typically just to end-users, not to— you know, to people that are buying for primary residence. And then most of the borrowers that are buying and holding are doing Section 8.

Joseph Crooms (11:18)
So talk to me about the Section 8 a little bit. how did y’all get into the Section 8 business or was it presented because of the market that you’re in?

Dan McCarthy (11:28)
Yeah, it was totally presented by the market that we’re in. You know, I— I tell the story sometimes. I told you off-camera we— I have twins, right? So I used to have a lot of rental property before I had kids. And COVID hit and it was a February, I’ll never forget it, it was February twenty twenty. Just— just about to start, right here in the US. And I had to go pick up rent and it was dark. There was a foot of snow on the ground. My wife and I had been in the house for, you know, three months. We hopped in the car, put the kids, newborns at that time, in the back seat, and we drove. And I swear to you, I picked up rent from a few houses. I walk out with five grand in cash. I’m a terrible landlord. If— if you’re one of my tenants, I am the greatest landlord in the world. But I— but I am the worst landlord in the world in terms of business, right? I have a heart. I’m not a slumlord. Not that there’s anything wrong with that— or there’s a lot wrong with that. Anyway, but I’m just a terrible landlord and I know that. And I was just doing it because the prices were right. I know what I was buying. I know the area. Like my knowledge of— of where I’m at is— is great. But we’re— we’re driving home and I got all this cash and I see the kids. It’s freezing, and how me and my wife looked at each other and we’re like, “What the hell are we doing?” Like, what am I doing? And I said, “You know what? I’m gonna change this.” And about six months goes by and I— I call this— this girl in Charleston, South Carolina, who has a— a huge lending company. And I didn’t know her. It was just a cold call referral from one of my buddies that was in her networking group. And she calls me back three minutes later. She’s probably given me a few hundred hours of her time for free and we become very close. She helped me start this entire thing, and I have everything in the world to give her. But that’s how I got into this thing. And I— I— I’m not even sure where I was going with that, but it’s just like we’re just growing and getting better all the time and pivoting and moving, you know, and I knew what I was good at and is the lending portion and getting solutions for people. And— but Section 8 just happened to come up because that’s what I was— I was purchasing homes that I didn’t— Section 8, that probably should have been Section 8. And I just had people coming into the market. All of our borrowers typically are actually two in California, one in Oregon, and then a few onesies-twosies all here in network that live here and work here. So it’s just— just where we’re at. Akron, Cleveland— lot of Section 8.

Joseph Crooms (14:29)
Let’s talk about Section 8 for a minute. What knowledge did you have to gain that you share with your lenders to sort of say, “Hey, these are something— if you’re gonna get some property, these are some things that you need to be aware of”? What would you say to me?

Dan McCarthy (14:45)
I would say talk to people that are Section 8 landlords. I think we were— we were looking for borrowers, you know, when we tell our borrowers to give us the story, you know, what’s your end game, right? And if you’re looking to rent it, are you looking to rent it Section 8 or not Section 8? And one of the reasons why we ask that is just because we just want to know if they have a plan or, you know, if they’ve already done a lot of research. And I would be willing to bet that all of our borrowers that actually do Section 8 are in Section 8 groups. They have lists. They’ve gone to CMHA, which is like the Section 8 area here, or, you know, company that takes care of Section 8 here in Cuyahoga County. And they have the lists of what’s needed. I think people that get into Section 8 have a— there’s more of a plan because in Section 8 you have to be qualified. You have to have a checklist done. You have to be on your P’s and Qs to— to be able to get Section 8 renters. Like I feel like Section 8 rent— or borrowers here are a lot more— it’s less of a side gig. Like this is their— this is their business and they’re— it’s a little bit more detailed-oriented and they have more of a plan. They’re not just flying off the seat of their pants thinking, “Well, I’m gonna buy this really awesome property and I hope I’m gonna make some money or I hope I’m gonna make, you know, a couple hundred dollars a door.” Yeah, like we ask him if it’s Section 8 or not. You know, “Hey, do you have the checklist? Do you have any other, you know, what’s it called? Like—” yeah, “Give me your portfolio of Section 8.” Most of these guys have a lot, a lot, maybe up sixty to a hundred doors for some of— but really like, “Do you have the checklist? Do you have a renter pool? Are you in some Section 8 groups? And how much research have you really done on the— on the Section 8 program?” because I’m a lender. I— I— I can’t tell you exactly, you know, the ins and outs of Section 8. That’s for the borrowers, but I do know that I am in the— in a market where Section 8 matters greatly. People need homes. And I— I even had one— one borrower tell me here locally, “Hey, especially in Cleveland, Ohio, it gets cold in the winter. And unfortunately a lot of people have kids and they don’t want to be homeless when it’s— when it’s zero degrees out here.” So they— every— every borrower that has had Section 8 here has actually had a pretty darn good experience using it. So don’t really ask too many questions to be quite honest with you. I’m— I just know I’m in a market that has a lot of it.

