Hard Money Lending with David Little of Crown Capital Resources
Ryan Kolden:
Welcome to Alternative Wealth, where we explore traditional and alternative investing, retirement, and personal finance concepts. I'm your host, Ryan Kolden. Join us as we talk about the strategies and tactics that can help you make better financial decisions.
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Ryan Kolden: Today on the show, we have David Little, an entrepreneur and co-founder of Crown Capital Resources, which focuses on lending in the real estate market. Crown Capital Resources was established in 2016, has funded over 200 properties, totaling loans over $54 million. David made the leap from a successful engineering career to launching a successful private credit fund. For years, David dedicated his nights and weekends to building his business, carefully balancing the demands of a full-time job with the drive to create something of his own. Through persistence, strategic planning, and an unwavering worth ethic, David grew his side hustle into a thriving business that allowed him to make a seamless transition to entrepreneurship. David, great to have you and welcome to the show. Thanks for having me, Ryan. I appreciate it. No problem. The first thing I want to go over and just dive into is very briefly, how did you get to where you are today? So how did you really go from working full-time with the corporation as an engineer to running a credit fund?
David Little: My path in real estate is a bit all over the place and I really had to find where my passion was. When I first started with the engineering role, which was 15 years ago, I had this vision of creating a large rental portfolio as well. I kind of viewed that as a path of income, something that I would appreciate over time and something that If I could acquire one or two properties a year over the course of an engineering career in tandem with that, I could call it 50 plus cash flowing rental properties. So that was initially my vision. But as I started acquiring the rental properties and dealing with all those headaches, I realized that I really didn't have the passion for that. And so I tried the next thing in real estate, which is a raw land development deal. I didn't love that either. I did some rock, I did some acquisition and management of Airbnb properties. Didn't love that. So finding hard money lending was one of the several different things in real estate I was trying kind of in tandem with that W2. And for me, after we finished me and my business partner finished our first hard money loan, it was pretty clear to me that a, you know, I had a passion for this and B, it was something that was sustainable that I could do with, with a full-time job as well.
Ryan Kolden: Okay. And for someone who's listening to this show and is currently working a job and maybe they're interested in running their own business one day or making the transition, full-time transition entrepreneurship, what are one or two things that you have learned with your experience that they think that they should focus on?
David Little: Yeah, I would say that you really got to figure out where your passion lies and don't be afraid to try different things. Try things that have a lower barrier to entry that you can go in there, experiment with, figure it out for you and then be okay with making the change. I mean, it took me when I first acquired my first rental property to actually starting the lending business, that timeline was close to seven years. I mean, I was trying a bunch of different things. in the interim. So that's what I would say. I knew I liked real estate. Real estate is incredibly broad. And there's a lot of different things that you could start a side hustle in the real estate world with relatively smaller barrier to entry. So I would just say just follow your passion and don't be afraid to pivot when it turns out that maybe you don't love it as much as you expect it to.
Ryan Kolden: So knowing what you know now, Is there anything that you would have done differently to either speed up that transition to going full-time? Or the other side of the coin is maybe you went too soon. Maybe you transitioned too soon. So what, if there's one or two things, is there anything you would do differently?
David Little: Yeah, for me, you know, it's hard for me to go back and say, I wish I'd done this. I wish I'd done this differently. The mind shift that I made was I initially thought of private lending as just a great way for me to passively, relatively passively deploy capital, right? So in the private lending space, if it's your own capital, like if it's your own money that you're lending, roughly your margins are going to be depending on your operating efficiency, let's call it. 15 to 20% of your notes outstanding, or sometimes it's considered AUM in our world. And that's a really good income for a relatively passive venture. I viewed private lending for the longest time as just something I enjoyed doing, something that was a great way for me to earn double-digit returns on my investments in a relatively passive way. The mind shift for me changed when we started bringing in family and friends and our AUM ballooned and we realized that we could make a lot more money within the private lending space by essentially leveraging third-party capital. And then there were a lot of other things going on with me personally and with my engineering career where I realized that you know, long-term the best path for me was really owning my own company and not staying in the W2 world. But there were a lot of things that intersected for me to kind of mentally make that transition. But no, I'm grateful for the time I spent in the engineering company. I think it built a lot of really great connections. And those are connections that today I'm leveraging to raise capital, right? Because that is one of the hardest things about being a private lender is you have to have a strong network to fundraise in. And I would argue that's one of the biggest barriers to entry within being a private lender. If you don't have that first tier connection of capital available to you, it's really, really hard to scale. Because in our world, we can't just scale our deal flow. We can't just bring in new clients and bring new deals and fund new properties. We have to scale our fundraising efforts really in tandem with each other. So having that fundamental, like all those connections in the oil and gas world put me in touch with some higher net worth people and people who I've gained their trust as an engineer. And now a lot of them, I'm now fiduciaries for some of the capital that they've chosen to invest with us.
