How to Build a Lending Business and Say Goodbye to the 9-to-5 with Loren Wornette

Bryce

Today, I’m very excited because we have Mr. Loren Warnette. Before we get started, I have to say: is this not the most amazing community you’ve ever been a part of? Every lender I talk to is so willing to chat, hop on a call, and share what’s working for them wether it is a fund or some other method they are using. I don’t know about you, but when I was more involved in rentals and flipping, there was often a slimy aspect to it. Of course, there are good people out there too, but there are also gurus and those just selling courses. However, I haven’t found that in the lending space. I love chatting with people and seeing what’s going on; I think this community is fantastic.

Loren

Yeah, I agree! The reason many of us got to where we are is by being open to different perspectives and willing to learn. That eagerness to learn makes for great conversations.

Bryce

Absolutely! It creates a really cool group of people. So, let’s dive in. You and I met not long ago in a similar coaching mastermind group. I remember reading through the live chat and noticing you were discussing lending in real estate. I thought, “I wonder if he’s involved in that.” We connected right away, and within that first week, you were eager to hop on a call and chat.

I know you a bit better than the rest of the audience, but can you give us a high-level overview? Share your elevator pitch.

Loren

Sure! I’m Loren Warnette, and I live in North Carolina. I own and operate REITransactional, which provides short-term lending for real estate developers and flippers. Before this, I built an 86-unit rental portfolio in about three years and did quite a bit of flipping as well. I realized I was making as much, if not more, than our lenders while doing a lot more work. So, I started the lending business about a year and a half ago, initially focusing on wholesalers and double closings, then added gap loans at the end of last year. This year, we’ve lent out just under $2 million, with another three-quarters of a million expected to go out in the next three weeks. We’re experiencing a lot of demand and working with some of the best, most loyal investors. Over the past three years, I’ve borrowed about $10 million from them, providing considerable returns.

Bryce

That’s amazing! We have a lot to unpack here. I know you recently quit your W-2 job—congratulations, that’s exciting! I was surprised to learn about your background in crop and soil science. It’s not common for someone from that field to move into real estate; usually, it’s tech bros, engineers, or finance guys. How did you transition from plant and soil science to real estate investing? Was it out of interest, desperation, or something else?

Loren

I’ve gone through a few shifts in my career driven by an insatiable desire to learn new things. My interest in real estate arose from wanting to improve my family’s situation. When COVID hit in 2020, we had a small baby and two young children. I didn’t want to be stuck in a nine-to-five job, asking for time off. We explored several paths, including an Amazon FBA business for about a year, but I eventually realized real estate was the best opportunity for achieving financial freedom. I never thought of myself as a “real estate guy”—I saw real estate as a means to an end. Before this, I was a junior partner in a consulting firm and then worked in sales for a large corporation for about ten years. I didn’t enjoy working for large corporations, which is why I recently left. Real estate has always been a vehicle for me, but my primary interest lies in business, which is why I’m shifting toward lending and moving away from rentals.

Bryce

I love it! It sounds like you’re a serial entrepreneur, like many of us, with a mix of past businesses that either succeeded or didn’t. I’m curious about your Amazon FBA experience—what didn’t work, and why did you see real estate as a better vehicle moving forward?

Loren

We started the Amazon FBA business while raising small kids. While we made decent money, the margins were tight, averaging about 16 to 18 percent. We did everything ourselves, from sourcing products to labeling, packing, and shipping. My wife and I were both involved, and we were sacrificing a lot of time with our kids for not enough return. So we decided to park that business, retain some earnings, and find a better vehicle.

Bryce

That makes sense. We found the same thing—after various digital products and services, we didn’t really catch our stride until we got into real estate. I remember when my wife and I first sold a property and walked away with a check for about $40,000. That was our lightbulb moment! Once you get that taste of success, you dive in. I’d love to hear more about your journey from rentals to flips and now to lending. It’s a common path—many start with rentals for the cash flow, then move to flips and eventually to lending. Can you give us a high-level overview of your transitions through these phases?