Joseph Crooms (18:10)
You know, Dan, when you said how you got started, you know, how you said, “I’m— I— I’m not really a good landlord, but you’re terrible.” Your— your heart is there even in the investment business. I— I— I— I picked that up right away. Thank you for sharing that with our audience. What’s been the— the key to keeping that— your machine running smooth?

Dan McCarthy (18:37)
I mean, it’s the same as on the loan officer side. It— you know, if they call me, I’m picking up. if I’m giving them updates on how much money we have at every given time, because we have a debt fund, right? So if somebody brings me a deal, it’s not, “Hey, I’m blasting it out to a bunch of investors. Hey, can somebody fund this?” It’s— it’s our money. It’s— it’s in a— it’s in an account. And the whole purpose of having a debt fund is having zero dollars, right? Like I hope I have zero dollars in my account, right? I— I need that money out there. so updating all of our borrowers on how much money we have, you know, weekly so that they— they know if we don’t have it, they might have to go somewhere else. And just kind of those— it’s just communication, right? They’re coming into town once a quarter typically, and one borrower, biggest borrower, comes in twice— twice a month, oddly enough, from California. And and it really is just like, “Let’s go grab coffee, let’s go grab dinner.” Like we are— we’re having like real relationships, and it’s not just surface-level relationships, like, “Hey, what’s your goal today, a year from now, five years from now, let’s grow.” And I think that telling people that I want to have a small borrower group where each borrower is doing a lot of business with us is gonna be a lot better for us because we can actually have those real relationships and they’re not just like, “Hey, I need money on this one time,” and like we’ll, you know, we’ll never, you know, talk to you again or, “I’ll go somewhere else.” You know, it’s— it’s like we’re helping each other out. And it really is just communication. Just— again, I don’t really have to do anything other than answer the phone and answer their texts and provide title companies with the right paperwork on time, early, and then keep everyone abreast of how much money we have, ’cause at the end of the day our borrowers don’t really care about anything else.

Joseph Crooms (20:39)
Now, every operator I know has a moment where things just get real— maybe a deal that went sideways or a time that they had to pivot fast. Would you mind sharing one of those moments with— with us, please?