Ryan Kolden: So one of the things I want to go back to was you said you kind of had this realization when you were working your engineering job that ultimately being like a business owner and entrepreneurship was going to get you closer to whatever it is that you wanted to achieve through your life. For some people, that is strictly monetary. For some people, it's having their own time and their own schedule. What specifically was it for you, if you don't mind me asking?
David Little: Yeah, so I'm pretty opinionated on this. I think that the easy answer that everyone gives you without really thinking about it is always going to be money. That's kind of the lazy answer, just to be honest with you, right? Because the way I think about that is money is just an ends to a mean. Money is not like an end goal or an end state. For me, when I really challenge myself to think deeply about what it was that I was really wanting. For me, it was all about autonomy over my own time. And so that's not to say I'm done working hard. That's not to say I'm retiring. It's just to say I want the ability to work on the projects and work that I want to do when I want to work on them with the people I want to work on them with. That to me was my definition of having made it, I guess, the business. And the realization came in that no matter how good your W2 is, no matter how much of a dream job your W2 is, you will never achieve that. And furthermore, I think you could argue that as you progress in a corporate role, the autonomy over your own time only decreases as a stepwise function. And I saw that within my own career. I started as an intern and ultimately reached the level of a division engineering manager. And when you first joined the company, let's just call it engineer one, you might have five hours a week scheduled in meetings and then 35 hours a week are yours to work on engineering projects. Once you reach engineering manager, I would walk in on a Monday morning and I had the realization of like, I have about 10 hours a week that are my own, about 30 hours a week I'm going to be sitting in another person's meeting. And that only goes one direction, really, especially in the larger corporation, of course. And so for me, I realized that, man, even the quote-unquote dream job, and I loved my job. I loved the people I worked with. I worked on meaningful projects, but it really wasn't ever going to yield me what I was truly chasing. And that was autonomy over my own time.
Ryan Kolden: You know what, I'm actually the same way. When I was in the Navy, there was one point in my time when I was on the submarine where my brother was graduating from college, and it was a big deal in our family for him to be graduating from college. He kind of had some struggles and whatnot, but one, it was very meaningful for us and very meaningful for me, and I asked to get time away, you know, to go to his graduation, and I was denied. I wasn't allowed to go. I wouldn't say that was the turning point for me, but that was like a very big deal of, you know, why do we work this hard if we can't, you know, do the things that we want in life, like being there for family and friends and things like that. So I think that is a very, very good point is even though you may end up working harder and longer for yourself, it does give you the ability to capitalize on moments like that you can never get back. Now, the last thing I kind of want to touch on, David, with regards to, you know, your transition from engineer to running the fund. Going from employee to owner can be a very difficult transition for people. Some people have issues with the structured aspect of the corporation to then managing your own time. in your family and whatnot. What would you say has been the most difficult or maybe the most surprising aspect of the transition? It doesn't have to be negative, it can actually be positive. What would you say has been the most unique or surprising thing that you've learned about running a business?