“I’m going to buy all these rental properties and live off the passive income.” But that’s total BS.

Loren

Yeah, I fell into the trap that a lot of new investors do: thinking, “I’m going to buy all these rental properties and live off the passive income.” But that’s total BS. We quickly realized you can’t really live off that income; you need to save it for when the HVAC system or roof fails. My goal then became to shorten my cash conversion cycle because, with rentals, that cycle is extremely long. So, we thought, let’s do some flips. We had properties we were considering for rentals, but instead, we decided to flip them to get some cash in the bank. This was especially helpful when we had an HVAC failure and needed additional liquidity.

Then we started a wholesale business to increase our leads for the rental portfolio. However, as we took on more projects, we found that we weren’t giving enough time to any one thing, and everything started suffering. Some flips didn’t produce the cash we expected. For instance, we might make $15,000 on a flip, while our lender made $18,000 without any of the hassle—no chasing contractors, no picking out flooring. That was appealing to me, and I wanted to know how I could do that.

Last year, some legislation in North Carolina changed how wholesaling worked, specifically around double-close funding. They stated that assignment contracts were considered a commission, and you couldn’t get that unless you were a realtor. I saw an opportunity: if we pulled some money from investors, we could do double-close funding—quick, same-day transactions. We’d send out $10,000 or $100,000 and get $100,001 back.

When you start telling people you have money to lend, they bring you all sorts of opportunities. Most of them are junk, but occasionally you find a diamond. One connection mentioned a guy who needed about $200K for a project due to some legal issues, but he had equity in land. He was willing to pay a pretty significant rate for just four weeks. We jumped at the chance—it was a no-brainer. That project ended up taking much longer than expected, but instead of a good deal, we netted about $70K profit over an eight-month loan.

While that was happening, we recognized a need. Many people in my network, like developers and flippers, had equity in performing assets—rental properties or land—but they were cash-strapped because their money was tied up in projects. Delays from permits or contractors would halt work on other projects due to liquidity issues. Instead of forcing them to refinance their performing assets and damage their cash flow, we offered blanket loans on those assets. We’d take a first or second position on two or three rental properties and provide short-term liquidity to keep their projects moving.

The nice thing about our product is that once they finish with it, they can either pay us back or let us hold the collateral at no cost. Next time they need liquidity, we can turn it around in two to three days since we already have the collateral established. This has been really helpful for established flippers and developers who need quick access to cash to keep their projects on track.

Bryce

Interesting! So, you essentially leave the liens in place, allowing them to use you as a line of credit.

Loren

It’s technically not a full line of credit since each transaction involves new loans and origination points. I haven’t found the perfect name for it, but it’s essentially collateral that we hold for as long as they want. We renew it every year, but there are regulations preventing us from leaving a second lien in place indefinitely. One flipper has used it five times, pulling $40K to $50K, using it for two months, then sending it back.

Another good use case is for people with new construction loans who may not want to deplete their cash reserves to fund materials. They can use their collateral to get $75K, buy their materials, and then pay us back with their draw.

Bryce

That’s amazing. I want to unpack two main things here. First, when you mentioned making $15,000 on a flip while your lender made $18,000—that’s a familiar story. We had a similar experience flipping a property during COVID when everything that could go wrong did.

I remember struggling to source materials, especially baseboard. We had a house almost finished but couldn’t get the last pieces we needed. I called every supplier I could think of, even offering to drive 12 hours for baseboard. In the end, we broke even on the project, making about $1,200, but our lender walked away with $25,000. It was frustrating to see how little stress they had compared to us.

Loren

Exactly. We always tracked how much we burned in interest charges per day. Being on this side of the business gives a different perspective. Every time a closing is delayed, it adds to the interest on our end, while for lenders, those delays can mean extra earnings.

Every time a closing is delayed, it adds to the interest on our end, while for lenders, those delays can mean extra earnings.

Bryce

Right. It’s interesting how that leads into the quick four-week bridge loans that borrowers often claim they need. I can’t count how many times borrowers said, “This will be a quick project.” In the beginning, I was naive about it, but now I see the pattern.