Dan McCarthy (20:56)
I think there’s been a couple— I— I think there’s been a couple of those where, you know, our paperwork has gotten better from day one. It’s funny, when we got our attorney involved, he just laughed at our paperwork, right? And— and we were even laughing. I mean, we were r— we were even laughing about it— like, not that we didn’t care, we did, but like at the time when I did the first couple loans, you know, it was pretty elementary. You know, it went from maybe three pages to thirty pages, right? So I think the crap moments are— we’ve had a few of them where borrowers just aren’t gonna be on time. And we don’t have any monthly payments for a reason— for accounting purposes and for their purposes, like it’s just a really good deal not to have to worry about making monthly payments. It’s all paid on the back end. The one problem with that is that if things are delayed, we don’t want to take a house. I mean, there are plenty of investors out there that are hard money lenders that hope and pray and cross their fingers that they default and they can just get a house. Like, let’s be honest, there are plenty of investors that do that. And that’s not something that we want to do at all. Like again, we’re trying to grow with these borrowers. We’re trying to give them a good experience and not have to tell people that, “Hey, we gotta take the house.” So it really is just about coming up with solutions— the “Oh crap” moments that we’ve had are, “Hey, we can sell these houses, but we can’t pay the full amount that we owe you.” And those are the “Oh crap” moments where it’s like, “Okay, let’s— let’s talk as like real— like real human beings, let’s find some solutions.” Because it might be a lot or a little that we have to adjust in the payoff or, “Hey, we’re gonna adjust it to X so that we can close.” But just so you know, we gotta put, you know, a lien on something else or a lien on you. And those are just never conversations that we want to have. And I think it’s just more about like those are easier to do when you have a super good relationship with people. But those surface-level onesie-twosies are always really hard to tell people like, “Hey, we don’t want to take your house.” So we gotta figure something out. And if we can’t figure it out, or you’re not gonna be— you know, amicable, then we are gonna have to do something that maybe both of us don’t want to do. And I think, you know, just like a lot of investors, right, through COVID, everyone thinks that if you own investment property, you’re just rich. Right? Like I— right? I mean, that’s— “Hey, I’ve got five investment properties.” Nobody thinks, “Well, I got five mortgages. I have five insurance policies. I have taxes,” right? Like, I’ve got a lot of stuff going on. I’ve— I have families, right? so I don’t think people want to have those conversations with people, and we got stuff going on too, and we have other borrowers and we— sorry, like sometimes we just don’t want to do stuff, but we’ve never had to do it, thank God. But that all is back to the respect and relationships that we have with borrowers.

Joseph Crooms (24:24)
It’s the kind of stuff people don’t talk about enough and honestly it’s what separates folks who just dabble to the ones who stay in the game. Right. Let me ask you this. What are you focused on solving or scaling next, and what’s the next real goal for you?

Dan McCarthy (24:41)
I think the— not I think, I know. The next part of scaling would be to get more borrowers, get— get out there in a pay-to-play fashion, you know. Unfortunately, and I do say unfortunately, but you know, I’ve been fortunate enough to have family and friends really allow us to do a lot of loans. I mean, we’re doing 26 to 30 loans at a c— at a time. And that’s a lot for somebody that’s not, you know, again, compliant, or we don’t have an underwriting or processing team. Like, it’s just three of us. And the reality is, we— we want to get to that point. I don’t know if we want to be conglomerate, but at the end of the day, like, we are gonna want more money and I’m gonna have to get either SEC compliant, to, you know, have an offering. I’m gonna have to go out and talk to more people about our services and maybe kind of help that word of mouth going, because obviously if it’s word of mouth, it’s not really marketing or advertising. so I don’t know if I have to be compliant or not, but just being a little bit more educated on how I can either pay to advertise or pay to market, which we have not done. We don’t have any bills. Our accounting bill is the only bill that we have, which is a great feeling. But if we do want to take that next step, we’re just going to start having to pay for advertising, marketing, and getting out there. and if that has to be, you know, SEC compliance, then we’ll have to do that. So it’s just looking at our options and broadening our horizons a little bit, because I don’t know everything. So I’d love to broaden my— broaden my horizons and talk to people about that. But that is our next step.

Joseph Crooms (26:35)
Thank you for sharing. You— you— you— you covered quite a few things on the— the— the SWOT that we spoke about and they’re in place. The next move can either compound things or create chaos depending on how you play. Now I know a lot of people listening are either early in their journey or looking to level off, and I think they’ll benefit from hearing this. When it comes to building relationships— and you spoke a lot about that— and I— and— and you know, i— that’s just something you can’t fake and growing in. What’s the biggest difference for you?