David Little: Yeah. So for me, the, the positive change was that before leaving, I was kind of, I was just doing both, right. I was, I was working 40, 45 hours at the engineering company and then 30, 35 hours a week at crown capital resources. And so for me, it was overall a really, really positive transition because effectively I was able to capture, you know, another 40 hours back of my life a week. And I think the trap… So that was the positive for me. Now the trap for a lot of business owners is that when you move out of a W-2 role and into a self-proprietorship, a small business, the to-do list of items is just never-ending. It is absolutely never-ending. If you wanted to work 100 hours a week, you absolutely could. And I think that's a real trap for business owners because I'm a believer in the Pareto principle in that 80% of your yield is going to come from 20% of your crops essentially. Put another way, you can work 80, 120 hours if you so choose as a business owner. But I really do believe that after a certain point, it's just diminishing returns. So what I would challenge business owners to say is figure out what are the key needle loopers in your business. And then what is kind of the busy work, right? So, uh, I think that's four disciplines of execution. There's a book that talks about this, figure out what's your, Your wigs are your wildly important goals. In other words, what's actually going to drive the business forward and then figure out what your whirlwind is. And the whirlwind are your daily deliverables that kind of the standard operating objectives of the business. But what you realize is that if you could, you could move into a place where all you're doing is your whirlwind items. And you're looking back at the end of the year and you're going like, yeah, operationally we kind of checked every, all the boxes, but like we didn't move the business forward in any way. So I think that's a, that's a key learning that I've had is, uh, distill down, like work reasonable hours, spend time with your family. Like remember why you made that, that pivot in the first place. And figure out what your KPIs are in your business, what are your key performance indicators, what's actually going to drive your business forward and spend 60 to 80% of your time there. And figure out how to either minimize or automate or outsource a lot of the other stuff. And it's really, really hard as a business owner. It's still something I struggle with because I got an engineering background and my baseline, my default is like, I'll just go do that. And the thing is, if you just say, I'll just go do that over and over and over again, you're not really guarding your time like you should as a business owner. So it's something I'm at least mindful of today. I don't know if I practice this as well as I should, but I'm at least working towards that. In fact, our Our thematic goal for the year for myself and Jeremy is focus on vision, not on tasks in the business. Work on the business, not in the business. That's another way to say it, I suppose.
Ryan Kolden: Absolutely. Now, I want to transition into specifically what it is that you do at Crown Capital. But before we do that, with real estate as an investment, the majority of people focus or typically end up on the equity side. So going out and buying properties usually with debt and really not so much the lending side. How did you end up on the lending side and what is attractive about lending in your perspective?
David Little: No, we ended up on the lending side because we, we actually, you know, as we were running around doing different real estate ventures, we had a friend of ours call us and say, Hey, I've got a house under contract. I just don't have the funds to fund it. So we, we did our, and we did our first hard money loan, Jeremy and myself on very much, you know, borrowed documents, Google legal docs, just kind of doing it all the wrong ways. And that's how we did our first deal. But I'll talk about hard money lending a little bit just to kind of operationally define it. So within the real estate space, there's a lot of different terms for what we do. Sometimes it's called hard money lending, private lending, bridge lending. I think the defining characteristic, in my opinion, is that when you originate a loan, you hold a first lien position onto that property. And so it's very, very different than like credit lending, where you'd say, Hey, I'm underwriting you as an individual. You're primarily underwriting property first and foremost. And then the individual kind of as a secondary, right? Because if everything goes wrong, ultimately you're taking back over that property. And so the next natural question, the next natural extension of this conversation is like, why do we exist? Right? We're kind of a niche. Why do we exist? And the reality is, is that The lending product that we offer and the lending product that say a bank would offer, there's very, very little overlap there. We're not really a competitor to banks at all. And so let's get an example of why we exist. So let's say you are a real estate investor. Let's say you're a flipper and you've got $300,000 to go flip a property. The reality is in a Texas metropolitan area, you're flipping one house at a time. So at the end of the year, if you flip two houses per year, you're finished the year with good margins, you flip two houses. So what a lot of flippers will choose to do is they'll take that $300,000, they'll leverage it up with hard money loans like ourselves at Crown Capital. And they'll go tackle four to five properties at a time. And so at the end of the year, they're on a property net margin. It's a little bit eroded because you have interest expenses, origination fees, et cetera. However, at the end of the year, they flip 10 properties instead of two. And so it's a way for real estate flippers to substantially increase the total amount of properties that they're doing. And then also there is core layer benefits to that, you know, such as they can get economies of scale. They can keep good crews running consistently, buy materials in bulk, things like that. And so that's the place we exist. We have clients for real estate flippers approach us and say, Hey, this is the deal as it sits today, would you guys fund this? We typically lend out 60 to 70% of after repair value. So putting numbers to that, if it's after a pair value of $210,000, we'll fund a maximum of $100,000 to $140,000 in the property. We go in with the purchase price and then we hold the renovation fund back in escrow. Those funds are progressively dispersed retroactively. And then as the property is paid off, they close through a title company, we get paid back first, and then the net equity is theirs to keep. And so that is… 80% of our portfolio and we just do it over and over and over again. Right now we're funding roughly $25 million and that's across 82 properties in Texas.