One borrower came to us, strapped for cash, offering two points instead of three for what was supposed to be a two-week deal. I wanted to help, but I knew we couldn’t negotiate on points; that’s how we fund our business. We still have that loan on the books, and it’s been going on for about seven months now. Projects rarely go according to plan, which is why this business model is advantageous for lenders: when things go sideways, you end up making more money.

It’s not that we don’t want projects to succeed; we want our borrowers to do well so we can succeed too. But the model is inherently better because we can earn while waiting, regardless of project outcomes.

Loren

Absolutely! We both have a unique perspective from being in the trenches. When someone tells me their project is nearly finished, I just chuckle. I know it’ll take longer—six to eight weeks instead of three. We have a different level of understanding that helps us communicate with our borrowers about their decisions and ensure we’re all successful.

We can assess properties effectively, too. If an appraisal comes back at $237K, I know there’s no way it’ll sell for that in its current state. If I need to move it quickly, I might list it for $199K. It’s essential to protect not just my money, but more importantly, my investors’ money. Relying solely on an appraiser’s opinion isn’t wise. You need to analyze all data and use experience to gauge the market accurately, which helps us determine LTV and lending decisions.

 

Bryce
I love it! Borrowers often present overly optimistic numbers, wanting the highest LTV possible. When I was flipping houses, I relied on a few lenders who occasionally warned me against certain projects. Their insights were invaluable, providing a crucial second opinion that helped prevent mistakes. As a lender, your experience means you’ve seen many deals and can spot potential pitfalls, which is vital in ensuring projects are successful.

Many newcomers to lending may struggle without a real estate background. The learning curve is steep due to the nuances involved.

Loren
Absolutely. Experience helps you identify red flags that inexperienced borrowers might overlook. You want to establish relationships with reliable borrowers who will return for your services. However, many lenders avoid first-time flippers, creating a catch-22: how do new investors gain experience without initial opportunities?

I think a mentorship program pairing experienced investors with newcomers could be beneficial.

Bryce
That’s a great idea! We’ve tried something similar by partnering with less experienced flippers on deals, sharing the profits while guiding them through the process.

While lending has its challenges, it can be more passive once the initial work is done. You handle the upfront effort in finding borrowers and underwriting, but once the loan is established, it’s mostly about monitoring and collecting payments.

Loren
Exactly! Setting up a loan is like pushing a cart uphill—it takes effort, but once it’s moving, it coasts. We continuously learn and adapt our processes for efficiency and scalability, like transitioning to monthly interest payments and requiring auto ACH for easier management.

Bryce
It’s impressive how you’re always iterating and adjusting. That’s essential for running a business well. Back in our rental days, every time we encountered a unique situation, our contracts grew longer with new clauses. Your adaptability is key!

Let’s pivot to your lending model. You mentioned that you used to let interest accrue until the end but now collect monthly payments. I’d love to hear your thoughts on the pros and cons of each approach since we prefer accruing interest.

Loren
The biggest pro of monthly payments for borrowers is simplicity—they don’t have to think about it until the end. However, the downside is they might be blindsided by a large bill at closing. We switched to monthly payments to maintain protective equity in the property. If interest accrues, the borrower’s equity diminishes over time, especially if the loan takes longer than expected.

Also, requiring monthly payments helps us identify problems early. If a borrower stops paying, we can address issues before they escalate, which minimizes risks for us and our investors.

Bryce
I see both sides. When flipping, I preferred not making monthly payments because it helped manage cash flow. Many borrowers feel the same way. But there are ways to structure loans with equity to cover payments while still protecting that equity.

Loren
Exactly! You can increase the loan size to cover monthly payments, which maintains equity protection.

Bryce
Let’s discuss your fund structure. You chose a 506(c) fund, which allows for advertising to accredited investors. What led you to that decision?

Loren
We opted for a 506(c) fund to advertise freely and attract more capital through channels like Google and Facebook ads. This model reduces the risk for investors, as their money gets diversified across multiple loans instead of relying on a single deal.

