BIG Changes Coming to Holbrook Capital in 2025

Let’s talk briefly about one of the biggest changes we’re making to Holbrook Capital in 2025. If you go back to episode four, we discussed whether or not lenders should collect monthly payments. I’ll give a quick recap of what we were doing at the time, why I preferred not collecting payments, and the changes we’re making moving forward.

In episode four, I talked about the pros and cons of collecting monthly payments. In the lending industry, it’s very common to collect monthly payments—about 80-90% of the lenders I work with do. However, I’ve always preferred not to collect them. Not because they’re bad, but because I thought about what worked best for me as a borrower.

For about six or seven years, my business was focused almost exclusively on house flipping. During that time, I modeled our lending after the hard money lender we used, who didn’t collect monthly payments. This was incredibly helpful to us as borrowers.

Here’s how it worked: we’d apply for a loan, they’d underwrite it, and then they’d issue the loan with no monthly payments. Instead, the interest accrued and the points were wrapped into the loan, with everything paid off at the end. As a borrower, this was a huge relief. When managing multiple projects, I didn’t have to worry about coming up with cash for monthly payments.

As a borrower, this was a huge relief…I didn’t have to worry about coming up with cash for monthly payments.

For borrowers doing flips, it makes sense. If someone has enough cash, they’ll likely use their own funds instead of taking out a loan. Plus, when managing several projects at once, monthly interest payments can add up fast. For example, on a $400,000 renovation project, your monthly payment could be about $4,000. Multiply that by eight projects, and you’re paying around $40,000 per month—which can quickly strain your cash flow.

When we first got into lending three years ago, we adopted this same model because it worked well for us. But over time, I began noticing that most lenders at industry events were still collecting monthly payments. Initially, I didn’t think it was necessary for our business. It helped set clear expectations with investors and reduced managerial overhead, as we wouldn’t need to track monthly payments or accounting.

But as we move into 2025, we are transitioning to a monthly payment model. All loans issued starting January 1st will require monthly payments, while older loans will continue with the accrual method until they finish.

You might be wondering, why this change? It’s been a thoughtful decision. The biggest factor is that as a lender, we have the flexibility to make the rules. If borrowers don’t like the terms, they can go elsewhere. However, as the market has shifted, we’ve noticed loans sitting longer without payoffs. This has affected our ability to disburse interest to investors, and it’s starting to take a toll on the business.

What I realized is that we’ve been taking on all of the risk unnecessarily, while the borrowers get all the upside. For example, with the current model where interest accrues slowly, the longer the loan goes on, the higher the risk for us.

Yes, the property’s ARV (After Repair Value) may be going up, but we are still shouldering all the risk. When a borrower comes to us, they should be taking on the majority of the risk, not us. We want to ensure that both our capital and our investors’ capital are always protected, which is why we’re now transitioning to monthly payments.

We want to ensure that both our capital and our investors’ capital are always protected…

In the past, when the market was hotter, projects paid off more consistently. This led to more churn—loans would pay off, and new loans would be issued regularly. Investors and we received payments, and everything ran smoothly. But in the last three or four months, the pace has significantly slowed. Whether due to the holidays or market conditions (probably a combination of both), things have been much slower.

As a result, we’ve had to pull from our cash reserves to keep personal finances afloat. This business is essential for our livelihood, and not having regular paychecks for months has been tough. I realize many people live paycheck to paycheck, and after several months without one, it would be difficult for them as well.

I also had a conversation with a lender who’s been in the business for over 30 years. He shared something insightful: when a capital investor gives you $100,000 at 12% interest (about $1,000/month), the first month’s payout is a pleasant surprise. By the third month, the investor begins to depend on that income. By month four, they might have increased their standard of living—buying things like a new car, which brings a new car payment.

This change in lifestyle makes the investor dependent on the monthly income, meaning they can’t pull that $100,000 back easily because they rely on the cash flow to maintain their lifestyle. The lender said it becomes addictive, and they can no longer focus on the initial principle they invested. That really stuck with me. As we’re raising more capital for deals, it’s crucial that investors are satisfied with the service we offer, as we depend on that capital to issue loans to borrowers.

So, when the lender said it becomes addictive, it clicked. It was a shift in my mindset. Instead of just having one accrual payoff period, we’ll now implement monthly payments. This way, we can distribute to investors, take a yield spread, and receive more consistent paychecks.

Money now is better than money later. So, am I going back on my original stance? Not really. Businesses grow, evolve, and adapt over time. As our business continues to grow and learn, so does how we operate. Our approach is adjusting and changing.

Overall, I believe this will make for a much better operation. Plus, I’m not opposed to aligning with industry standards more. While being outside the box is great, I’m not sure I want to stay there forever.

Overall, I believe this will make for a much better operation. While being outside the box is great, I’m not sure I want to stay there forever.

When building out Lender, the software tool we use, it’s incredibly advantageous for me to design it the same way that most of our lenders will use it, particularly by collecting monthly payments. Here’s a quick recap of how this typically works:

Let’s say we close a loan on February 11th. The origination date is set to February 11th. At title, we’ll do a few things: we’ll net fund the loan, meaning for a simple loan of $100,000, we charge three points. So, we’ll wire $97,000 and move the $3,000 in points to our business operating account. This is our income.

On top of that, we will pre-collect prorated interest for the days in February, from the 11th to the 28th. I don’t have the exact dollar amount in mind right now, but this interest is prepaid because the borrower’s first payment will be due on April 1st.

In the mortgage industry, payments are made in arrears. So, interest accrues for the entire month of March, and the payment on April 1st covers that interest. In this scenario, the loan closes on February 11th, we collect points, fees (like underwriting or doc prep), and prepaid interest for the remaining days in February. The first monthly payment will come out on April 1st and cover the interest accrued in March.

Both the prepaid interest and the monthly payments are divided up and paid to capital investors or to us as a yield spread. Our method is slightly different because of our fund model. Individual payments aren’t always divided up in the same way.

For example, if you receive a $1,000 monthly payment, typically, you’d pay about 9% to investors ($900), while keeping the rest as a servicing fee. We handle it differently. All income goes into the fund, which is pooled. Then, we pay our investors their preferred return first, and whatever remains is kept by us.

Whether using the co-lending model or the fund model, it essentially works the same. The funds are pooled and paid out on a monthly basis, and I really like this model. It makes accounting simpler since I know we’re paying investors each month. Some investors reinvest their payments, and we keep whatever’s left over.

It makes accounting simpler since I know we’re paying investors each month.

So, moving forward in 2025, we are changing the way we do things. We may hate it, but I don’t think that will be the case. I’m both excited and anxious to see how this plays out. We’ve already done a couple of loans with the new monthly payer model, and I’m really liking the net funding model. I prefer getting paid when the loan closes, rather than wrapping points into the loan and receiving a lump sum later.

It’s nice to get big paychecks upfront. For instance, we had a project pay off yesterday, and our income from it was significant—around $15,000 even after paying out investors. That’s because interest accrues, and we get a large lump sum.

But moving forward, we’ll see how this model compares and how we feel about it. So, that’s it for this week’s episode.

I’m curious to hear your thoughts. Do you use monthly payers? Or do you have everything accrue and pay off at the end? If you ever need to reach me, you can email me at podcast@joinlender.com. I’d love to hear from our listeners and learn about your methods.

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