Ryan Kolden: Got it. So I see why it's attractive from a, like if I was flipping homes, so if I was the actual real estate investor, it allows me the ability to, you know, expand my operations like well beyond like what I could have done with my own money. But as an investor in, let's say, you know, Crown Capital or someone who just wants to invest in hard money lending, can you describe, you know, what makes that attractive, you know, as an investor?
David Little: Absolutely. So from our perspective, let me just zoom out just a little bit. Essentially, Crown Capital Resources is the servicing arm to the company. And then if you were to draw an org chart, over here you have the Crown Capital Income Fund. So this is the 506c entity in which we bring on third-party capital investors And they fund the fund. The fund is diversified across all our loans. And so for a third-party capital investor, there's several different advantages. The first and foremost is we believe it's a very low-risk venture. And so why would that be? And you'd say, well, as of right now, our average loan-to-value across our entire portfolio is 60%. And so, well, what does that mean today? That means that we have $25 million of notes outstanding. And let me do the math here. And the properties that we have a first lien position on today are worth $42 million. So there's a huge amount of equity buffer there, first and foremost. So if there's ever a foreclosure or something goes wrong, like we have first position to the property that we could take over. And there's a huge spread there between what the property's worth and what our note on it. So it's broad real estate exposure over a geographically diverse area. It's highly over collateralized. And then, so that's very attractive to people. And it's completely passive as well, right? So there's no operational oversight that you have to worry about. It's an evergreen fund. So that means if your funds are within the income fund, You're earning 9% to 10%, depending on which class you're in. There's no, okay, we're syndicating this loan and we're hoping to have a successful exit. And then this is going to be a five to seven year hold. For us, it's a highly fungible, highly liquid investment. So if people want to move their capital in and out, flex in and out, we allow them to. So for us, when we think of like what we are competing against for our third party capital investors, we aren't competing against the five to seven year old with the syndications and the upsides. Really what we're trying to compete against is more closer to what a treasury might. So we want to be similar risk profile to a treasury, and we want to be about twice the return. So that's the space that we built. The idea would be, hey, instead of holding some of your money in a CD, invest it with us, earn twice the return, have similar liquidity profile. And then on the risk aspect, as a third-party capital investor, number one, you have the risk aspect of the core business model itself. It's very over-collateralized loans. But then what we actually do is we put a second provision in of risk management for all our third party industries as well. And that is the way in which we structure the funds highly, highly incentivizes our third party capital investors. So typically speaking, when these income funds are created, the top line revenue comes in. And then right off the top, you have management fees and then usually business operating expenditures, miscellaneous expenditures, et cetera, payroll, et cetera. And now the bottom of the capital stack are third-party capital investors. And so the idea is like, hey, if everything's great, everything's running really properly, you are going to get paid. We essentially took that structure of a traditional income fund and we actually flipped it. So in our income fund, The top line revenue comes in on the business. And the first people that get paid out are third party investors. And it's only when they are first and fully paid out that anything else is able to be paid in the business, including my salary as well. So we have highly, highly aligned… That's very unique. the business outcome? Yes. And the reason is, the vast majority of our fund is comprised of friends and family. I joke with people, I'm like, hey, one of the biggest investors in our fund is my mom. And I promise you, my mom is not going to lose money. So we structured it such that if we have a bad month or if we were to have a foreclosure, Me and Jeremy will eat that. We'll eat that loss before any of our third-party capital investors will see that. So that's how we wanted to structure it. We wanted to follow the same ecos that we originally created this business under. So yeah, so we're proud to have that structure. And for us, and to be honest with you, we've got a really good track record as well. So we're not overly concerned with non-performing loans and foreclosures. In eight years of operations, we've had one formal foreclosure. And so, you know, we run a really tight ship.