We offer a 15% preferred return with a 60% profit share, making it attractive for long-term investors. However, some investors prefer the direct model because they want to evaluate each deal individually. We believe the fund structure allows us to scale our business more efficiently.

Bryce
That’s a strong approach. We also transitioned to a fund model for similar reasons. The direct placement method can lead to headaches, especially if investor funds are delayed, impacting the borrower’s experience and your reputation.

Loren
Exactly. We want to streamline the process and maintain clear visibility on how funds are utilized. This way, we can keep investors informed and ensure their money is working effectively.

Bryce
What was your experience like setting up the fund?

Loren
It took about two to three months, primarily working with an attorney and refining the necessary documents. We spent around $15,000 to $20,000, which is relatively low compared to others who spend upwards of $40,000 or more.

Bryce
That’s impressive! Sounds like you did a great job managing costs and timelines.

Loren
Attorneys can be very expensive, so it’s smart to prepare as much information as possible before involving them. If you can draft a document and highlight what you need, it saves a ton on billable hours. Understand the structure you want, the clauses for protection, and do thorough research. This prep work allows the attorney to focus on refining what you’ve created.

Bryce
That’s a fantastic tip! Many people avoid learning about these things, thinking it’s solely the attorney’s job. But if you’re managing a fund, you should have a basic understanding of terms like 506(b) vs. 506(c) and the differences between accredited and sophisticated investors.

Loren
Exactly. If you manage a fund, you should be able to discuss your documents in detail. I’ve reviewed mine multiple times and was deeply involved in crafting them. Relying entirely on an attorney without understanding the material is risky.

Bryce
Absolutely! While hiring professionals is important, saving significant amounts of money is worth taking some time to learn the basics. It’s not a waste if it can save you $20,000.

While hiring professionals is important, saving significant amounts of money is worth taking some time to learn the basics. It’s not a waste if it can save you $20,000.

Loren
Would you hire a contractor to renovate your house and just leave them alone for six months without giving them direction? Of course not!

Bryce
Right! That approach would lead to costly mistakes.

Loren
Exactly. Changes in a project lead to more billable hours, just like needing to adjust legal documents. You have to actively participate in the process. I dedicated a lot of time to preparing our fund documents, which meant fewer loans during that period, but it was essential for long-term success.

Bryce
Go slow now to move fast later, right? For those unfamiliar, could you briefly explain the required documents like the PPM, OA, subscription agreements, and investor questionnaires?

Loren
Sure! A fund typically consists of two entities: the general partnership (GP) and the limited partnership (LP). The GP manages the investments, while the LP provides capital.

When investing in a fund, LPs need to sign several documents. For a 506(c) fund like mine, you need proof of accreditation, such as a letter from an accountant or tax returns showing a certain income level.

You’ll also sign the operating agreement for the LLC, which outlines your role and contributions. Finally, the subscription agreement states the amount you’re investing and provides your contact details.

Loren
The third document, though not mandatory to sign, is critical: the Private Placement Memorandum (PPM). Essentially, a PPM outlines every possible way a fund could lose money in a succinct document—about 80 pages long. It details how investors will be compensated, the rules for contributions, and limitations on fund activities. For instance, if my fund is dedicated to short-term real estate investing, I can’t redirect that capital into oil and gas investments without violating the PPM.

This document also addresses key issues like what happens if I get sick or pass away—who takes over, how distributions are handled, and so forth. Its purpose is to outline potential risks and clarify how they will be managed.

Bryce
Exactly! We joke with investors that if they have trouble sleeping, reading the PPM is a good way to drift off. But it’s crucial because it transparently outlines all risks. We want investors to understand that while we’ve had a history of good returns, there’s always a risk involved.

Loren
Absolutely. Disclosing all relevant information is essential, just like in real estate transactions. I want investors to be fully informed, so they can trust that we’re making sound decisions. My fund has returned an average of 31% per annum over the past four years, but it’s vital they know the risks from the start. This is also why the SEC requires accreditation for investors.

Bryce
That makes sense.