Dan McCarthy (27:10)
big— I mean, the biggest— the differentiator for me is— was learned on my— on my— my other care— my loan officer position. I— I am lucky enough to be self-generating, and I say lucky even though I created my own luck, I guess, in that— in that aspect, but you know, I talk to a lot of new loan officers and they are like, “Okay, what’s the one thing?” Like it’s a big silver bullet, right? Like, “What’s that one thing that you did?” And it’s like, “Well, there isn’t one thing, but I think the biggest thing is—” I know you don’t want to do it, nobody wants to do it: you have to give people your cell phone. I know we have direct lines at work. This is not a nine-to-five. It’s just not— it’s just not a nine-to-five. And if you want it badly enough, you’re gonna not make it a nine-to-five. But if I get a call on a Sunday night at nine o’clock, I’m answering. If I get a call at seven o’clock in the morning, I’m probably answering, or I’m, you know, texting you like, “Hey, I’ll call you right back.” If I get an email— I don’t have email on my phone, by the way. I don’t have email on my phone. I don’t have all like our work technology on my phone, and people always ask me, “How the hell do you not have any of that, but like work so efficiently?” And it’s like, “Well, I work from home, of course.” And when I come into the office, when I leave, or when I pop my head in— my phone calls, my emails, I am like, if I’m sitting here, I am answering those. Those are paramount, number one. And borrowers, realtors, investors— I don’t know, people trying to buy a primary residence— that’s all they care about. Is, “I just need somebody depend on. I just need somebody that’s real with me and dependable and can answer their phone.” And that has absolutely served me well, you know, for 17 plus years on that side. But I think it’s also served me a lot better on the hard money because, you know, this is their livelihood, right? Investing to our borrowers. We— we’re lucky enough to have borrowers that are doing this full-time for their livelihood. And those onesies-twosies aren’t, but they’re trying, right? At least they’re not on pause, right? Like it’s like, you know, me and my wife were talking, like I— I just feel like when I owned all these— all these rentals, I was like stuck on pause. And I knew I wanted something more and I just needed to press play and just take some action. And I don’t know. It’s— it-— it’s really just about being real and answering your phone. That’s— that’s it. Don’t be scared. I mean, right? Like, don’t be scared.

Joseph Crooms (30:04)
Hmm. And typical you said that because I was gonna say you can’t fake that. Relationships are everything in this space. Alright, before we wrap— we wrap up, if someone wanted to reach out to you, connect with you, maybe collaborate or learn more about what you’re doing, what’s the best way to reach you and— and repeat it, say it once and repeat it once again. Run it, tell us how to do it.

Dan McCarthy (30:30)
Yeah, you just— you can text me, call me. I will— I will— you could— well, I don’t have a pager, but I guess if it was the nineties you could just page me. But honestly, you call— call or text me 440-479-8384, and again, 440-479-8384. And like my mentor in— in Charleston was telling me, she didn’t have to answer the phone. And she said, “You know what? But if somebody wants to call you and ask you a bunch of questions and take time out of your day to, you know, call you, I— you’re gonna pay— you’re gonna pay somebody else just like I did you, right?” So I’ll be happy to talk to anyone on the technology side of this— I do think it’s a huge competitive advantage. I’m just happy to help anyone. I just know I’m in a market that has a lot of it, people need homes. So don’t really ask too many questions to be quite honest with you. I’m— I just know I’m in a market that has a lot of it.

Joseph Crooms (31:23)
Then I— I’m gonna tell you, somebody was trying to find their pen, trying to write it down. I know you didn’t, but give it one more time. Give me your full name, tell what you are, and tell how to reach you.

Dan McCarthy (31:35)
Dan McCarthy, Danimal. Everyone here in Cleveland calls me Danimal. Dan McCarthy, 440-479-8384.

Joseph Crooms (31:48)
Very much. You got it. Listen, I appreciate your time, Dan, your story, your perspective. We need more people in space that are doing it right. Wayne, thanks for— again for being here. And as for those tuning in, I— I— I— I know they got value very much from you, and they should subscribe to us. We got some more conversation coming with operators, just like Dan, who— who are out there building real businesses. And we’ll see you on the next episode, which is called Investor Fuel Real Estate Pros Podcast. And today, our guest’s name was Dan McCarthy. Thank you, Dan.