Ryan Kolden: What did you do with the foreclosure? If you don't mind me asking, did you decide to operate it as a rental or did you sell the asset and take the proceeds from it? What did you do with the foreclosure?
David Little: So our foreclosure, I have it burned in my memory, the first one, it was we ended up sending a demand letter late June. The borrower had missed his extension payment. So his primary term was up, missed his extension payment. We sent a demand letter, which is pretty standard operating procedure. And then in Texas, it's a really quick process. In Texas, it can be as fast as 43 days from sending the demand letter. But the receival of that certified mail is essentially what starts the clock. So this particular one, the borrower just couldn't come up with the funds. It was a property out in San Antonio and our loan out on it was $250,000. Roughly 50 days later, we took over the property. So it actually goes all the way to a courthouse auction. The courthouse auction was August 6th of 2024. My business partner attended because he's very local in San Antonio. And it's just like you kind of maybe see on HGTV. They go up there and they say, hey, who wants this property? We set a minimum reserve bid, which was our loan amount. It didn't get met. So we took over the property. And then from there, we went and walked the property and there were several items that just needed to be… We walked it with the real estate that needed to be touched up and finished up. So we hired a contractor and a few weeks of work and we tidied everything up that needed to be done. We actually also fixed the foundation as well. It was fear of being that needed to be raised a little bit. And then we ended up putting it to market for $299, got multiple offers, I think the highest of which was either $325 or $329. So that's the nice thing about having these over collateralized loans. If your loan amount is $250,000, the house sells for over $300,000, there's plenty of margin in there for things to go wrong. And that was one of our big lessons learned. Foreclosures aren't, they're not these huge capital loss events, but from a time perspective, they're a pain. And so from our perspective, when we took over the property, we knew what we were going to do. We're not interested in holding rentals. We're not interested in becoming flippers. Our perspective is we want to put them up. If there's a little bit of work left to do it to get it listed, let's do that and get it listed because our core business, our core competency is private lending. There's a lot of guys who are private lending and they have a construction company and they do have rental properties. We don't do anything. We've sold out of every other real estate asset that we hold and own and ran. And now me and my business partner just do private lending. So we're laser focused on the business. And we've got a really aggressive growth goal in 2025. So you really need to be if you're going to hit those.
Ryan Kolden: Now with private credit, it's pretty extensive in the ways that you can participate in it. So whether it's direct lending to middle market companies, leveraged loans, hard assets like single family rentals, aircraft, contractual cash flows, like royalties. Commercial finance, equipment leases, financing receivables. I understand that Crown Capital is in the business of private lending, but can you explain a little bit more deeply as to what your investment thesis is?
David Little: Yeah, like you mentioned, if you're really talking about private lending, that's an extremely broad category of things that you can really do. From our perspective, I like the business model of hard money lending, because at the end of the day, there is a hard asset that I have a first-link position on. So if the client gets hit by a bus, or if he decides to leave the country, or if he just decides that he's going to file for bankruptcy and no longer work on the project, we can still take over a property. And that's another reason we only lend in Texas is because Texas is a very lender-friendly state. Typically, from a demand letter to foreclosure can be as quick as 43 days. So it's not like some states in the US, especially in the Northeast, where that can be a nine-month process. In Texas, it's extremely quick. And so that's why we've chosen this particular avenue. We said Texas is an incredibly strong market. If you look at a 1, 5, 10 year census map, there's always people moving into Texas. Typically the median housing price in Texas is more affordable, right? So our average loan size today is right around $290,000 and we like to be in that price point. But we found that this asset really suits us because residential real estate, the underwriting and evaluations is pretty straightforward. In Texas, you can acquire it back really quickly. Typically, if there are repairs that are needed on it, it's going to be a little bit more simple. And so that's why the residential aspect of our portfolio still comprises 80% of the day. We do do commercial loans as well, but we underwrite those a lot more aggressively just because it's just the nature of the beast.