Loren
The SEC aims to protect investors, especially with minimum investments often starting around $75,000. They want to ensure that someone isn’t risking their last savings. While it can be tedious to gather the necessary documentation, once you’ve done it, it becomes easier. I provide a template for my investors’ CPAs to fill out, confirming their accreditation.

Bryce
That should suffice as proof.

Loren
Exactly! We have to be diligent about this because bringing in a non-accredited investor can jeopardize the entire fund.

Bryce
Absolutely. Now, as we wind down, could you give a brief overview of your lending structure—like rates, points, and LTVs? There are so many different models out there.

Loren
Sure! For our flagship gap loans, we charge between two and four points on the origination side, and we don’t lend less than $40,000. These loans are typically for six months or less, but we allow up to three extensions, each costing an additional point for three months.

We focus on short-term loans because our rates reflect the inherent risks. Our rates range from two to three points per month, translating to an interest rate of 24% to 36%. We require monthly interest-only payments, and we ask for bank statements to ensure borrowers have adequate funds.

We avoid lending smaller amounts like $20,000 since the return wouldn’t justify the effort.

Loren
Exactly. The interest rate range of two to three points depends on the equity protecting the loan, especially whether it’s in first or second position. For example, a property with a 40% or 50% loan-to-value (LTV) ratio in second position will command a higher interest rate than a first position loan at 60% LTV due to the additional risk involved. We’re constantly balancing these factors to ensure we’re generating income while also providing valuable services.

The demand for our product is so high that we occasionally discuss lowering our rates, but we haven’t had to. For instance, I have a loan going out next week for $103,000, intended for about a month. We’re charging three points on that, totaling $6,000, which is a solid return for providing liquidity quickly.

Bryce
That’s amazing!

Loren
Right? Plus, it’s backed by a property worth $1.4 million, with a $175,000 existing loan. Our LTV is very strong, making it a great deal. We never lend over 65% LTV, factoring in both first and second positions. Historically, even during significant economic downturns, home prices have dropped by about 30%. So, at 60% LTV, we have that 30% buffer plus an additional 10% to protect our capital and any owed interest.

Bryce
That’s a solid strategy!

Loren
Exactly. And regarding usury laws, we specifically target states like North Carolina and South Carolina, where commercial loans aren’t bound by these laws. In contrast, Florida has a maximum rate of 18% annually for commercial loans, which is why we don’t lend there. Texas is also tricky; there’s a lot of oil money, and borrowers often find cheaper options, so we haven’t found our niche there yet. However, I’ve had $6.3 million in loan requests just in North and South Carolina over the last 45 days, so there’s plenty of demand.

Bryce
That’s impressive! How do you decide which loans to fund?

Loren
It’s a trifecta: we consider the equity in the property, the borrower’s history and reliability, and the property’s location. For instance, even if a borrower has solid references and equity, if they’re bringing a deal from a market I’m not familiar with—like Maryland—I won’t proceed. We also see borrowers with significant cash reserves who want to borrow for liquidity, and that’s a positive sign.

Currently, we’re looking at a deal with an 18% LTV, where we’re considering funding a $500,000 loan.

Bryce
Wow!

Loren
Good deals are out there, but I’m selective. We fund about two to three deals a month, not because of lack of demand, but because it’s crucial to protect my investors’ money. This is my first fund, and I’m committed to making it successful over the next five years, with plans for a full audit to establish a strong foundation for future projects.

Bryce
That’s fantastic! Loren, I have a thousand more questions, but I want to respect your time. Thank you for this incredible discussion. I’d love to have you back to explore more topics.

If anyone wants to reach out to you for knowledge, insights, or even to borrow from you, what’s the best way to contact you?

Loren
There are two ways: I’m active on Instagram at @investwithloren, or you can visit our website, reihighyield.com, to see our investor products and book a call with our team. For borrowing inquiries, reach out via Instagram, or visit reidoubleclose.com.

 

Connect with Loren:

• reihighyield.com or reidoubleclose.com
• Instagram : @investwithloren
• Email : [email protected]