Ryan Kolden: Right. Now, I'm kind of getting into the ending part of the show today. And I want to kind of finish it up with more of a personal question, but it could also be business related as well. What is something that you're working on right now, you know, whether it be personally or via your business that excites you?
David Little: Yeah, I think 2025 is my first full year of working in Crown Capital Resources, you know, I mean, that's the inherent company. Um, and so for me this year, it's, it's really about, uh, finding balance. I'm a, I'm a pretty data driven individual. And so of course, you know, my business partner and I always set a really high goals every single year for ourselves. And my default setting is just to work, work, work, work, work. But I'm really trying to focus this year on balance and remembering why I left the engineering company. And it is, it is, you know, objectively to control my own time, but maybe. a better answer would be to spend more time and more quality time with my family. So I'm trying to find that balance and I'm trying to… One thing that I tell myself over it is I try to make my default answer yes. My wife says, Hey, can you come to your daughter's presentation? We can work on this project together for weeks. My default answer is yes. And then I'll figure out how to move work around to make that happen. So I think I think I'm okay at it and I'm going to continue to work on it this year and just see how that goes. But yeah, like I said before, it's so easy when you own your own business to let yourself work 60 hours a week. It's so easy for when an email comes in and your home office is 20 feet away to just step away and go take care of that even if it's 7 o'clock at night. But the to-do list will always be there tomorrow. Yeah, the emails will always be there tomorrow. Yeah. So I'm super focused on that this year. And when I left, one of the things that my wife said to me, which is true, which is funny, she said, I feel like people leave a 9-to-5 to work 24-7. And so one of my objectives this year is to prove to her that, Hey, that that's not how it's going to be. I'm going to be able to leave this and I'm still going to be able to find balance and we're going to objectively have a better home life. And I'm not essentially. Leaving the nine to five to just add it to crown capital. It's like, no, no, no. The family's getting that time back. So, yeah, that's what I would say. That's, that's one of my personal focuses this year.
Ryan Kolden: That's fantastic. David, it's been great having you on the show. Is there anything that we didn't cover today or any last words you want to leave the audience with?
David Little: Yeah, well, first and foremost, I would say that anyone who has any interest in private lending or just wants to have a conversation about how they might get started, please feel free to reach out to me by email. I'm happy to jump on a call and just talk through any any information that you might be curious about or any other information about my journey or any professional questions as well. I'm usually pretty much an open book, but no, besides that, I typically tell people as well, if you're listening to these podcasts and you're feeling a little bit overwhelmed, I would say my biggest advice is just to start. just to start doing something that you might want to do. And if it feels a little bit overwhelming to just go start your own thing, the advice I would realistically tell somebody is to pick something, let's say it was wholesaling in the real estate industry, and you had some interest that you might want to do that, I would call some local wholesalers and just offer them to work for free. I guarantee they will take you up on that offer. Because when you're first starting, you got to realize you don't have a lot of expertise and you don't have a lot of capital, but you have a lot of time. So utilize what you have. And I know if somebody called me and said, Hey, I want to work for some free, what are some tasks that you could get? You could have me do. I would be more than happy. And that's going to be every, you know, business owner as well. So if you have an industry, if you have interest in a certain industry, that's the biggest actionable advice that I can give to people. Just. Just start spending your time, getting that industry some way, shape or form and figure out if you're actually passionate about it.
Ryan Kolden: Great. David, I appreciate you coming on the show today. What I'll do is I'll drop David's resources in the show notes. So if anyone wants to reach out to him, you'll be able to do that. I'll leave his website as well as his email if you want that. Again, thank you so much for your time and coming on the show today. And that's a wrap. Thanks Ryan. Hey, real quick before you go, thanks for listening and please remember to hit follow on your podcast player. You won't miss any episodes and it helps support us bring you the show. Today's show notes and resources are available to you by clicking the link in the description. The opinions and views expressed here are for informational purposes only and is not tax, legal, financial, investment or accounting advice. This material is educational in nature and should not be deemed as solicitation of any specific product or service. All investments involve risk and a potential for a loss of principle. Should you need such advice, please consult with a licensed financial, tax, or legal professional. Neither host nor guest can be held responsible for any direct or incidental loss incurred by applying any of the information offered.
